Booking on profits from a big online stock
One of the happy survivors of the dot-com boom is growing faster than ever, says a U.S. advisory which also likes two Canadian growth stocks.
Remember when online shopping was a novelty?
All of a sudden, you didn’t have to go to the store or trudge to the mailbox with an order form. You could just pick and click.
And what a novelty it was, as web sites for buying and selling seemed to multiply by the day. The market value of these sites and a host of other tech stocks soared into the stratosphere.
Then it was over. Most of them disappeared into the ether, unhappily taking a large helping of investors’ money with them.
There were survivors, of course. They were the ones that had a sound business plan from the start-up. And they didn’t just survive, they thrived.
One such thriving survivor is the big bookseller of the high-tech revolution, Amazon.com (NASDQ-AMZN).
And a leading U.S. advisory, The Complete Investor, has just added this stock to its Growth Portfolio.
Before we get to the Amazon story, though, we have a perfect excuse to update the Canadian stocks in that Growth Portfolio.
Two Canadian resource stocks
While this advisory recommends a number of Canadian stocks to its U.S. readers in various portfolios, it currently holds two in its Growth Portfolio. Both are resource stocks.
Potash Corp. of Saskatchewan (TSX/NYSE-POT) has been in this portfolio since February 2009. The fertilizer giant was trading at $74.68 when it was added to the portfolio and has risen to over $108. It yields 0.4 per cent on its dividend of $0.40.
The other is Silver Wheaton Corp. (TSX/NYSE-SLW), which doesn’t actually mine any silver. Instead, it purchases silver “streams” from mines around the world and sells them on to the market.
It’s been in this portfolio since this past December. The advisory bought it at $16.07 and is trading at $17.43 now. It pays no dividend.
Now we turn back the page to Amazon.
If you can’t beat ‘em
Amazon isn’t just a survivor of the dot-com bust of a decade ago, but “one of the world’s most dynamic growth companies,” says Mr. David Sandell, writing for the advisory.
s“Amazon’s online business model means it avoids most of the overhead costs that constrain traditional brick and mortar retailers, from energy to rent to sales force,” he adds.
By passing some of these savings on to customers, it can keep them coming back for more. And remember, says the author, you can shop anytime you want, 24 hours a day, 365 days a year.
But the real key to Amazon’s success is its evolution. It started as a bookseller of course, with closely related products like DVDs and CDs.
But it has expanded into a huge online marketplace that sells a great deal of third-party merchandise along with its own wares. You can pretty much get anything you want on Amazon today — TVs and other electronic products, clothing, toys and even groceries.
Says Mr. Sandell: “Smaller retailers have been happy to take an ‘if you can’t beat ‘em, join ‘em’ approach, using Amazon’s reach to sell their own products.”
This doesn’t just increase sales, but also pushes up profit margins with higher-ticket items. The numbers tell the story.
Help from the iPad
Electronics and other general merchandise grew from 35 per cent of Amazon’s total revenues in 2007 to 45 per cent in 2009. At the same time, lower margin items like books and CDs fell from 62 to 52 per cent.
During those two years, total sales surged ahead by 65 per cent, reaching US$24.5 billion. Earnings per share shot up by a full dollar from $1.12 to $2.12. International sales are also growing, which offers a nice buffer against the “still stretched American consumer,” says Mr. Sandell.
But wait a minute. What about Amazon’s hand held book reader, the Kindle. Won’t it suffer from the introduction of Apple’s much-ballyhooed iPad? Not really, says the author. In fact, it may help.
A dynamic device like iPad, he says, “could lead to higher levels of online shopping, a boon for Amazon overall.”
It is estimated that U.S. online retail sales grew by 11 per cent in 2009, to some $155 billion. They are projected to grow by 10 per cent over the next five years. Amazon should grow at a much faster rate than that, says Mr. Sandell, as it gains greater market share. Its earnings could rise by as much as 35 per cent.
Amazon released its first-quarter results yesterday, and profit surged by 68 per cent. Still, the company’s more modest forecast for the current quarter pulled the shares down by about 5 per cent, to $150.09. There is no dividend.
One thing those results seem to indicate is that today’s supposedly reluctant consumer is pretty comfortable with online buying these days. And this advisory is convinced that as the online market grows, so does Amazon’s market share.
You may not be able to tell a book by its cover, but you can tell an online bookseller by its earnings per share.
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