The press release passed with hardly a notice by me about halfway through 2008. Apple (AAPL) had surpassed Wal-Mart (WMT) as the world's leading retailer of music. Sure, it was interesting to hear such a success story, but the sheer magnitude of the news didn't really hit me until companies like Amazon (AMZN) and eBay (EBAY) announced their amazing Christmas seasons in 2008. It suddenly hit me. The internet is taking over the retail world.
It crept up on me. The internet has been around a long time. I didn't even really notice that compact disks had become obsolete. Sure, I have my mp3 player just like everyone else, but who bought their shares of AAPL five years ago because of AAPL's expected impact in the music industry?
Looking back, I feel silly for not anticipating such a maneuver. But a person can't catch all of the big movers. However, it stands to reason that the future of retail resides on the internet. The first names that come to mind are EBAY and AMZN. Sure, both of these names look promising. I'm not going to jump on AMZN right now, though. Their balance sheet is hot, with hardly any debt in relation to their cash on hand, but their profit margin is minuscule at just 3%. Plus, their P/E ratio is in extremely speculative territory at a hair over 35. Yes, I love AMZN's business model. I love their user-friendly interface. However, how much can this company grow to justify investment in a P/E that high? Even though I see a lot of potential, especially since they are developing products to compete with the innovative Netflix (NFLX), it seems that AMZN is just a tad overpriced at the moment.
EBAY is a much better deal. Their profit margin is above 20%, and they have no debt. The price is trading at just 9X earnings, and I'll be frank - well over half of my retail purchases are made on EBAY. EBAY seems to me to be more of a value play at the moment compared to AMZN's growth play.
However, we cannot forget about the innovator in this group. NFLX has developed a product that has forced video rental stalwart Blockbuster (BBI) to completely restructure the way it does business in order to compete. NFLX has changed the way people watch movies. Just when people thought that NFLX was about to start giving market share back to BBI once BBI decided they had to compete to stay in business, NFLX is starting to do to the movie industry what AAPL did to the music industry. Can you imagine a future where one can watch any movie one wants to on demand? Can you imagine a future where Blu-ray will be obsolete because HD feeds are available via the internet?
The fundamentals on NFLX don't look so hot at the moment, but keep in mind that NFLX is still developing their product. They've already taken down one big boy in BBI. Now BBI is back, and AMZN is joining the fray. Does NFLX have what it takes to compete? I believe they do. Their innovation has stayed ahead of the game for the past five years, and they have a lot of room to grow. In fact, I envision a future where people are forsaking their $50 a month cable bills in exchange for an internet movie feed like NFLX. Their biggest competitors tomorrow will be cable stalwarts like Charter International (CHTR) and Time Warner Cable (TWC), along with dish providers DirecTV (DTV) and DISH Network (DISH). For right now, though, NFLX has room to grow under the radar before these television giants are likely to even take notice.
Disclosure: Author holds a long position in NFLX
