Amazon has often been accused of diversifying too much and becoming unfocused, having expanded from its core ecommerce model into seemingly unrelated areas - whether that be AI through Alexa, video, and music content, or its recent foray into the grocery market through its $13.7 billion buy of Whole Foods.
However, Amazon has always argued that it only invests for the long term, and that its broad range of services and products help to complement one another. It all comes back to the Amazon ecosystem and the company’s aim to be a one-stop shop for consumers. Everything ties together.
For example, Amazon’s array of electronic products such as the Kindle, Kindle Fire, or Fire TV all push customers to use Amazon’s app store and ecommerce platform. Virtual assistant Alexa encourages owners to shop with Amazon and join the Prime subscription service in order to make the most out of Amazon’s video and music content, which in turn is allowing Amazon to penetrate even more unlikely areas such as advertising by providing large addressable markets for companies to target.
What is Amazon: a titan of tech or ruler of retail?
So what is Amazon – a technological rival to that of Microsoft and Apple, a content firm challenging Netflix, a cloud-computing company taking on Oracle, or a retailer battling it out with the likes of Wal-Mart and Alibaba? In short, it is all of these things and more.
Generally, a company with so many diverse activities would be classed as a conglomerate with many unrelated activities, much like General Electric. With businesses operating in aviation, financial services, healthcare, energy and transport, General Electric as a whole is valued less than the sum-of-parts (the value of each separate unit), because investors price in a ‘conglomerate discount’ to reflect concerns that managing so many unrelated businesses makes a company like General Electric more unfocused than a business channelling all its energy into fewer products or services.
However, with Amazon shares trading substantially higher than earnings forecasts it is hard to argue that the market has included a conglomerate discount in Amazon’s share price. Amazon has so far escaped the conglomerate tag, despite its expansive activities. Bezos has kept his other interests like the Washington Post and spaceflight firm Blue Origin separate from his Amazon empire, much like Elon Musk has ring-fenced his numerous ventures like Tesla, the Boring Co and SpaceX.
Here is a brief breakdown of Amazon, looking at the biggest aspects of its diverse portfolio:
- Ecommerce: Amazon’s core business sells its own and third-party products to customers around the world. The US is by far its biggest market, with the UK, Germany, France and Canada some of its other major markets. The company also offers private label goods and ranges like AmazonBasics and Amazon Handmade. They also own other websites like shoe and clothing retailer Zappos.
- Retail: The acquisition of Whole Foods means Amazon now has a significant physical retail presence in the US, to challenge the likes of Wal-mart, adding to its other brands like AmazonFresh and AmazonGo.
- Hardware: Amazon has released many electronic products. The Kindle is regarded as the most successful, and has been followed by the Kindle Fire (a tablet spin-off) and the Fire TV and Fire TV Stick (internet entertainment streaming devices). One of Amazon’s flops includes the Fire smartphone.
- Cloud-computing: Amazon Web Services is the world’s leading provider of cloud-computing services, and sells the very systems it used to build its core ecommerce platform to businesses. Other elements include AmazonServices, which helps third-party retailers upgrade their own online platforms.
- Artificial intelligence: Alexa, through virtual assistant devices like the Echo, Echo Plus, Echo Dot and the latest Echo Spot (which has an added display function) represents Amazon’s big move into AI to take on rival products like Google Home and the Apple HomePod.
- Content: Prime Video and Prime Music offers members access to a variety of content. It also creates and commissions its own content through arms like Amazon Studios, and owns other related sites like IMDb (which acts like an online TV and film encyclopaedia).
- Books: Amazon has evolved this unit to include other offerings like CreateSpace, which allows users to self-publish everything from books to DVDs, CDs and digital downloads. Amazon also owns the audiobook service Audible and book recommendation site Goodreads.
- Gaming: The company is ‘all in on games’ with Amazon Game Studios, which has been complimented by the purchase of video game streaming site Twitch. Amazon also has its own app store, which is the default platform for its hardware devices.
- Advertising: This service folds in to its other areas, but Amazon does have units like A9, which is the company’s search engine tool leveraging Amazon’s unrivalled data on consumer trends and shopping habits.
Amazon share price: a technical analysis
The parabolic run higher in Amazon stock since October encountered heavy selling, but it provided investors with the first real dip in the price for several months. It has rebounded, creating a new higher low, suggesting a resumption of the uptrend. A failure to hold above $1340 would signal a potentially bigger retracement, to $1266 and then $1210 in the near term. Continued gains target $1620, the recent record high.
