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By Zain Asher
October 25, 2012
Four Japanese-Americans prepare to be sent to an internment camp on February 28, 1942.
Four Japanese-Americans prepare to be sent to an internment camp on February 28, 1942.
Time & Life Pictures/Getty Images

Ever since it was founded in 1994, Amazon.com has been all about transformation.

The Seattle-based online retailer started off by reinventing the way books were sold. Then it redefined itself by hawking everything from furniture to electronics — in the process challenging giant retailers such as Wal-Mart head-on.

More recently, the company doubled down on its dotcom roots through tablets, streaming video, and cloud computing. Transformation, though, comes at a steep price.

Can Amazon afford to keep being so daring?

Tech 2.0

Amazon is re-embracing its inner nerd. The company struck a blow against Netflix by signing an agreement with Epix, giving Amazon Prime subscribers access to thousands of additional streaming videos.

EC2, the firm’s cloud-computing unit, leads Google and Microsoft in market share. And with the Kindle Fire, which controls 22% of the U.S. tablet market, Amazon is taking direct aim at the iPad and Apple’s iTunes platform.

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The stock is already reaping benefits — investors are valuing it like an Internet startup circa 1999.

Morningstar analyst R.J. Hottovy says, “Amazon’s P/E shouldn’t scare investors off because its profitability is still being sacrificed for investments in rapid expansion.” Of course, you’ve probably heard that one before.

Reinventing retail

The e-tailer, which accounts for almost 2% of retail industry sales, is growing rapidly and poses a threat to traditional big-box stores. To keep up with the company’s expansion, Amazon is building 18 new fulfillment centers, which will further speed up delivery times.

“Amazon is already testing out pilot programs in certain cities which would allow for same-day delivery service,” says Wells Fargo analyst Matt Nemer. “If successful, the online behemoth could pose an even greater threat to brick-and-mortar stores.”

The threat could be slightly muted, though, by new laws forcing Amazon to collect sales tax on behalf of states where it previously hadn’t, shrinking the online seller’s price advantage.

Big sales, little profits

While revenues are thriving, reaching $48 billion last year, profits have seen better days, as the company is in spending mode.

Amazon recently paid $775 million for Kiva Systems, makers of warehouse robots. That followed last year’s acquisition of U.K.- based LOVEFiLM to help compete against Netflix globally.

And in an effort to gain market share, Amazon’s new Kindle Fire 2 will be sold virtually at cost.

“Amazon isn’t trying to make money on hardware,” says Morningstar’s Hottovy. “It’s using devices to lure consumers into spending more on e-books, digital content, and Prime subscriptions.”

The strategy is a gamble: Wal-Mart and Target have stopped selling Kindles for competitive reasons, potentially slowing Amazon’s plans.

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The purpose of this disclosure is to explain how we make money without charging you for our content.

Our mission is to help people at any stage of life make smart financial decisions through research, reporting, reviews, recommendations, and tools.

Earning your trust is essential to our success, and we believe transparency is critical to creating that trust. To that end, you should know that many or all of the companies featured here are partners who advertise with us.

Our content is free because our partners pay us a referral fee if you click on links or call any of the phone numbers on our site. If you choose to interact with the content on our site, we will likely receive compensation. If you don't, we will not be compensated. Ultimately the choice is yours.

Opinions are our own and our editors and staff writers are instructed to maintain editorial integrity, but compensation along with in-depth research will determine where, how, and in what order they appear on the page.

To find out more about our editorial process and how we make money, click here.

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