Some may assume Amazon is overpriced, given its 646% share-price appreciation over the past five years, the third-best performance of
members, and because it sports a stratospheric price-to-earnings ratio of more than 100 based on its current share price of about $232.
But patient investors can expect to continue to be rewarded because of its leading role in e-commerce, an industry that's in its infancy on a worldwide basis. Morningstar calls Amazon "the most disruptive force in retail in recent years" and that should be taken as a compliment.
Those are the same words used to describe
, the computer company that branched out to redefine the world of gadgets with its iPod music player, iPhone smartphone and iPad tablet. Much like Apple, Amazon has felt its own strength by putting booksellers out of business and becoming the go-to place for shoppers who want to buy just about anything.
Amazon has increased its active customer base to 137 million users as of April, which represents a four-year compound annual growth rate of 20%, Morningstar said.
There's no reason to think that sort of growth can't continue because the company is adept at coming up with new ways to grab customers for a growing array of products and services. And it's adding more third-party sellers eager to gain new customers via the link on Amazon.
Aggressive and fearless is how best to describe the company's approach to business since its 1995 online launch as the "Earth's biggest bookstore" by founder and CEO Jeff Bezos.
After crushing brick-and-mortar book sellers, such as Borders, it moved on to squash electronics and music retailers such as Circuit City. Now it's threatening
and many other types of retailers, including the mighty
. Rivals are scrambling to find ways to meet its competition.
In one of its latest initiatives, Amazon is taking on the venerable Apple and online-video merchant
with its Kindle Fire, a tablet computer selling for a mere $199 upon release Nov. 15. Apple's iPad tablet is $499.
And that comes soon after the company rolled out Amazon Premium, a $79 annual package that offers free two-day shipping on any item ordered from its Web site. They will also get access to its online digital media streaming library, something that Apple offers, as well as to their TV, something that Netflix offers.
Kindle Fire buyers will get Premium free for a year and Amazon hopes to hook them on buying online and its media offerings.
Amazon also sells the $79 Kindle e-reader for those interested only in reading books and magazines, available from its vast library.
Amazon says it will have 12,000 items in its digital media library by year-end, including books, music, movies and TV programs. It has content-licensing agreements with Fox Broadcasting,
and NBC Universal, to name a few of its resources, and last week it reached an agreement to add select Public Broadcasting Service programming.
Amazon's Web site offers what is probably an unmatched online shopping experience, given its breadth of product categories, shopping suggestions based on a customer's prior purchases, product rankings based on a scalable list of criteria, buyers' objective product reviews, competition among vendors and shipping options.
As a result, it now has a stranglehold on retail in general, posting 2010 revenue of $34 billion, 40% more than in the previous year. Sales are on pace to grow 44% this year, which would bring sales to $49 billion. And that's in a slow economy that has consumers tight with a buck.
Amazon earned $2.53 per share in 2010, a 24% gain, after lifting earnings by 29% in 2009.
In contrast, Wal-Mart posted sales of $421 billion in its most recent fiscal year, 3.4% over the prior year's sales, and its earnings were $4.18 per share, up 12%.
Institutional investors, including mutual funds, own 71% of Amazon's shares, which have a market value of $105 billion. Capital World Investors, parent firm of the American Funds Growth Fund of America, is by far the biggest with 5.6%, and it has been steadily adding to its stake over the past two years.
analysts said two weeks ago that "Amazon has built a highly defensible business that is well-positioned to take share of both online and offline commerce. We continue to like Amazon shares long-term and believe the company's investments are appropriate for driving continued share gains."
And Morningstar says that due to its low-cost operations, Amazon generates a return on capital exceeding 50%, which should create huge cash flow once its new initiatives gain traction.
The company had a hefty $6.3 billion in cash on the books at the end of June, and relatively little in debt at about $300 million, which indicate a healthy balance sheet, one that could withstand a few bumps in the road.
And there is one issue that threatens Amazon's well-oiled machine, and that's the prospect that cash-strapped state governments, egged on by brick-and-mortar retailers, will be able to slap a sales tax on online retailers. Several states had such legislative proposals and there may eventually be some national accord for a uniform state sales tax on the industry.
But that's not necessarily a crippling blow, as Amazon has, and will continue, to diversify its products and services, if the past is prologue, and many in its customer base are likely to take a tax in stride.
Amazon, scheduled to release third-quarter earnings on Oct. 25, is expected by analysts to report earnings of 24 cents per share on revenue of $10.9 billion. Its earnings for 2011 are expected to be $1.90 per share, and that will grow by 64% to $3.11 per share in 2012, according to
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