Blue Nile Inc (NILE) Combines the Best of Amazon.com, Inc. (AMZN), Tiffany & Co. (TIF)

This is partly due to Amazon’s valuable platform via which numerous third-party sellers distribute their products. This arrangement allows Amazon to earn significant fee income from third-party sales without having to hold inventory. About 40% of Amazon’s unit volume comes from third-party sellers, so it gets a significant advantage that Blue Nile can never match.

In addition, Blue Nile’s high returns on capital will surely attract more attention from competitors. Although it would be difficult for new entrants to make a dent in Blue Nile’s profitability, established players like Tiffany and Amazon.com, Inc. (NASDAQ:AMZN) may wield their significant buying power to completely disrupt Blue Nile’s business.

Bottom line

Blue Nile Inc (NASDAQ:NILE) trades at such a low price because investors believe there is a significant change that the company will be overcome by competition from Amazon, as well as traditional retailers like Tiffany as they grow larger online presences.

Investors who correctly determine whether Blue Nile’s competitors’ efforts will succeed will make a lot of money one way or the other.

Ted Cooper has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Blue Nile. The Motley Fool owns shares of Amazon.com.