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Amazon.com (NASDAQ:AMZN) is the world's best retailer, writes Barron's Mark Veverka, and it's winning over both customers and shareholders.

The benefits of Amazon's business model are even more apparent when times are tough. Its operations are cheaper to run than those of traditional retailers, allowing the company to pass on significant savings to customers. Products are shipped directly from warehouses to customers' houses, bypassing the time and expense of first shipping merchandise to thousands of individual stores. The absence of stores also means the company has fewer layers of expense for real estate, employees, inventory and utilities. Amazon's ability to carry customer payments on the balance sheet for up to 26 days before it has to pay suppliers can help lower pricing and gives Amazon room to grab more market share.

Despite spending-wary consumers, Amazon had a strong Christmas season and free cash flow rose 16% in 2008. It carries more product categories than ever before, both through its own operations and through third-party retailers on the site, and offers more brands per category. Amazon has become the first stop of cybershoppers and with less than 10% of all retail sales done online, there's plenty of upside for growth. Customers also like its low-cost shipping and its 'Prime Program' which offers free two-day shipping on most items for $79 a year.

Amazon is growing overseas too. It ships in six foreign countries, including Japan, China and Germany. In Q4, international sales of $3.07B made up 46% of total revenue.

Ever pragmatic in finding ways to leverage its operations by running parts of other companies' businesses, Amazon is now pushing into cloud computing, allowing third parties to outsource their IT and data-sourcing operations through Amazon. Having spent over $2B on its systems in the last decade, Amazon offers several services, including Amazon Simple DB (databases), Amazon Elastic Compute Cloud (computing capacity) and Amazon Simple Storage (data storage). The market for cloud computing is projected to reach $150B in 2013.

Aside from Amazon's strong e-tailer business model, the company now has e-book reader Kindle as well. It recently released a new version of the Kindle which has been selling well. Analysts estimate the company has sold 350,000 of the devices so far, and at $359 it generates not just revenue but book sales as well. Kindle is arguably better than a similar gadget developed by Sony (NYSE:SNE), and is broadening its base with an application available for the iPhone (NASDAQ:AAPL).

With Friday's close of $70.52, the shares sell at roughly 20 times the company's free cash flow of $1.36B in 2008. Profit for 2008 was $1.49 per diluted share, up 36% from the year before, on $19.17B in revenue, up 28% from the year before.

  • Walter Price, of Allianz Global Investors, expects free cash flow to grow around 20% annually going forward, without taking into account potential growth from Kindle or cloud computing. He thinks "it isn't unreasonable to expect that revenue could double over the next three years," and believes shares could break $100 in 2-3 years.
  • Gene Munster, of Piper Jaffray, has a 12-month price target for the stock of $81. He upgraded Amazon to Buy in early March, partly because of a survey his firm conducted which showed 81% of Amazon's customers are satisfied with the retailer and 94% would recommend the site to a friend.

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  • Last week Amazon (AMZN) said it will close distribution centers in three states, and either lay off or transfer around 210 employees to other nearby facilities.
  • Discovery Communications (NASDAQ:DISCA) alleged Amazon's (AMZN) Kindle book reader violates a patent it registered in 2007. It plans to sue for damages and future royalties, but won't seek an injunction to halt Kindle sales.
  • Amazon.com (AMZN): Q4 EPS of $0.52 beats by $0.13. Revenue of $6.7B (+18.2%) vs. $6.44B. "We're particularly grateful for the unusually strong demand for Kindle in the fourth quarter." (PR)
Source: Amazon: King of the Retailers - Barron's