IT WAS A MOVE OF great hubris and optimism. Back in the days before the word "e-tailer" was firmly established in our lexicons, a wide-eyed entrepreneur named Jeffrey Bezos started a company that sold books online and bestowed his venture with an incredibly ambitious name: Amazon.com ( ).
It almost seemed as if Bezos knew then just how big his business would eventually become. This year, Amazon is expected to report sales of $13.8 billion.
Its web site claims that it offers the "Earth's biggest selection" of everything from books and music to kayaks and canoes. It even sells groceries now. And the company has no plans to stop there.
Amazon has invested a healthy amount of money into expanding its business into the digital distribution of movies, music, books and television shows. As it plows its way into the digital media frontier, the company will have to carefully balance its lust for expansion with its loyalty to its core businesses, all the while trying to watch its spending. That won't be an easy feat, though it appears Amazon is up for the challenge.
Yet, despite all of the promise of exciting new markets, and the new revenue streams that come with them, I think Amazon's stock, which has climbed 54% in the last month alone, has far outpaced the company's prospects. I applaud Bezos's team for tackling these new ventures. After all, companies that employ the "if it ain't broke, don't fix it" mentality may eventually find that they've become obsolete.
But for Amazon to excel in the digital entertainment world, it will have to go head-to-head with some pretty formidable competitors. Take Amazon's Unbox movie-download business, for instance. The service, when combined with TiVO's ( ) digital-video-recorder technology, allows users to download movies onto their DVRs and watch them on their TVs.
The service pits Amazon squarely against Apple ( ) and its Apple TV. Last week, Amazon announced its plans to open a digital music store that will not only take on Apple's iTunes but other well-entrenched players like Microsoft ( ), RealNetworks ( ) and Napster ( ), to name a few. One could argue that the sheer volumes of people who visit Amazon's site each day will give the company's new digital ventures a leg up on the competition.
Offering its visitors more profit-generating services like music downloads will end up being a win-win situation for both Amazon and consumers, says Hamed Khorsand, an analyst at BWS Financial, a portfolio management and equity research firm. Traffic alone, however, is not always enough to sell an online music service. Just look at Yahoo's ( ) efforts to gain traction in the space.
Yahoo bought the Launch music service in 2001 to much fanfare, but Launch never really got off the ground. After re-branding the service Yahoo! Music in 2005 it was widely believed that the company would take the market by storm.
After all, Yahoo's sites are the most visited on the web. But Yahoo's sizable online presence wasn't enough to steal real market share away from entrenched players like RealNetworks, let alone Apple. What will help Amazon more than anything else is the fact that it's breaking with convention and offering music free of sticky digital rights management, or DRM.
Without that copy-protection, the music it sells can be downloaded onto any type of music player whether it's an iPod or a Zune. That flexibility should be attractive to some music buffs. We can expect the competition to follow suit.
Apple chief Steve Jobs is a loud proponent of DRM-free music and has signed with EMI to offer music free of copy-protection. Khorsand expects that the lack of DRM should help Amazon's online music store gain "a decent market share" within the next three years. But it probably won't have any meaningful impact on the company's bottom line.
"The company will do about $15 billion in sales next year," he says. "It takes a large amount of sales and profits to contribute to the bottom line." As for Unbox, Amazon has proven that it's thinking through the practical application of its digital initiatives.
Its partnership with TiVo makes it much easier to download movies onto the TV screen. Who really wants to sit at their computer and watch a three-hour movie like "Lord of the Rings"? Not me.
And I think plenty of other people would agree. Of course, all of these cool, new initiatives cost plenty of money, an issue that has weighed on Amazon's profits and its stock in the past. In the company's latest first quarter it spent $186 million on new technology and content, up from $146 million in the year-earlier period.
Analysts were relieved, however, to see that the growth of the company's spending was at least slowing from the somewhat jaw-dropping levels of 2006. Amazon's chief technology officer, Tom Szkutak, proclaimed that spending will continue to grow at a slower rate throughout this year. Lower spending, a lower tax rate and growth in its core business helped Amazon improve its gross margins significantly and report a 115% increase in net income during the first quarter.
Wall Street has applauded the company, with several analysts upgrading the stock and sparking a in the shares that has continued since the company's April 24 report. Yes, Bezos's brainchild has certainly given investors a reason to celebrate. But for now, it might be worthwhile to step back and watch as the company gets its new digital businesses off the ground.
With the shares trading at a forward price/earnings ratio of 70, it's just not worth it to me to get into this stock no matter how much promise the future holds. For comparison's sake the forward P/E on eBay ( ) was recently 27.7, Yahoo's was 54.
6 and Google's ( ) was 35.7. Investors should wait for some sort of meaningful dip say to the high $50s or low $60s before buying these shares.
There's little doubt that Amazon has lived up to its name. I'm sure there will be plenty of growth ahead for the business, but its stock is just a little too big for its britches right now.
News RSS