Amazon Stock Is Still Music to My Ears

NEW YORK (TheStreet) -- Not a day goes by without some analysts complaining about Amazon's (AMZN) valuation and how much the company spends each quarter. I know that tune won't change anytime soon. Those complaints helped send the stock down 9% for the year to date as of Friday's close.

Well, according to published reports, Amazon has begun discussions with record labels about a music streaming service to go along with its Prime movie streaming business.

The company wants to take on Pandora (P), Spotify and Apple's (AAPL) iTunes Radio. If this is true, you can expect an impact on Amazon's quarterly earnings -- not to mention a possible hit on margins due to the costs this would require. But so what?

The way I see it, Amazon CEO Jeff Bezos is introducing an effective marketing advantage known as bundling. To further differentiate Amazon's services, Bezos will be able to package Amazon's Prime service, its 2-day shipping, and now music streaming. All of this will be brought to you into a low-cost bundle consumers are certain to buy.

Would Netflix (NFLX) be able to compete with this service? Netflix charges $7.99 per month for (only) movies and TV shows?

Jeff Bezos is not dumb. He has killed off traditional booksellers and disrupted the entire retail space because he knows exactly what he's doing. But I'm now hearing notions that Amazon's ambitions are getting misguided. And the company's stock price is once again the major drawback.

I won't disagree that Amazon's P/E ratio of 610 pales is vast compared to, say, Apple's multiple of 13. But I also understand that to draw up valuation fears in the tech sector ... well, you might as well complain that water is wet.

Amazon's stock has always been expensive -- and the Street has never cared. It seems counterintuitive that we would begin to care about Amazon's stock now when CEO Jeff Bezos has introduced (among other things) the idea of drone-delivered packages.

Sure, earnings aren't spectacular. Margins have underwhelmed, to put it mildly. Even so, Amazon continues to grow year-over-year revenue at a 20% clip. If this performance wasn't seen as "routine" the Street would be celebrating how amazing that actually is.

Plus, amid all of the recent earnings complaints, no one seems to remember the company posted gains of 240 basis points in gross margins last quarter. Margins were up to 26.5%. This occurred even with higher fulfillment and marketing costs.

Amazon's lack of profits will continue to be a popular argument. But this is not your average growth story. It's a mistake to assume Bezos doesn't know what he's doing. In fact, everyone is Silicon Valley is following his model. Amazon is setting the new standard.

Consider this: With so many retail options out there like Wal-Mart (WMT) and Best Buy (BBY) it would be a mistake for Amazon to be so keenly focused of profits. If prices were equal, there would be no differentiation. Not when consumers can easily drive to a near-by Barnes & Noble (BKS) for that same book.

To that end, the reason Amazon's profits and margins aren't exciting yet is because Bezos is actively building the type of product and service he believes will get consumers to keep coming back. This model has worked for both Facebook (FB) and Netflix.

What's more, the fact that Amazon has yet to approach its critical mass is reason enough for investors to remain patient. It's at that point profits will start to matter. Don't forget, it wasn't long ago that investors launched these same complaints about Google (GOOG).

They wondered how "a mere search engine" could make money. Today no one is searching for these answers anymore. Google has produced the results. So will Amazon. It's just a matter of time.

With the stock trading at around $363 per share, this is a sure bet to $400. Short the stock here if you dare. But with rumors of an Amazon phone still swirling around, there are plenty of gains to be had and plenty of growth opportunities ahead.

At the time of publication, the author was long AAPL and held no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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