Even with a slight correction over the last week, Amazon's (Nasdaq:AMZN) shares are up 200% over the last 12 months. Skeptics continue to question whether the company can continue to improve gross margins and increase revenue rapidly at the same time.
But, to a large extent, that misses the point of why Wall Street is buying into the company's future. With a new only payment service that will go after Ebay's (Nasdaq:EBAY) PayPal, Amazon shows that it is willing to look for new, large businesses that make use of its existing customer base.
The Past Does Not Mean Much
From October 2003 to April 2007, Amazon's share price was flat. Investors would fret about the amount of money that the company spent on technology and customer shipping. And, ecommerce can be a tricky business. Other companies including Borders (NYSE:BGP) and Barnes & Noble (NYSE:BKS) sold books. Amazon's CD and DVD business was competing with large companies such as Best Buy (NYSE: BBY), and its consumer electronics business was up against the likes of Circuit City (NYSE:CC). Margin pressure could come from any of these companies.
Someone At The Company Pays Attention
When Amazon released it earnings for the first calendar quarter, sales increased 32% to $3.02 billion. Operating income increased 38% to $145 million. The company held its technology spending to 27% year-over-year and technology costs rose only 35%. In the second quarter, sales increased 35% to $2.89 billion and operating income increased 149% to $116 million.
For the quarter, Amazon's increase in technology expenses was only 20%. The management had listened to Wall Street's concerns and dialed back on fast rising costs without hurting earnings.
Three New Businesses
Recently, Amazon has shown a willingness to enter into unfamiliar territory. It started three businesses:
#1 - Video download service
#2 - Leasing its excess computer storage
#3 - Ecommerce payment
With the company's huge DVD sales base, download-over-the-internet premium video was a natural extension of a business that the company already had. It even had the chance to target frequent DVD buyers with its customer lists.
The company also began a service firm to lease its excess computer storage, hosting, and bandwidth to other companies who do not want to make the capital investment on their own. Amazon's existing large list of affiliate sellers has been a natural target for this.
Very recently, the company disclosed it is entering the ecommerce payment business. This arena is dominated by Ebay's PayPal, which is 34% of that company's sales. Also, there is increased competition by Google's (Nasdaq:GOOG) newer Checkout.
The Amazon product will have a critical advantage over Google's entry. Amazon had over 53 million unique visitors in the U.S. last month, and it has substantial sales overseas. Even if its payment systems ends up being used by a large portion of its own customers and no one else, it is likely to be a runaway success.
Life Beyond Books
And, the company can market the service to ecommerce companies using the Amazon hosting and storage businesses. In my view, the reason Amazon's stock keeps rising is because the market can see the opportunities for large businesses beyond selling books.
To learn more about ecommerce, e-tailing and all things "e", read Choosing The Winners In The Click-And-Mortar Game.
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