DEALWATCH: Amazon Should Shop - But Not At Retail
29 Avril 2009 - 8:16PM
Dow Jones News
In the summer of 2001, my wife and I took a lovely trip to
Italy. We have one regret - we didn't spend enough money. The euro
was at 85 cents, compared to $1.30 now. We should have brought home
suitcases of Italian clothing, salami and olive oil.
Amazon.com Inc. (AMZN) may have similar regrets if it doesn't
spend the rich currency it currently holds - its stock.
The company has an eye-popping price-to-earnings ratio of 50
times this year's projected earnings, a valuation four times that
of the market as a whole. The company's valuation relative to the
broader market has been rising since the market bottomed in
November of last year.
Amazon may or may not be overvalued. It's had a high multiple
for years, and both growth and margins are heading in the right
direction. But the disconnect with the overall market creates an
opportunity for making acquisitions with stock.
Which acquisitions, though? In recent months, Amazon's purchases
have focused on additions to its Kindle e-book portfolio.
Historically, it has invested in smaller e-retailers.
At present, few, if any, of the other publicly traded
e-retailers are appealing targets. From eBay Inc. (EBAY) to Blue
Nile Inc. (NILE), negative growth rates abound.
Retail is not Amazon's only business, however. Amazon Web
Services provides enterprises with information technology services
through the Internet "cloud:" computing capacity, data storage,
content distribution and so on. Running applications in the cloud,
rather than in local servers, can help companies cut both IT
hardware and operating costs.
AWS also lets customers - predominantly small and medium-sized
businesses - piggy-back on Amazon's payment infrastructure, and
even its network of warehouses for "pick, pack and ship"
services.
Amazon has real advantages in this area. No one has more
experience with the logistics of running a Web-based enterprise.
Its negative working capital is evidence it knows how to monitor
and manage suppliers, customers and warehouses. Amazon can't sell
customers a hardware-software-services bundle, as big competitors
like IBM Corp. (IBM) can, but the hardware component of cloud
computing is getting cheaper and less important.
The company doesn't break out sales or profit numbers for AWS.
But AWS is in a growth area and, by virtue of its parent, has
capital available. Acquisitions make good sense.
The biggest independent player in e-retail support and
outsourcing is GSI Commerce Inc. (GSIC), and the leading software
player is Art Technology Group Inc. (ARTG). But an Amazon takeout
is highly unlikely in both cases. These firms' core customers are
large merchants that will hesitate to outsource to a competitor
like Amazon.
There are other directions Amazon could go, however. It could
pick up companies with technology that would improve customers'
e-commerce operations but would not involve AWS taking substantial
control of their sales channels. To pick just one example,
LivePerson Inc.'s (LPSN) software helps e-commerce sites convert
more visitors into buyers, a key objective for many AWS
customers.
Alternatively, Amazon could reshape AWS by deepening the
software offering that sits on top of its infrastructure platform.
MySQL, the popular open-source database application for cloud
computing, could become available when its owner, Sun Microsystems
Inc. (JAVA), is absorbed by Oracle Corp. (ORCL). Buying MySQL would
move AWS away from the channel conflict of e-commerce towards pure
cloud services.
It's hard to say where Amazon ultimately wants AWS to go. Using
the company's high-multiple stock to get there is a good idea,
regardless.
Paul Sharma, senior columnist in London, contributed to this
column.
(Robert Armstrong is a senior columnist with Dow Jones
Newswires. He can be reached at 201-938-2319 or by email at
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