(excerpt)

Finding and purchasing good stocks has a lot in common with finding and purchasing good holiday gifts. It’s usually best to go with the strongest ideas and not so much the cheapest price. With delivery trucks in overdrive for the holiday season, we look to Amazon.com. It may not be cheap, up over 100% this year, but if you are looking to give a great long-term gift, this one is hard to beat. …

The climb of Prime

As the king of the on-line retailers, the major growth catalyst has been Amazon Prime. The $99-per-year subscription service provides customers with free two-day shipping, as well as streaming music and videos. Introduced in 2005, growth has been explosive, and by 2014, nearly 30 million U.S. households subscribed to Amazon Prime and nearly 40 million worldwide. Many analysts believe by the year 2020, 50% of all U.S. households will own an Amazon Prime subscription. …

Amazon Web Service

A lesser known area that is driving growth is Amazon Web Service (AWS), their cloud computing service, and a major reason why Amazon stock has increased over 100% in price this year. In its latest earnings report released in October, the AWS business segment reported 78% year-over-year sales growth, and a 432% increase in segment profits compared to a year ago. Segment operating margins nearly tripled. …

Attack of the drones

How can we have a discussion about Amazon without talking about the drones? Amazon Prime Air is a future endeavor that promises to deliver packages in less than 30 minutes via drone right to your front door. The idea is becoming closer to a reality and it is realistic to think that in the coming years, Amazon Air will take flight. Although Amazon Air doesn’t look like a revenue generator in the near term, it is another way in which Amazon looks to differentiate itself from the other on-line retailers.

The risk

Of course, investing in Amazon has its risks. It has increased in price over 100% this year alone and over the past five years it has returned over 30% annually, more than doubling the S&P 500 over that time period. This has made Amazon stock very expensive on a relative basis compared to its peers and S&P 500. …

Don’t be afraid

At the moment we understand that some investors will look at the high P/E and this year’s rally and sit on the sidelines waiting for a better entry point, but we feel that such apprehension misses the point. Amazon has proven again and again that it will do what it takes to innovate to set them apart from the competition and this innovation has driven an amazing growth rate in their revenue. Ten years from now when you are getting Christmas gifts delivered by drone, listening to the latest holiday album on Amazon Prime Music and watching ‘White Christmas’ on Amazon Prime Video you will realize why a gift of Amazon stock today is really the best Christmas gift.

 

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