AMZN Stock is Backed by a Winning Strategy
Some financial analysts pray at the altar of Jeff Bezos, the CEO of Amazon.com, Inc. (NASDAQ:AMZN), while others crusade against AMZN stock. The faith of markets has had an extraordinary effect on Amazon stock, but the bears still think it will collapse.
There are so many factors driving the success of Amazon stock that it’s hard to focus on just one thing. Amazon has its hand in tons of business lines. From cloud computing services to food delivery, the company has a wide scope, so understanding Amazon means looking at its strategy or the business lines that exemplify its strategy.
AMZN stock is essentially a play on monopoly power. One of the defining characteristics about Amazon is its unrelenting pursuit of market share; the company doesn’t try to carve out a niche with thick margins, but rather it goes for volume.
The strategy for Amazon is based on a fundamental principle you likely would’ve learned in Economics 101 known as “economies of scale.” Put simply, it says that as a company produces more of an item, the cost per unit tends to drop. The success of Amazon is built on this principle.
Even though it’s not my favorite strategy, I don’t understand how critics can argue that it’s not working for Amazon. Have you see the price of AMZN stock?
The Bullish Case for Amazon Stock
Amazon stock is up 112.8% this year alone. That’s right: despite how loudly and often the bears call an end to the bullish run on AMZN stock, it just continues to rise.
Chart courtesy of www.StockCharts.com
I’ll concede that the market can be wrong sometimes, because if it wasn’t, stocks would be fairly priced and no one would have the chance to make any money. But this isn’t one of those times. Investors are getting it right on Amazon stock.
Amazon’s tactics in the book business are exactly the same as its retail strategy. Carry slim to non-existent margins so that Amazon’s prices are lower than those offered by rivals, then make sure that deliveries are efficient and timely.
At the time, the bears were ignoring Amazon stock because e-books were beneath their radar. That made it easy for AMZN stock to get a stranglehold on the publishing industry.
Critics also said AMZN stock would fall because no one wanted to shop online. Wrong again, Bob. A few months ago, the gross value of AMZN stock eclipsed the market cap of Wal-Mart Stores, Inc., making Amazon the largest retailer in the world.
Jeff Bezos runs a tight ship and he willed Amazon to accomplish those goals. Tight margins and timely deliveries worked in tandem to drive Amazon stock higher on the charts.
AMZN Stock Poised for Even More Growth
One reason Amazon stock attracts so much negativity is that its strategy sacrificed short-term profits. AMZN stock was always a bet on the long-term control of a market, but the bears just couldn’t see that. The common refrain was always, “Oh, someday, Amazon stock will have to deliver profits and since they aren’t doing that right now, I’m bearish on the stock.” Well, if they have to do that in the future, talking about current profits doesn’t make any sense.
Remember: past performance isn’t an indicator of future performance.
Besides, the reason AMZN stock will continue to rise is because the firm is actually delivering on its promises. Jeff Bezos always said that once Amazon gained enough market power, it would start delivering profits. In the last six months, Amazon has turned a net profit of $171 million. I’m sure the bears will stick to their guns and say something like, “but that’s nothing for a company as big as Amazon!” That’s hardly the point, though.
To me, the delivery of profits was proof that Amazon is on the right track. Jeff Bezos committed to a strategy that showed daring and intelligence, and that was enough for a while. Now that he continues to deliver on those promises, we’ll see Amazon stock soar in the foreseeable future.