This Is My Highest-Conviction Stock in the Market


Last summer, I pledged to put my own money behind 10 stocks. My goal was to build the World's Greatest Retirement Portfolio.

So far, the results have been outstanding. Since inception we've put up an outperformance of about 18 percentage points over the S&P 500!

But out of all 10 stocks, there's only one that that holds my greatest conviction to succeed as a business in the future, and that company is (NAS: AMZN) . I'll explain the two key reasons I believe the company will be thriving for decades to come.

But first, let's review how the company has done so far
Last year when I wrote my original recommendation for the company, I focused on its enduring competitive advantages -- including its brand, cost advantages, high switching costs (Amazon Prime's free shipping), and its network effect.

While I believe all four of these advantages are still intact, there are two major developments that deserve some attention since last year. First off, the company has spent lots of money on technology. That money is being used to improve the company's technological infrastructure, which includes the buildout of Amazon Web Services -- the company's cloud initiative. While overall revenue grew by 34% last quarter, spending on technology and content increased at 63%, meaning investment in this segment ate into profits.

The second area to take note of is spending on fulfillment. I've written about this before: The company's buildout of expensive fulfillment centers throughout the United States is designed to speed up and streamline delivery of products, further improving customer satisfaction.

While the actual capital expenditures on the centers will be accounted for in depreciation expenses over the next 39 years, there are lots of recurring costs eating into profit right now. The company is building up its inventory and spending money (outside capital expenditures) to expand fulfillment capabilities, but as these centers come online, they have yet to be able to contribute revenue. Like technological investments, fulfillment expenses grew faster than revenue last quarter, coming in 51% higher than 2011.

Combined, these two areas of expense have driven profits down, which has caused the company's P/E to skyrocket up to 176. Even so, the company has underperformed the S&P 500 -- including dividends reinvested -- since my recommendation last year by only a slight 1.7%.

Innovation: It's a big deal
But despite worries about these booming costs, I'm still quite confident in the company's future. One of the reasons is that CEO Jeff Bezos has engrained a culture of long-term innovation within Amazon.

What was once simply an online book ordering and delivery system has bloomed into several different fields. Amazon's Kindle was a revolutionary new product, which helped end the life of Borders book stores and forced Barnes & Noble (NYS: BKS) to develop its own e-reader, the Nook. Amazon's Kindle still holds the e-reader crown, though, as Barnes & Noble has found it hard to compete with the ultra-long-view Amazon.

The company also has its very own tablet -- the Kindle Fire -- that competes with Apple's (NAS: AAPL) iPad. Though the Fire might be inferior functionally to the iPad, it's also priced as such and can generate recurring revenues for Amazon when it's used to purchase e-books and other items from That's why comparing the Fire directly with the iPad isn't really an apples-to-apples look.

Amazon has even taken a foray into streaming online movies, emerging as a somewhat serious competitor to Netflix (NAS: NFLX) . It doesn't hurt Amazon's chances that it has far more cash on hand to purchase content than Netflix, and it offers added benefits like free shipping from Netflix can't say the same thing.

I'm not saying that every one of these diverging businesses will prove successful over the years. The company needs only a few to do well. And in a business environment that's constantly being disrupted by innovation, I take solace investing in proven innovators.

A wide moat
Remember those fulfillment centers I was talking about? Well, they're a big deal. Having streamlined, super-expensive centers spread throughout the country ensures that when you order something from Amazon, it will get to you in just a few days. Reliability like that engenders customer loyalty, which leads to strong recurring revenue.

For a company to enter the space and attempt to make a dent in Amazon's dominance, it would have to first spend billions to match the company's scale and then hope it could offer something to win over customers.

If I were a bright entrepreneur, I would look for other ways to succeed outside taking on Amazon. The cost would be too high, and the probability of success too low. And with the Forrester research group estimating that e-commerce accounts for between 7% and 9% of all sales in the United States, you can see how much room for growth there really is.

The one industry that poses a threat
There is, however, one industry that I think could one day usurp Amazon's business model: 3-D printing. I was first introduced to this mind-boggling technology while researching industry leader 3-D Systems (NYS: DDD) , and I've been fascinated ever since.

Our top analysts have prepared a special free report on 3-D printing: "3 Stocks to Own for the New Industrial Revolution." I'll give you a clue and tell you 3-D Systems is one of the companies. But get a copy of your report today to find out who the other two are, and why this technology has so much potential. The report is absolutely free!

At the time thisarticle was published Fool contributorBrian Stoffelowns shares of Amazon and Apple. You can follow him on Twitter, where he goes byTMFStoffel. The Motley Fool owns shares of, Apple, 3-D Systems and Netflix and has written calls on 3-D Systems.Motley Fool newsletter serviceshave recommended buying shares of Apple, Netflix, 3-D Systems, and, creating a bull call spread position in Apple, and writing puts on Barnes & Noble. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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