Blue Nile: Online Retail's Diamond in the Rough?

As the holiday season nears, investors are rightly flocking to shares of online retailers such as (AMZN). After all, more shoppers -- lured by value and convenience -- are heading online. But while web giant Amazon gets all the attention, investors would be wise to take a look at one of its lesser-known peers: online jewelry retailer Blue Nile (NILE).

%%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId-61603 alignment-right size-small"%%Both Amazon and Blue Nile trade at steep valuations -- 51 times earnings and 53 times forward earnings respectively -- as investors anticipate blistering growth for the e-commerce sector. But while shares of Amazon have rallied a sharp 60% over the last six months, Blue Nile's stock is up only 40% over that time period. And Blue Nile may have a much easier road ahead than its larger peer, making it a better way to play the scorching online sector than Amazon.

For starters, Blue Nile isn't staring down the law of big numbers the same way in the same way as Blue Nile has a market cap of about $860 million, and reported net income of $2.6 million on $66.9 million in revenue during the last quarter. That compares to a gargantuan $56 billion market cap for Amazon, with net income of $199 million on revenue of $5.45 billion. While new growth prospects for Amazon look promising -- the Kindle, for example, has been a hit -- it is still far easier for Blue Nile to deliver the kind of earnings growth that will have a major impact on the bottom line.

But while concerns boil up about how Amazon will continue to grow -- shares got hit 3% just this week on those worries -- Blue Nile will enter the holiday season with a tailwind instead. The luxury retail sector may be in the midst of a quiet renaissance as affluent customers, many of whom have seen their net worth rise sharply thanks to a surge in the stock market, look to spend again. Indeed, online personal finance site reported that the luxury retail sector is on the rebound based on spending activity by its users.

The competitive landscape could not be more different for Amazon and Blue Nile. Amazon seems to be headed for a showdown with juggernaut Wal-Mart(WMT) -- a competition that could quickly get bloody and batter already thin margins. Blue Nile, meanwhile, will get a boost from the flood of bankruptcies that hit brick and mortar competitors during the downturn.

"We think that Blue Nile is likely to gain sales from the more than 1,400 jewelers that closed their doors last year," John Staszak, an analyst at Argus Research, wrote in a November report. "Over the long term, we remain confident in the company's ability to offer lower prices and take additional market share from traditional brick-and-mortar retailers."

Of course, Amazon has long been taking share from traditional retailers. But Blue Nile may just be getting started making shares that much more appealing for investors.
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