The Next Step Amazon Needs to Take to Remain Competitive

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Amazon.com (NAS: AMZN) recently reported, and despite beating earnings estimates, the revenue miss pushed the share price down as much as 11.5% after-hours. Despite this miss, I am still bullish on the performance of the company going forward, and have made a bullish CAPScall on the stock on my CAPS page, expecting the stock to outperform the S&P over the next few years.

With Amazon remaining vague as to the total Kindle Fires sold, which is a marked departure from Apple's (NAS: AAPL) practice of highlighting the exact number of devices sold in its earnings, it's hard to know exactly how well the Fire is competing with the iPad. As a Fire owner, I have few complaints about the device and see it as a nice entry-level tablet device. I don't see it ever outselling the iPad, but being second-place to Apple is not a terrible position to hold.

What I like about Amazon
I have been a faithful Amazon customer for as long as I can remember. I purchased my first Kindle last year and have moved to purchasing the majority of my books in an e-book format. Even when I buy books in print format, I choose Amazon over Barnes & Noble (NYS: BKS) because of the price difference, as well as the free shipping I receive as an Amazon Prime member.  These two factors may be big contributors to why Barnes & Noble has recorded negative net income in recent quarters.

While the availability of movies and television shows pales in comparison to the library at Netflix (NAS: NFLX) , I have been able to stream many of the shows and movies I would have watched on Netflix in the first place. Because of this, combined with the PR disaster that was 2011 for Netflix, prompted me to cancel my Netflix membership and use Prime as my primary video-delivery service. If they can continue to add content, and with plans to offer its video streaming to non-Prime members, they will truly be a competitor for Netflix.

What I want to see changed
As an investor, I don't think that I am alone in wanting the P/E of Amazon to come down from its lofty perch. Using the average earnings per share over the past three years, its P/E is still around 90. With gross margins hovering around 22% for the last three years, and net margins down to just over 1.3%, there isn't a lot of room to grow without expanding revenue streams. One revenue stream to pursue would be to continue to expand its video offering outside of Prime members.

But as much as I like my Amazon Prime account, with its free videos and quick shipping, I've been less than pleased with Amazon's streaming presence on other devices. For example, with my Netflix account I could stream videos using either Microsoft's (NAS: MSFT) Xbox 360 or Sony's (NYS: SNE) Playstation 3. With Amazon, I would have to do a back-door fix using Windows Media Player to watch Amazon videos through my Xbox. Furthermore, as far as I can tell, it wouldn't work with free Prime content, severely limiting the ability to watch the videos on a screen larger than my Kindle Fire.

There are other methods of streaming Prime videos to a television, including the purchase of numerous compatible devices that work with the service. Short of spending money on redundant electronics, I am forced to continue watching Prime videos on my Kindle Fire or computer. If Amazon took Netflix's approach and added support for the Xbox, PS3, and Nintendo's Wii, they would expand their reach to over 100 million U.S. gaming-console owners. If they were to capture just 1% of these owners as new customers, they would add an additional $79 million in revenue from Prime memberships alone, providing them with some money to add more content.

Is video domination next?
Amazon has become a retail leader since its humble beginnings as a book seller over 15 years ago. It could now be considered a one-stop shop for nearly any item that you want to purchase. With the addition of its video service, especially the expansion beyond Prime members, it could become even more of an entertainment hub for customers. It is for this reason that Amazon has been included in our new free report, "3 Stocks That Will Help You Retire Rich," along with two other great stocks. Click here to get your free copy before it's too late.

At the time this article was published Fool contributorRobert Eberhardholds no position in any company mentioned. Follow him onTwitter. The Motley Fool owns shares of Microsoft and Amazon.com.Motley Fool newsletter serviceshave recommended buying shares of Amazon.com, Netflix, and Microsoft.Motley Fool newsletter serviceshave recommended creating a bull call spread position in Microsoft. 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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