Amazon as an Investment

Back in 1999 I bought a lot of AMD on the basis of their developing a chip, popular among overclockers and DIY builders, that would be superior to Intel’s. The market hadn’t picked up on this superior product yet. Later, when the market finally got wise, AMD stock went from something like $10 to $60, before the bubble popped; eventually of course Intel’s superior warchest of resources punished AMD again, and almost a decade later, AMD stock is under $5.

In 2006 I invested my Iraq blood money into Nintendo on the basis of the new Wii being a sleeper hit with gamers. I was right. Its stock went from the low teens to $77, so I made a killing.

After I sold my Nintendo, I looked for another stock to invest in and couldn’t find anything. Apple had already made its run, and Google’s stock had been stagnating for a year.

The IPO market is pretty dry and there’s not really any web companies that are currently private that would be screamers if they IPO’d. I mean, would Facebook be able to justify a high valuation?

That should have been a sign to me that a bull market was taking a break…   I love to study tech and web stuff and I couldn’t find a single stock worth investing in with expectation of a large gain. There are great tech companies of course but they’ve matured to the point where they won’t have screaming stock prices.

The closest contender I can find is Amazon. Even the daytraders right now are not clued in to what Amazon is doing these days. Most think Amazon is just selling books and CDs online still. But they’re doing so much more.

It’s not just the Kindle, which is the first of the gadgets that will end up turning books into nostalgia purchases. It’s also the massive cloud of computers Amazon, using Amazon Web Services, built in order to handle their order processing and database calls so that you get pages of books displayed on your screen.

Now they are letting other companies buy time on their cloud or grid to borrow process time for their own web sites, database queries, and sales. Imagine you have an online retail company: you can use Mechanical Turk to get bored programmers to construct parts of your site for you. You can use Amazon’s database format to save some of your inventory list of stock. You can use Amazon’s front-end order processing system so that people can easily buy your goods.

In other words, Amazon is making money multiple times off the same hardware and software that it runs to manage its own inventory system. They make money off you vacuuming up books and magazines into your Kindle (since it’s so easy for you to acquire new reading through the Kindle now).

And there is a perception gap: most people do not know Amazon is doing this, even though they are by far the leaders in providing cloud services. Most people doubt the Kindle will succeed also, even though the paper book is doomed once e-readers can add more utility like pull out your favorite quotes and publish them online, fully search books on the fly, etc.

An e-reader will be a killer app one day. (but probably as part of a multi-use device)  The Kindle will take off in its next iteration or two, if Amazon can improve the look and versatility of the device (although this potential re-design for Kindle 2.0 isn’t what I was hoping for…).

I’m not naive enough to think Amazon will do well in the current environment. Both weakness in retail (consumer confidence is low and there’s less perception of disposable income) and stock market pressure on tech stocks will drive (and have driven) AMZN down. Here’s a chart:

Costs are also dropping so fast that margins will decrease on sales of media as well as on processor time.

But if I had to bet on any stock out there to be low risk, high reward, I think Amazon is the play. I haven’t bought it yet, for full disclosure.  Given that the market is in danger of crashing, AMZN’s stock could very well get crushed as well.  If macroeconomic factors take precedence, stock price means nothing.  So I’m watching, but wary.

Amazon is one of the nimblest companies out there right now and Jeff Bezos knows how to manage his resources. He’s at the forefront of the companies exploring the future of the Internet.  He has a good architecture in place; certainly we do not know what the future will look like, but the companies with the smartest people and the best tools will be the ones who will recognize it before the rest.

That’s my best bet right now.  What do you think?

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2 Comments

Filed under Business, Internet, Stock Market, Tech, Web

2 responses to “Amazon as an Investment

  1. I think the web services is going to continue to be huge for them (and actually convinced my dad to buy AMZN about a year ago).

  2. Ben

    Sweet…good call. I am late to that party I guess! What else is compelling out there in terms of investment?

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