Today's Hot Topics   ▲  |  ▼

This online pioneer has been a major force in growing generations of consumers into Internet buyers, and it continues to be a pioneer for online retailing, writes Elliott Gue of Personal Finance.

Amazon.com (AMZN) is best known as an online retailer of books, a business it pioneered in 1995. The company is now the world’s largest online retailer, selling digital and print media, electronics, apparel, and myriad other categories of goods.

Amazon has been a disruptive force in the retailing industry, and it’s now riding the growing popularity of e-commerce. The 2011 bankruptcy of Borders Books, once one of the largest and most respected booksellers in the US, largely stemmed from the fact that no bricks-and-mortar store can rival Amazon’s inventory of titles.

Amazon’s growing selection of electronics goods offered at discounted prices has represented a serious competitive threat for once-dominant electronics retailer Best Buy (BBY) over the past few years. Best Buy has been forced to match Amazon’s prices to propel sales, and the result has been weakening profitability and margins.

Increasingly, Amazon is becoming the dominant e-commerce destination site on the web. The share of Amazon’s sales driven by search engines such as Google (GOOG) has actually declined in recent quarters, a sign that consumers are searching for items directly on Amazon’s site, and a testament to the power of its brand.

Buyers feel their online payments on the Web site are secure whether the goods they’re buying are sold directly by Amazon or by third-party sellers who simply use the company’s Web site and payments system to market their products.

The company’s low-cost distribution platform, which includes advanced inventory management systems and a network of warehouses, conveys a major cost advantage over traditional retailers. As the share of retail sales conducted online continues to jump in coming years, look for Amazon to be a major beneficiary.

Perhaps the most important near-term growth driver for Amazon is its digital media business and the Kindle Fire tablet computer. The company recently introduced four new versions of the tablet that will be available in time for the 2012 holiday season, including a 7-inch Fire priced at $159 and three high-definition (HD) Fire models priced at $199 to $499.

While Amazon is tight-lipped about the manufacturing cost of the Fire, most believe the company prices the units at close to cost and makes its profits by selling to consumers digital media delivered to the tablet.

Amazon has been particularly aggressive in expanding the video content it conveys to Amazon Prime subscribers via the Kindle. Most recently, the online giant inked a deal with pay television station Epix to offer the latter’s titles, including content produced by Viacom (VIA) and its subsidiary Paramount Pictures, as well as Lions Gate Entertainment (LGF) and Metro-Goldwyn-Mayer. That deal brings Amazon’s library of video titles to over 25,000.

Trading at 2.2 times sales and 65 times 2013 earnings estimates, Amazon is not a cheap stock, but that valuation is justified by its growing dominance of the online retailing industry. Buy Amazon.com under $300.

Subscribe to Personal Finance here...