Measure Value by the Product, Not the Price

The trader sees Amazon as a bargain at $325.
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Has anyone considered that

Amazon

(AMZN) - Get Report

may be cheap? I know, this bit of heresy hits you like a cold mackerel in the face. But in the spirit of the holidays, give me a chance to explain myself.

First, I need you to concede a basic truth. Two hundred points ago, Amazon was cheap relative to where it is now, at 325. Some people would argue that it was hideously and terminally overvalued 200 points ago and all that has happened is that the stock has become more ludicrously overvalued. I think that's faulty logic.

Two hundred points ago, Amazon was not pricing in the possible success of its template in other ventures besides books. This is the crux of how the shorts got Amazon wrong.

As long as it was just a bookseller, the price of the stock made no sense. Book selling is not a high-growth business. Those who shorted Amazon because it was bigger than

Barnes & Noble

(BKS) - Get Report

were dead wrong though because Amazon's "experiment" in retail was in books. It has since extended its dominance to CDs, which, while not much of a faster-growing business than books, is beginning to make Amazon look like a department store.

Amazon obviously never intended itself to be just a bookseller. Which is why its stock was so #*&$ cheap earlier in the year, because it was priced as if it were. (Remember, I asked you to concede that Amazon was cheap 200 points ago for the purposes of this article, as I don't want to get your rigor up.)

Amazon could turn out to be the world's biggest online retailer, a virtual global

Wal-Mart

(WMT) - Get Report

. For that, it is priced absurdly low. Because

if

it can pull that off, there is no way it will keep this small market cap vs. a Wal-Mart. That would be illogical.

Why would I pay more for an online Wal-Mart than an offline one? Easy. What makes Wal-Mart great is its pricing power vis-a-vis the manufacturers. Wal-Mart has critical mass. It is the gorilla that gets what it wants.

So is Amazon. As Amazon becomes a bigger and bigger portion of, say,

Simon & Schuster's

book orders, do you think it can't wrangle pricing concessions from the publisher? Are you going to say no to someone who is responsible for 10% of your sales already? I don't think so.

But, and here is the reason why I would pay more: Wal-Mart may have tremendous pricing power vis-a-vis the manufacturer, but what if it is wrong about the consumer? What if it buys something nobody wants? What difference does it make how cheaply it was bought?

Amazon has no inventory. Amazon has no inventory. Keep telling yourself that, and you will understand why a retailer with no inventory is a very dangerous retailer indeed.

Go into

Bloomingdale's

as I did earlier in the week. Take a look at the markdowns on those sweaters. You tell me if they are making a dime on that merchandise, which has already been reduced multiple times. But they have to move that merchandise. They have inventory, and inventory costs money. Inventory is killer when it doesn't move.

Here is the punch line: If you could buy a retailer with no inventory, you would pay any multiple for it vs. its competitors.

Which is why Amazon is cheap.

So then why do I own a measly 5,000 shares of Amazon (measly for a fund my size)? Because it takes a huge amount of discipline not to peel off 5,000 shares every 30 points up. Have I taken way too many profits in Amazon? I don't think that's ever a mistake.

But this stock is making me rethink that logic.

Random musings:

Excellent straightforward story in the

Journal

about the

CNBC

flap. Sometimes when you read about yourself you think, "Gee, did that reporter even have a clue? I mean, heck, she spelled my name with a K." Other times you get pieces like this, and you are glad that there is an organization out there that strives to get it right.

James J. Cramer is manager of a hedge fund and co-chairman of TheStreet.com. At the time of publication, his fund had a long position in Amazon, although positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column by sending a letter to TheStreet.com at

letters@thestreet.com

.