Will Amazon Stay Prime?

07.06.2017 • United Kingdom

Andrew Lockley – Exponential Investor (Great Britain) –

Amazon shares recently broke through the $1,000 mark. It growth – both as a firm, and as a stock – has been remarkable.

After this landmark price, now is a great time to ask where Amazon stock will go next. If its success continues, the firm could grow to dominate e-commerce on a scale we’ve never seen before. Or, it could end up getting torn apart by a public-interest lawsuit – just like Standard Oil was, a century ago. Today and tomorrow, we’ll try to divine the future of this internet giant.

Tech companies don’t get a lot more boring than Amazon – but that’s good

We don’t talk enough about Amazon at Exponential Investor. That’s probably because the firm is, quite frankly, a bit boring. Don’t get me wrong: I strongly prefer boring businesses in my own investments. Nevertheless, they don’t tend to make great copy.

Any firm which delivers my socks and loo roll inevitably struggles to excite me. Familiarity breeds contempt – but that’s very dangerous, from an investment stance. Sticky customers, with humdrum purchasing patterns, are the bedrock of solid business economics. Amazon is now so baked into our lives, that we risk forgetting what a revolutionary company it is.

Let’s look at how far Amazon has come

Amazon started as a bookseller, but then became a deliverer-of-everything. It also expanded from being a simple retailer, becoming a marketplace. That’s a critical step, when it comes to serving the “long tail” of obscure products consumers demand. For example, I recently bought some freeze-dried raspberry powder on the app. It’s unlikely that Amazon could efficiently run a large enough team of buyers and merchandisers, to properly evaluate such niche products. For that, it relies on its marketplace sellers.

Nowadays, even if Amazon is doing the warehousing and distribution, much of the business risk and decision-making falls on its partners. In fact, a whole industry has grown up to support retailers who trade on the Amazon marketplace.

If you’re interested in building an e-commerce business, Amazon offers a pretty easy way to begin – as it solves the key problem of getting traffic. There are even third-party franchises, to help you get set up. Fundamentally, all you need to do is to pick a sector that’s currently underserved by Amazon – and start retailing. Anything that you want, and can’t find, is a good place to start. If you’re looking for a tip: try bulk household generics. A few firms sell large cartons of unbranded dishwasher tablets, etc – but there isn’t the choice you might expect.

Beyond the marketplace, Amazon’s retail offering is currently expanding faster than the observable universe. It is creating new retail sectors, such as Amazon Fresh. It is creating new delivery approaches, like Amazon Now. It is creating new service groups, like Amazon Prime. It is creating new discount levels, like Amazon Pantry. It is creating new delivery technologies, like Amazon Prime Air. It amounts to an astonishingly-rapid expansion of the firm’s service – with a pretty good success rate, to boot.

But what of Amazon’s wider business?

One of Amazon’s most impressive talents has been to take internal processes, and turn them into external products. If you aren’t in the tech world, you may not have heard of Amazon Web Services (AWS). However, this Infrastructure-as-a-Service (IaaS) offer is now the world’s dominant player. This type of technology is often referred to as “the cloud” – a term which is not specific to Amazon. Even Amazon’s competitors, such as Netflix, use AWS. (For clarity, Netflix competes with Amazon Prime’s TV-on-demand offer.)

Most people only notice how widely used AWS is when it breaks. Late February saw a slew of sites get knocked out, by a partial failure of a key AWS service (S3 storage). But, overall, AWS is a pretty reliable beast. That’s why firms use it. Just a few days ago, British Airways became the most recent large firm to discover the problems that can be caused by trying to run their own on-premises IT infrastructure. Events like this – and the resulting £100m compensation bill – will prompt more firms to quietly move to Amazon hosting. After all, if your business is flying planes, what business have you got running a data centre?

All this expansion is great, isn’t it?

Presently, Amazon is storming ahead. But unfortunately, the situation is far from great. We’ll return to this subject tomorrow – to examine just how dangerous Amazon could become. And that’s a big problem for Amazon investors. So keep an eye on your inbox, for further analysis. In the meantime, if you’re interested in technology that goes from new to disruptive to mundane, you need to consider bitcoin. My colleague Sam Volkering reckons bitcoin could hit $100,000 one day. Crazy? People said the same about Amazon. Make your own mind up when you’ve seen this.

Meanwhile, do let us know your thoughts on Amazon: andrew@southbankresearch.com.

Best,

Andrew Lockley
Exponential Investor

-Read more at www.exponentialinvestor.com-

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