Amazon, Amazon, Amazon. The gift that keeps on giving.
Jeff Bezos has been my favorite CEO since Steve Jobs died, and increasingly Amazon is becoming my favorite company.
Their retail story is well digested and understood. Amazon knows one thing: the key to retail is to make the friction between the decision to buy stuff and the act of buying it as little as possible. One click buying, kindle, curation, shipping, Prime, etc, Amazon just wants to get you the best things you want to buy and make buying it as easy as possible.
But they’ve not stuck to what worked. Bezos is a relentless visionary engine and he has consistently broken new ground. Amazon Web Services has maintained 57% of the cloud services market two years in a row, and grew income over 100% at $2.2 billion.
But perhaps the most important thing Amazon has done, and the reason their stock just became a buy again for me, is Alexa. Alexa is their AI personal assistant which powers (but is definitely not limited to) their home device Echo. In my twitter and readings at the end of last year, I identified Internet of Things as the mega trend that has, in my view, reached a tipping point meaning that it will now start gaining massive adoption. By positioning Alexa as the operating system of the home (something I berated Apple for not doing in several posts), Amazon has set itself up to building a hugely profitable and rapidly growing business in a new space. They are enabling outsiders to build applications that work on Alexa, they are talking to device manufacturers many of whom Amazon retails for, to build support for Alexa into their devices so that it communicates and is controlled via voice. And Amazon knows that whether you’re making shopping lists, buying things for online delivery, getting your prescription read to you, streaming music or movies and what have you, it has a service that can meet that and it is collecting data on what you like and how you use the AI in order to vastly make it better.
By the time Apple ever gets around to using Siri in the same way, if they ever do, it will be too late. Google has some hope here but Amazon is just too compelling.
At the same time, their profitability and aggressive reinvestment gives Amazon the firepower to pursue insanely good ideas like Go, their friction-less, completely seamless, pick-up-and-go physical stores.
Finally, as part of its aggressive paring down of costs, Amazon is rolling out its own delivery airline, Prime Air to save money on the billions it gives to UPS and Fedex as its retail footprint has grown larger and larger. Knowing the company, even though I haven’t seen the cost break down for Prime Air, I know they wouldn’t be doing it if it wasn’t cheaper so I expect the savings they make on there to feed into their business. Who knows, they might even expand the service into competing more directly with those two, which is really how most of their extra services got their start.
Now, those are just the narratives side, which for a company like Amazon is what drives the valuation. However, there are a lot of numbers that back up my belief that Amazon should increase at least 40% over the course of this year. For one, the company is valued at less than 3x revenue, which is on the low end of tech companies (because of their artificially low reported profits). Even if that multiple stays the same, with Amazon slated to earn around $180-$200 billion in revenue this year, they should see a market cap of close to $500 billion, which is 42% higher than today’s price. Now, if due to improving consumer sentiment and higher demand for Amazon’s stock from very positive investor sentiment, then we should see that multiple expand ever so slightly, taking Amazon’s valuation closer to $600 billion or 63% increase by the end of the year.
People always talk about Amazon’s lack of profits. It’s intentional. Amazon runs a lot of its businesses close to break even to break industries and capture market share. Jeff Bezos is a finance whiz. He knows the levers he’s pushing. While reported profits have hovered near zero and barely crossed $2bn last year, operating cash flow has been positive since 2002 and hit around $18 billion last year. He just plows all that cash either into expanding existing services, making them cheaper or entering new businesses. So, in the end, the company is a perfect profit machine, just deferred.
Based on all of the above, it’s pretty easy to make the case for Amazon as a solid buy. Like all investing decisions however, I like to point out, all of the above is simply the most probable state of affairs to expect, which is the best we can hope for. There is no certainty to it. Markets may tank tomorrow. Anything could happen. Do your own homework, make your own risk decisions, and flourish.