Of America’s five largest tech companies, one is not a tech company at all. Amazon.com, Inc. (NASDAQ:AMZN) is, and always has been, a logistics company. Its tech dominance is an outgrowth of its core business: building retail logistics and then finding uses for it. Still, AMZN stock — as the “A” in FANG — is lumped together with tech stocks. Let’s have a closer look.
Source: Via Amazon
Amazon built its cloud to handle its own order flow. It began renting that cloud, and serving media, to get more use out of it. If Amazon doesn’t have immediate use for logistical capacity, it offers that capacity to the market, and when the market figures out how to make money with it, Amazon does too.
That’s how Amazon got into artificial intelligence with Alexa. It was a way to bring in more orders, and a way to get more use out of its cloud. Its success allowed Amazon to put it into other devices, and those devices are now making money.
How much money?
Not much money. Amazon is less interested in its net income line than in its growth trajectory, which it wants to be 20% per year, quarter-on-quarter. For the quarter ending in June, to be reported July 27, analysts are expecting revenue of $36.93 billion. Compare that with $30.4 billion for the same quarter in 2016. To Amazon, that is right on plan.
The huge run-up in Amazon shares since early 2015, when you could get buy it for under $300 per share, is based on a change in perception of this unchanging program. Back then, amateur analysts saw small profits, even losses, and called it a Ponzi scheme. Now they see the same things and call it genius, but the program hasn’t changed.
Most of the technology that makes Amazon dominant is not computer technology. It’s the technology for breaking bulk in its warehouses — robots moving pallets and forklifts help pull orders — that’s the key to the operation. Amazon’s marketplace and third-party fulfillment is just like Amazon Web Services (AWS) — a way to get others using this capacity, with AMZN learning from them
The Amazon Problem
The problem with Amazon’s business model is that, while it’s fine for a small or even medium-sized company, it’s a direct antitrust violation for a company of Amazon’s present size.
The assumption among analysts, who think they finally understand Amazon’s game, is that it sees Whole Foods Market, Inc. (NASDAQ:WFM) as retail infrastructure, a platform for gaining traction in a grocery delivery business where it has been a bit player. But it’s also a way for it to compete more fiercely against its own Marketplace customers, from whom half its retail revenue comes from.
Amazon is less an innovator than an explorer and copycat. It sees Marketplace merchants making money using its infrastructure so it creates its own store brands and takes that profit for itself. It sees Costco Wholesale Corporation (NASDAQ:COST) making money through memberships that build a loyal following, and makes Amazon Prime into the same thing, with the lure of free shipping. The difference is while Costco has a retail margin of 13%, Amazon’s margin is now 33%, and that’s been climbing steadily for years.
The Bottom Line on AMZN stock
Amazon should be primed to make enormous profits right now. Growth in its Selling, General and Administrative expenses is slowing, its “free” revenue from Prime and related products is exploding. So is AWS. Sales growth is on-target and should increase once the Whole Foods deal closes, and it seems no company can stand in its way.
Still, there is a maximum value for everything. There’s a ceiling; Is that ceiling 3.4 times sales for what is essentially a retailer? Or, is it 182 times earnings for a company that is becoming a grocer?
That’s what the market is trying to sort out, along with AMZN stock investors. Amazon today is a company in full, fully valued. We all know what happens when anything matures. Amazon is ripe fruit that smart investors are starting to harvest.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.
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