AMZNing?

If you have read anything on this Blog, you know that I consider innovation and entrepreneurism to be the drivers of our economy and general quality of life Americans enjoy. Jeff Besos is both an innovator and entrepreneur.

My buddy, growth investor and reformed venture capitalist, on the Left Coast has been pumping Mr. Besos company, Amazon.com Inc. (ticker: AMZN), to me for a while. I can’t in good conscious put AMZN on the Long Interest List because it is trading at 50x FY09’s expected earnings, and there is just no margin of safety there. In my view, if you invest in AMZN here, you will either make a lot of money or lose a lot of money. The stocks of interest posted on 2outof4 hopefully have a little less room to the downside.

That does not mean to say that I am incapable of putting on my former growth investor hat and looking at the facts. Besides being an awesome retail platform and a place value oriented consumers are turning in hard times, AMZN’s new product, the Kindle, may have the potential to be a game changer. Some of all of the above is clearly in the stock price. It must be at 50x Price to Earnings. But can Kindle, as a platform, revolutionize the consumption of books and AMZN as a Company? There seems to be evidence that it can:

http://www.businessinsider.com/henry-blodget-kindle-sales-now-a-shocking-35-of-book-sales-when-kindle-version-available-2009-5

If this is close to true, it is not difficult to imagine the revenue growth from Kindle that AMZN could experience with penetration expansion. The new Kindle DX could gain traction in other places too:

http://www.virginia.edu/uvatoday/newsRelease.php?id=8566

That is what growth investors count on - that a company’s product will go where people are not imagining today. Sure Mrs. 2outof4 would prefer the touch and feel of a “real” book today, but carrying 15 of her favorite Chick Lit books to England this summer may be a tad impractical!

As my West Coast friend points out, do not get caught up in the device per se. There will be tons of copy cats. The key is the Kindle platform and distribution. If AMZN can make those ubiquitous and be the conduit for the majority of electronic books going to a myriad of devices, then AMZN wins – in a HUGE way.

Plus, on last year’s Free Cash Flow (FCF) run rate, a relatively modest five year growth rate, and maybe a little too low of a weighted average cost of capital (WACC, I figure they have cash on the books and the cost of raising equity for them would be de minimus), I actually calculate slight upside to today’s share price. That of course is what AMZN’s investors are banking on at these multiples. They are assuming growth will be larger than Wall Street analysts can fathom today.

Maybe it will. My friend’s theory is that Mr. Besos will appear on stage with Steve Jobs (assuming full recovery) at a future Apple meeting and announce how Kindle and the iPhone, together, will revolutionize how we read books. It is at least an interesting theory.

So will the revolution happen and can AMZN’s share price go higher? It is hard to imagine, but that is what growth investors do!

-2outof4