Back when I set up my Covestor portfolio, I thought long and hard about tech/web stocks and couldn't come up with any that I wanted to own. The two large cap Internet companies that I really like are Amazon and Google. I subsequently bought Google (NASDAQ:GOOG) in late October at $672 and it's up a bit since then.
Google trades at 33x next year's earnings and I suspect, as usual, that the street is underestimating Google's earnings power. So in my mind, Google is not that expensive as many other Internet stocks are.
Amazon (NASDAQ:AMZN) is harder for me to get comfortable with. It's trading at 100x this year's earnings and 55x next year's estimated earnings. And with so much of its earning power tied to its core retailing business, that seems expensive to me.
But there are two reasons I love Amazon. The first is that our family buys everything that we can on Amazon. If we want to purchase something, we first visit Amazon. If they have it, we buy it there. It's because Amazon already has all of our payment and shipping information (all the various incarnations) and because they have never let us down. Amazon has nailed the online shopping experience. It's the Wal-Mart of the web (without all the negativity that surrounds Wal-Mart).
But being the Wal-Mart of the web has never gotten me that excited about Amazon the stock. There is something else going on that does get me excited about Amazon the stock. Amazon is slowly but surely building a platform for web applications and services that is superior to anything out there. Almost every new company we see these days is using Amazon's platform (S3 and EC2) for some part of their service.
We had a conversation at our portfolio CEO summit last month about Amazon. There were some questions about how reliable Amazon would be. One of our CEOs, a very capable software engineer in his own right, pointed out that if Amazon runs on it, why isn't it good enough for a startup? That was a good point that got more than a few nodding heads.
For those who don't know, S3 is a storage system for the web. If you have images, audio, video, or just files you need to store, you can open an S3 account and store them there instead of on your own servers. It's highly scalable and very cost efficient. EC2 is a virtual server. If you'd rather provision a server in Amazon's data center than get your own server and put it into a colocation facility, it's a relatively simple thing to do with EC2.
This week, we got to see the next card in Amazon's hand. They introduced a web database service that works with the rest of their platform. Just because you can store files in S3, doesn't mean you can make easy queries to them. For that, you need a database layer. A database for the web. It's pretty interesting that with all that the web has brought us over the years, we don't really have a native database for the web.
My friend Dave Winer describes this new database that Amazon is delivering to the web in a post yesterday. Here's what got my attention:
Today, when a company raises VC, it's probably because their app has achieved a certain amount of success and to get to the next level of users they need to spend serious money on infrastruture. There's a serious economic and human wall here. You need to buy hardware and find the people who know how to make a database scale. The latter is the hard problem, the people are scarce and the big companies are bidding up the price for their time. Now Amazon is willing to sell you that, to turn this scarce thing into a commodity, at what likely is a very reasonable price. (Haven't had time to analyze this yet, but the other services are.) Key point, the wall is gone, replaced with a ramp. If you coded your database in Amazon to begin with you will never see the wall. As you need more capacity you have to do nothing, other than pay your bill.
Further, the design of Amazon's database is remarkably like the internal data structures of modern programming languages. Very much like a hash or a dictionary (what Perl and Python call these structures) or Frontier's tables, but unlike them, you can have multiple values with the same name. In this way it's like XML. I imagine all languages have had to accomodate this feature of XML (we did in Frontier), so they should all map pretty well on Amazon's structure. This was gutsy, and I think smart.
Now let's think about what happens when thousands of web startups start using Amazon's database system to support the services they build. Thousands of web applications using a common and shared web native database. That's going to allow some very interesting things to develop. It may become necessary at some point to build on top of Amazon's database if you want to get a level of interactivity with other similar services. Is Amazon building a data API? I don't know because I am not technical enough to truly understand all of this. But it sure smells like a big deal to me.
The funny thing about Amazon's platform play is that it feels like something Google would have done. But they didn't (or at least they haven't yet). Amazon is out googling Google.
That makes me want to own this stock. And so I bought some shares today. Amazon and Google now make up about half my Covestor portfolio. The rest is oil and commodity plays and Toyota which is a hybrid engine play.
I have always loved Amazon and now I have a good reason to own it. And maybe you do too.
Disclosure: long AMZN and GOOG