Amazon is due to release its results for the first quarter of 2018 later this April, and the company has provided guidance targeting net sales of between $47.75 billion and $50.75 billion, which would be between 34% to 42% higher year-on-year. Operating income is likely to drop, guided between $300 million and $1 billion compared to the $1 billion delivered a year earlier.
Amazon: opportunities and threats
‘What we need to do is always lean into the future; when the world changes around you and when it changes against you – what used to be a tailwind is now a headwind – you have to lean into that and figure out what to do because complaining isn’t a strategy,’ – Bezos.
With the market confident in Amazon’s ability to grow earnings over the forthcoming years, investors should look at the other matters that will drive its share price higher or lower in the immediate future. Amazon has plenty of growth opportunities in the pipeline, but there are leaks that need to be addressed.
Growth opportunities: what will support the Amazon share price?
‘There are two ways to extend a business. Take inventory of what you’re good at and extend out from your skills. Or determine what your customers need and work backward, even if it requires learning new skills,’ – Bezos.
Advertising: giving Google a run for its money
‘Similar to the candy and magazine racks, which are the most valuable space in the store, Amazon is the most valuable space on the web because you are at the very bottom of the funnel. Not only are people about to make a purchase, but you know what’s in their basket. It’s hard to imagine a more target-rich medium than Amazon or robust offering,’ – Scott Galloway, marketing professor at New York University’s Stern School of Business.
Google and Facebook are thought to control anywhere between 60% and 80% of the online advertising market. The world’s largest advertising agency WPP deploys more of its clients' funds in Google than any other firm, at about $6 billion in 2017, with another $2 billion spent on Facebook, and sums spent on other sites like SNAP is growing. WPP is set to increase ad spending on Amazon to $300 million this year from the $200 million spent in 2017 – meaning Amazon has a long way to go to catch Google.
Learn more: what challenges are WPP and the wider advertising industry facing?
Amazon’s offer of such a wide range of products means it will become a big player in search advertising to rival a space dominated by Google, rather than display advertising. Amazon could source material revenue from companies seeking to promote their products when customers are searching on Amazon, which also has the likes of video to push advertising products through.
It has always been known that Amazon would have the data it needs to monetise an advertising business, and the company looks like it is now putting it to work. However, this also comes at a time when data management and privacy is being heavily scrutinised following the recent Facebook and Cambridge Analytica scandal.
Read more about Cambridge Analytica: a threat to Facebook's shares and reputation?
Amazon and groceries: we all need food
‘This is just the beginning – we will make Amazon Prime the customer rewards program at Whole Foods Market and continuously lower prices as we invent together. There is significant work and opportunity ahead, and we’re thrilled to get started,’ – Jeff Wilke, CEO of Amazon Worldwide Consumer.
It must be sore for any retailer shutting up shop opposite a Whole Foods having succumbed to online shopping. Amazon, having taken shoppers off the streets and into the digital shopping age, is now taking on the US high street, equipped with 450 of ‘America’s Healthiest Grocery Stores’, with another 13 in Canada and seven in the UK.
All of Amazon’s businesses have to play a role in the bigger Amazon machine, and Whole Foods is no exception. The stores will leverage Amazon’s sophisticated logistics network to help lower prices. Prime will be used as its loyalty scheme. Whole Foods products are now sold through AmazonFresh, Prime Pantry and Prime Now. Amazon lockers have also been installed in some Whole Foods stores for customers to pick up their online shopping.
While many parts of retail cannot avoid the move online, there will always be demand for ‘offline shopping’ for some products, like food. Even when Amazon has drone deliveries up-and-running, when you need a pint of milk, you need a pint of milk.
Amazon Web Services: the secret jewel
Amazon Web Services (AWS), which competes with Microsoft Azure and Google Cloud, is the leading cloud-computing company in the world. This secret jewel is how Amazon affords razor-thin retail margins. AWS made an operating profit of $4.33 billion in 2017 (up 39% year-on-year) while Amazon as a whole made just $4.10 billion (down 1.9%) – and AWS generates just 10% of Amazon’s total net sales.
The list of companies it acquired as customers last year alone sums up why AWS, not the ecommerce business, is proving to be the cash cow: Expedia, Walt Disney, Symantec, National Football League (NFL), Capital One, Bristol Myers-Squibb, Honeywell, Experian, Dow Jones, Ubisoft and more.
AWS also homes AI development, which is in a ‘golden age’ according to Bezos. This includes Alexa, the digital assistant built into the Echo range. Alexa will be appearing in more homes around the world, providing a direct link between the consumer and Amazon without a laptop or phone in sight.
