Amazon Justifies Its High Price, Again

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Amazon.com (NAS: AMZN) bears think its P/E ratio of 137 will undergo a correction to something saner, perhaps a little above the traditional average market P/E ratio of around 16, but the juggernaut of high valuation recently announced a new site to capture even more consumers. Take a look at AmazonSupply.com, the new marketplace that caters to "business, industrial, scientific and commercial customers."

The new digs
AmazonSupply offers products "from basic supplies like drill bits and automatic hand dryers, to hard to find parts like laboratory centrifuges and miniature polyimide tubing." In addition, orders can qualify for free two-day shipping, and there is a 365-day return policy, a dedicated customer service center, and corporate lines of credit that allow customer to pay up to 45 days later.

How did Amazon get into this business? Although the specifics were undisclosed in any annual report, Amazon acquired SmallParts, a supplier of "tubing, parts and fasteners for the medical supply and research industries" in 2005.


The new competition
With the new site, Amazon welcomes several new direct competitors. Staples (NAS: SPLS) , the No. 2 online retailer by sales, hopes customers will keep pounding on their "easy" buttons. Staples recently boosted its dividend by 10%, with a yield around 2.9%.

Also, Home Depot (NYS: HD) and Lowes (NYS: LOW) will have to compete with AmazonSupply's offerings of plumbing, materials, and tools. The stores can take a breath with their paint and wood businesses, however, as AmazonSupply lists only spray-paint and doesn't offer lumber. Home Depot updated its website last year, and began offering a "Buy Online, Pick-up In Store" service, and redesigned the site so customers use fewer clicks to find products. Lowes introduced mylowes for homeowners to save room dimensions, paint colors, owner's manuals, warranties, wish lists, and reminders online.

The new arguments
Now Barnes & Noble and Best Buy won't be the only topics in discussions of online versus bricks-and-mortar. However, get ready for any of the following questions: Will business customers wait a few days for the tools, materials, and supplies? Or do AmazonSupply's target customers demand the immediacy of shopping in person? Will shipping these potentially heavy tools and materials continue to erode Amazon's margins, like many have claimed Amazon Prime has done? Are the current relationships between business and supplier too strong to disrupt? Will Home Depot and Lowes be caught up in a price-fixing scheme for e-wrenches? OK, maybe not that last one, but Amazon's move into this market will definitely spur some interesting dialogue.

While Amazon's high P/E might scare off some value investors, I believe its constant moves into new markets completely justifies its price. For two other stocks -- along with Amazon -- that might help you build your own wealth, check out our free report: "3 Stocks That Will Help You Retire Rich".

At the time this article was published Fool contributor Dan Newman thinks delivery workers might not appreciate delivering boxes of bronze bars. He owns shares of Amazon.com, but no other company mentioned above. Follow him @TMFHelloNewman.The Motley Fool owns shares of Amazon.com and Staples. Motley Fool newsletter services have recommended buying shares of The Home Depot, Amazon.com, and Staples, as well as writing covered calls on Lowe's. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days

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