When a company carries a 400-plus price-to-earnings (P/E) multiple, investors are expecting strong growth. And that’s exactly the case for Amazon.com, Inc. (NASDAQ:AMZN) stock. Trading at $572.45, the company has a P/E ratio of 461X. So, what kind of growth potential could possibly allow Amazon stock to be so expensive?
Three words: “Internet of Things” (IoT).
This Could Be Huge for Amazon Stock
Amazon has entered the IoT world in a step-by-step manner. Right now, the easiest way for you to experience Amazon’s IoT expertise is through a tube-shaped device called “Echo.” The device turned out to be a surprise success since its launch in 2014.
Echo is connected to Amazon’s cloud-based personal digital assistant, Alexa. By telling Alexa what to do, Echo can read audiobooks and the news, report traffic and weather, and even control the lights in smart homes. Through a recent partnership with Ecobee—a smart thermostat maker—Alexa can help you control the temperature in your home as well.
The best part is that while being your personal digital assistant, Alexa can also direct more business to Amazon. If you tell Alexa, “Alexa, get me paper towels,” the digital assistant will automatically order more paper towels for you from Amazon.com.
Also, through the list of things that you ask Alexa to remind you of, it would also get an idea of what your shopping list looks like. And that would help Amazon send you more relevant coupons and advertisements.
So, Echo is a rather amazing device, for both consumers and Amazon. And at $179.99, it’s not exactly expensive. But in an effort to reach more consumers, the company has introduced two new devices—“Amazon Tap” and “Echo Dot.” (Source: “Amazon Introduces Echo Dot and Amazon Tap, Two New Alexa-Enabled Devices,” Amazon.com, Inc., March 3, 2016.)
Both Amazon Tap and Echo Dot are voice-controlled devices, so you can talk to them just like you would with the original Echo. Moreover, they are also connected to Alexa. The neat thing is that the new devices are much cheaper: Amazon Tap is priced at $129.99, while Echo Dot will cost you just $89.99.
Note that these hardware products are just the tip of the iceberg that is Amazon’s giant Internet of Things (IoT) platform. What Amazon really plans to do is build the infrastructure that connects all devices in the IoT space.
How would the company accomplish such an ambitious plan? Through the cloud.
In case you haven’t noticed. Amazon’s cloud computing arm, “Amazon Web Services” (AWS), is already the dominant player in its business. Moreover, its growth rate has been nothing less than phenomenal.
In 2015, net sales from AWS surged 69.8% year-over-year to $7.88 billion. Operating income from the segment more than tripled to $1.86 billion. (Source: “Amazon.com Announces Fourth Quarter Sales up 22% to $35.7 Billion,” Amazon.com, Inc., January 28, 2016.)
Amazon has expanded its cloud computing service to the IoT industry. Last October, it announced “AWS IoT,” a platform that “makes it easy for devices—cars, turbines, sensor grids, light bulbs, and more—to connect to AWS services so that companies can store, process, analyze, and act on the volumes of data generated by connected devices on a global scale.” (Source: “Amazon Web Services Announces AWS IoT,” Amazon.com, Inc., October 8, 2015; http://phx.corporate-ir.net/phoenix.zhtml?c=176060&p=irol-newsArticle&ID=2095590.)
According to Amazon, the platform will be able to support billions of devices and trillions of messages. It will also integrate with “Amazon Kinesis,” “Amazon S3,” and “Amazon Machine Learning” to build IoT applications, analyze data, and manage infrastructure.
The Bottom Line on AMZN Stock
As the Internet of Things revolution takes hold, Amazon could be one of the biggest gainers. Moreover, more connected devices like the Echo could also boost Amazon’s e-commerce business.
However you look at it, the company is well positioned for the future and that’s reassuring for AMZN stock investors.