Threats and barriers: what could knock the Amazon share price?
‘A brand for a company is like a reputation for a person. You earn reputation by trying to do hard things well,’ – Bezos.
Amazon faces several headwinds, some over the longer-term and some that need to be addressed more immediately.
US government vs Amazon: Trump takes on Bezos
‘I have stated my concerns with Amazon long before the election. Unlike others, they pay little or no taxes to state and local governments, use our Postal System as their delivery boy (causing tremendous loss to the US), and are putting many thousands of retailers out of business!’ – US president Donald Trump, 29 March 2018.
The US president is unhappy with Amazon on multiple fronts, claiming:
- The US Post Office is losing ‘billions of dollars’ delivering Amazon goods around the country
- Amazon is not paying its taxes properly while ‘fully tax paying retailers’ are closing down across the country
- That Bezos is using the ‘Fake Washington Post’ as a lobbyist for Amazon (the editor of the paper has denied Bezos has any involvement)
Trump’s accusations are strong, and questionable. Never mind the fact that the growth in parcel deliveries is the only saving grace the US Post Office amid declining letter volumes, it is actually illegal for the service to deliver packages for a loss. The attack on tax is not new for Amazon or any of the big players and is likely to pose a bigger threat, especially with the EU looking to introduce an ‘EU Digital Tax’ to address the ‘mismatch between where value is created and where taxes are paid’.
The power of Amazon in US ecommerce and growing influence in retail has even prompted calls for Amazon to be split up. The former US CEO of Wal-mart, Bill Simon, recently said that Congress should consider the move, because Amazon is ‘not making any money in retail’ while putting others out of business. ‘It’s anti-competitive, it’s predatory, and it’s not right,’ he said. Amazon responded by saying Simon has no real basis to claim it operates its retail division at a loss.
Amid the recent cut to corporation tax, the Whole Foods deal being signed off, AWS chasing a multi-billion dollar contract with the Pentagon, and the fact Amazon is looking for a new site for its second US headquarters – there are plenty of cards to be played.
Trump’s choice to pick a fight with Amazon has pushed shares lower, but the consequences of the spat won’t be known for a while, meaning there will be plenty of pressure on shares.
Amazon is not the unrivalled king of ecommerce: Alibaba and Coupang
‘If you’re competitor focused, you have to wait until there is a competitor doing something. Being customer focused allows you to be more pioneering.’ – Bezos.
Alibaba could prove to have the thieves needed to steal value away from Amazon. Amazon may be the dominant player in the US (Statista predicts Amazon will account for 50% of all retail commerce in the US by 2021 from 37% in 2017), but Alibaba is the king in China, which has a considerably larger addressable market and faster growth. Interestingly, Alibaba too has a cloud-computing unit.
Amazon’s performance over the last 12 months has been impressive, but always trumped by Alibaba. The US giant shares may have climbed 55% over the past year but the Chinese competitor has risen 60%. Amazon’s revenue rose 31% in 2017 while Alibaba reported a 57% surge (in yuan terms). In terms of market cap, the gap between the two is constantly closing.
Read more: how could a US-China trade war impact markets?
Other rivals still have the potential to emerge, despite already being sizeable businesses in their own right. South Korea has its own ecommerce giant named Coupang which is reported to be worth about $5 billion and backed by the likes of SoftBank, which is looking to take on leaders like Gmarket (owned by eBay), demonstrating vast markets that Amazon will have a tough time breaking into.
Amazon must maintain growth and prove its ventures pay off
‘It’s not an experiment if you know it’s going to work,’ – Bezos.
Investors have followed guidance from Bezos over the years, tracking the likes of revenue and cash flow to measure Amazon’s performance, rather than focusing on the bottom-line. This will only continue to work if Amazon sustains a substantial amount of growth. If it does become too stretched, and returns from its heavy investments fail to materialise then Amazon will be much less attractive as both its growth and its bottom-line would begin to stagnate against a backdrop of very tight retail margins. However, taking risks with technology through the likes of AWS and AI is what will continue to give Amazon its edge.
Conclusion: Amazon share price could start offering more opportunity
Amazon shares are not cheap, and had been riding high for several months before Trump knocked them back down. The mixture of material pressure emerging on several fronts and Amazon’s proven growth strategy means investors are likely to be presented with more opportunities to trade Amazon in the coming months. Trump provided investors with the first real dip in the Amazon share price for several months, and more are likely to come.
