Why I'm Adding Amazon to My Watchlist

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This article is part of ourRising Star Portfolio series.

As portfolio manager of Tier 1 Investments, a Motley Fool Rising Star Portfolio, my mission is to identify the best businesses in the world and invest in them at attractive prices. One of the ways I do that is by searching through hundreds of companies and adding a select few to my watchlist. Then from my watchlist I select what I believe to be the best of the best to add to the Tier 1 portfolio. Today I'm adding Amazon.com (NAS: AMZN) to my watchlist. Here's why:

Amazon's revenue growth has actually been accelerating, from less than 30% growth in 2008 and 2009 to 39% growth in 2010 and more than 41% growth in the last 12 months. The company's core Internet retail operations continue to gain share from its bricks-and-mortar competitors. Due to its fundamental competitive advantages, namely a lower cost structure and ability to offer a wider selection of goods, that's a trend I don't expect to end soon.

I'm even more impressed with Amazon's initiatives to widen its competitive moat. Its Amazon Prime program gives its customers the incentive to make more and more of their purchases at Amazon by offering free shipping. But Amazon didn't stop there. It's now strengthening the advantage it has with its Prime membership program by offering free Internet streaming of thousands of movies and TV shows. This is putting it in direct competition with Netflix (NAS: NFLX) , but Amazon's ability to package its video streaming service with its Prime program will make it a fierce competitor in this space.

I'm also intrigued by Amazon's entry into the tablet market with the debut of its Kindle Fire. At a $199 price point, it has been a hit with consumers, with Amazon recently reporting that the Kindle Fire was the best-selling product across all of Amazon.com on Black Friday. This puts Amazon in Apple's (NAS: AAPL) crosshairs, as it no doubt will take steps to defend the iPad's market share. But with the Kindle Fire selling for less than half the iPad's price, Amazon has positioned itself to be a formidable competitor in the tablet market.

What I'm watching
Amazon's stock always seems to appear expensive. But dominant businesses with strong competitive advantages and superior management often do. Going forward, I'll be trying to determine a fair price at which to buy Amazon's shares. I'll also be trying to determine how the Kindle Fire will affect Amazon's profit margins, as the company is believed to be selling the Fire below its cost to produce each device. Will Amazon be able to make up for that loss in increased digital book and music sales? Or will the Fire earn its keep by simply helping Amazon strengthen its lead in its core online retail sales operations? Let me know what you think by joining the Tier 1 Investments discussion board.

At the time this article was published Joe Tenebruso manages a real-moneyRising Star Portfoliofor The Motley Fool and is an analyst for the Fool's Million Dollar Portfolio and Income Investor premium services. Joe has written puts on Apple.The Motley Fool owns shares of Apple.Motley Fool newsletter serviceshave recommended buying shares of Amazon.com, Apple, and Netflix.Motley Fool newsletter serviceshave recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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