Overview & Historical Performance
Very few companies have had the same success as Amazon. From 1926 to 2015, only 30 stocks have accounted for one-third of the cumulative wealth generated by the entire U.S. stock market: Amazon was one of them. The company operates in the online retail, cloud computing, and paid streaming service markets and continues to expand into different categories to extend its reach to consumers. Historical performance has been extraordinary: between 2011 and 2015, Amazon more than doubled its sales from $48 billion to $107 billion. Despite its historical performance, many investors are questioning whether this growth will continue.
Acquisition of Whole Foods
On June 16, 2017, Amazon.com announced its plans to acquire Whole Foods Market for $13.7 billion. The announcement sent shockwaves through the industry as it catapulted Amazon into hundreds of physical stores and fulfilled its many failed attempts at selling groceries. In terms of real estate, the deal gives Amazon about 500 new instant fulfillment centers.
For Amazon, the purchase is yet another step in grabbing every part of a consumer’s shopping experience, and has confirmed what many have been thinking: Amazon is strategically positioning itself to compete with Wal-Mart. According to The Washington Post, Amazon is “already in your mailbox, with all of the items you’re purchasing with your Prime membership; your living room, with its Echo device and Prime television services; your library, with its Kindle; and your closet, with Zappos. Now it wants to fill your fridge.”
Impact on the Industry: As a result of the acquisition, grocery chain stocks fell sharply: upon initial trading, Wal-Mart fell ~5% and Kroger declined ~9%. Investors pulled money from these prominent retailers due to worries over increased competition. Payments companies (e.g. Square, Vantiv, Verifone) also took hits Friday over concerns that the deal will lessen demand for these types of methods of paying for goods at checkout (think: Amazon Pay).
Broader Implications: The Whole Foods purchase gives Amazon additional fulfillment centers and the ability to distribute other products more locally, while also gaining expertise in the perishables market.
Success Factors: Future Trends
Amazon’s historical performance is extraordinary, but many investors wonder what’s next for the e-commerce giant, especially in the wake of the Whole Foods acquisition. As past growth is not always an indicator of future performance, there are six predominant areas that are key to Amazon’s success.
Online Sales: Amazon’s bread and butter is their online marketplace. Although not purely focused on profitability, the company’s ability to reach consumers and gain their trust is unmatched. As such, expected growth in the industry could have a larger impact on Amazon’s performance. According to Statista, U.S. online sales were $322 billion in 2016 and are expected to climb by more than 50% to $485 billion by 2021.
In terms of market penetration in 2016, 43% of U.S. online sales are with Amazon: that’s $4 out of every $10 spent online. Almost 80% of online sales growth comes from Amazon alone, and there are currently about 80 million Amazon Prime members (2016). This accounts for 64% of households in the U.S.
Amazon Web Services: Over the last ten years, Amazon Web Services (AWS) has become the dominant cloud service, but is now facing intense competition from a variety of sources, most notably Microsoft and Google. AWS's competitive advantage includes procuring, designing, and architecting data centers and data storage resources. Despite increased competition, AWS continues to gain traction, which is important for its margins. As a company, Amazon has experienced a huge increase in both sales and growth, but has not been nearly as focused on profitability. Although only a small portion of Amazon’s portfolio, AWS contributes significantly higher margins as compared to other divisions and has even helped the retailer generate operating income a few times.
Artificial Intelligence: Artificial Intelligence (AI) has been a hot topic over the past few years, so it’s no surprise Amazon is interested in getting into the game. Even Amazon CEO, Jeff Bezos, has been quoted, saying “AI will be a huge part of Amazon's growth over the coming years.” Most notably, Amazon’s first foray into AI was in 2014 with the Amazon Echo and its AI software, Alexa. Success of the Echo and Alexa is already prominent; not only is the Echo popular, but many third-party device makers are scrambling to incorporate Amazon’s AI into their own devices. Despite competition from Google, Apple and, Microsoft in the AI department, Amazon looks to be the leader, especially with regard to third-party integration.
Grocery & Retail: Amazon has been trying to become a player in the grocery market for a number of years now, through their Amazon Fresh, Prime Now, and Go platforms. Their acquisition of Whole Foods is both a concession of their previously failed attempts as well as a strong platform with which to seriously enter the grocery business.
Online is poised to become a bigger part of the overall grocery shopping equation; it’s predicted that shoppers will begin by moving certain purchases (non-perishable items) online. According to data from Prosper Insights & Analytics, 7.7% of U.S. consumers purchased groceries online, up from 5.7% (+35% increase) two years ago (2016). It is estimated that by 2025, 20% of all US grocery sales will be conducted online. Due to shifting consumer patterns as well as the Whole Foods integration, there’s a possibility Amazon could become the third-largest grocery retailer by 2021.
Millennials: According to the 2017 Brand Intimacy Report Brand by MBLM (the largest study of brands based on emotion), Amazon was the “single most-trusted of all retail brands among customers of all ages, as they feel a strong emotional attachment.” Amazon was also noted to be the top retail brand for consumers between the ages of 18 and 34, and the second highest rated brand among consumers overall.
As an added boost, younger generations are driving increases in online grocery shopping. In 2016, one in ten millennials made a grocery purchase online, which is an increase from 8.4% in 2015 and 6.8% in 2014.
Streaming Services: Amazon has three large pillars – AWS, Marketplace, and Prime subscriptions – and it’s possible that its Prime streaming services, could become the fourth. Half of all US households with a TV now subscribe to Streaming Video on Demand (SVOD) services, and Amazon Prime membership is increasing rapidly.
Very rarely do companies reach the level of success that Amazon has demonstrated annually for the past 10+ years. The company has continued to expand into almost every category of consumers’ lives and as such, has positioned itself as one of the strongest companies in 2017. Also remarkable is that Amazon just recently passed Volkswagen AG to become the world's biggest corporate spender on research and development (at around $18 billion), indicating Amazon’s continued desire to invest in their future. Although the stock price is high (stock is up +32% in 2017 and +40% in the last 12 months), analysts are expecting another +10% increase in the next 12 months.