Jeff Bezos Will Keep Pushing Up AMZN Stock
There’s an old investing proverb that perfectly sums up the strategy used by Amazon.com, Inc. (NASDAQ:AMZN): “You can dig for gold, or you can sell shovels.” There are plenty of bears on AMZN stock, but that’s what they fail to understand; Amazon stock isn’t built on gold, but rather, it’s valuable because Jeff Bezos sells shovels.
The metaphor dates back to the Gold Rush era. At the time, most ambitious and entrepreneurial young men were heading off into the wilderness in search of gold. Many would panhandle in the streams, trying to catch a few bits of the valuable precious metal. Others would dig for gold using pickaxes and shovels.
But who sold the shovels, pickaxes, and pans? After all, if you were a gold prospector, then you competed with every other Joe out there. On the other hand, only a handful of people would be sharp enough to sell the tools everyone else needed to succeed.
That’s the big difference between, say, a Samsung Ltd. and an Alphabet Inc. The physical smartphone market is incredibly competitive, meaning Samsung is just one of many makers. By contrast, Alphabet developed the “Android” operating system, which is used by a variety of smartphone makers, Samsung included.
Shovels over gold, that’s how Jeff Bezos runs Amazon.
What Bezos Has in Store for Amazon Stock
So what is today’s equivalent of the Gold Rush and by consequence, what are today’s shovels? To find the answer, we have to look at an emerging trend called the “Internet of Things,” or the IoT. The IoT is a modern Gold Rush.
Companies have become increasingly data-conscious in the sense that tracking product performance can help boost efficiency. To facilitate that process, more and more products are being fitted for Internet connectivity, hence the Internet of Things.
Imagine your lamps were all connected to an app on your smartphone. You could preset the controls to minimize your electric bill or time the lights to switch on in the morning using an app. Alternatively, the app could adjust controls based on the data it reads through the lamps regarding usage, peak times, etc. to reduce costs and minimize your overall carbon footprint. This is just one example.
Of course, all the data flowing from these devices has to be computed through the Internet. That business is known as cloud computing and coincidentally, Amazon happens to be a market leader in cloud computing.
OK, maybe it isn’t a coincidence; Jeff Bezos likely knew exactly what he was doing.
The Upside for AMZN Stock
There’s a massive amount of information that needs to be processed online. According to Gartner Reports, no other competitor is even close to Amazon in terms of its market share of the cloud computing business. (Source: “AWS named as a leader in the IaaS Magic Quadrant for the 5th consecutive year,” Gartner, last accessed November 23, 2015.)
In fact, Amazon Web Services, the web hosting and cloud computing arm of Amazon, is responsible for the slim, but noticeable profits we’ve seen in the company’s reports lately. Amazon stock isn’t known for its bottom line, but “selling shovels” in the IoT is turning that around.