Why AMZN Stock Price Could Reach $1,500
Do you know why I love Amazon.com, Inc. (NASDAQ:AMZN)? Because it keeps other CEOs up at night (that is not a joke—CEOs have admitted it). Amazon seeks and destroys the competition by providing better products, plain and simple. That is why you want to be on the right side of AMZN stock…it puts the fear of God into its enemies.
Those who stand in Amazon’s way tend to lose their money or their jobs.
Just take a look at history: Amazon crushed the book industry, brick-and-mortar retailers, and many IT companies. A lot of real people lost their jobs as a result.
Call it the ugly side of capitalism.
But the net result was massive gains to Amazon’s stock price. The company’s trademark blend of perfectionism and ruthlessness continues to power its success, and that’s what Amazon’s critics fail to understand.
Looking at AMZN stock, they see a bloated valuation. How can Amazon justify such a high P/E ratio? Their margins are too slim! Go short! Go short! Go short!
None of that seems to matter, though.
Despite the tonnage of bearish takes leveled at Amazon, the share price still rose 1,314% in the last decade. It more than doubled in the last two years. Simply put, it doesn’t seem to be slowing down, regardless of its size.
How in the heck is that possible? As usual, Warren Buffett has the answer.
Warren Buffett’s Wisdom Is Amazon’s Secret Sauce
The Oracle of Omaha once said, “Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be mis-appraised.”
This perfectly explains why Amazon stock is so special.
The company keeps building addictive products, like “Amazon Prime,” the “Echo,” the “Kindle,” “Amazon Web Services” etc. (that’s the “excellent companies” part of Buffett’s quote).
But investors don’t appreciate the true value of those addictive products, because they don’t expect a $450.0 billion company to keep sales growing at 20+% (that’s the “mis-appraised” part).
So Amazon ends up in a continuous cycle:
- Enter a new market.
Investors shrug, as if to say “Whatever.”
- The competition gets scared.
All of a sudden, investors are paying attention.
- Start eliminating the competition.
Now investors are turning bullish. I wonder why.
- Completely dominate the market.
Laugh as investors trip over themselves to get a piece of AMZN stock.
- Repeat from Step 1.
The first time we saw Amazon go through this cycle was in the book business.
For all of living memory, publishers would sell books wholesale to retailers like Barnes & Noble, Inc. (NYSE:BKS). It was a neat little system. Then Amazon came knocking.
In what would turn out to be a fateful decision, Amazon signed a deal with publishers allowing the sale of books and ebooks on its website. Retailers started to feel the pinch after a while.
Then things got worse when Amazon introduced the Kindle, a device just for reading ebooks.
BKS stock plunged. Amazon stock surged. That has been the story ever since.
The truth is, if you had invested in Barnes & Noble then, more than two-thirds of your money would be gone. But if you’d invested in Amazon stock, you would be sitting on quadruple-digit returns.
Chart courtesy of StockCharts.com
10 Reasons to Be Bullish on AMZN Stock
My point is that if you want to know where AMZN stock is headed, take a closer look at Amazon-the-company. Not Amazon-the-stock. This may seem counter-intuitive, but you’ll be thanking me when market sentiment turns.
When the optimism of a bull market is gone, bad companies are flushed out.
Only great businesses survive the bloodbath. Only the ones that made themselves essential. They grow stronger during the down years, because expansion comes cheap when blood runs in the street.
Amazon is one of these great businesses.
It is powered by Jeff Bezos’s unfaltering obsession with customer satisfaction.
He’s been asked about his management approach before, and he says the same thing every time. To paraphrase, the idea is not to satisfy your customers, but to delight them. Make them feel real joy and they’ll come back.
It’s harder than it sounds. Bezos has a natural touch for figuring out what people want. He also has a knack for running a lean business. Coupling these talents is what makes him an outstanding CEO.
1. Amazon Is Starting to Control Its Own Shipping
Excellent delivery is a hallmark of Amazon’s business. Until recently, FedEx Corporation (NYSE:FDX) and United Parcel Service, Inc. (NYSE:UPS) had a monopoly on delivering Amazon’s parcels. However, the e-commerce giant is dipping its toes into the delivery business, apparently to add capacity for peak seasons.
But from the way they’re going about it, it looks more like it wants to replace FedEx and UPS. Amazon is leasing airplanes and trucks, and leaving the door open to a full-scale delivery operation, one in which it would provide delivery services for other companies as well. UPS and FedEx don’t appear to take the threat seriously, but as I showed above, that can be a fatal mistake with Amazon.
2. Amazon’s Drone Delivery Is for Real
You may have heard that Amazon wants to finish the “last mile” of delivery by drones. Did you laugh when you heard it? Because it’s not a joke—Amazon is dead serious. It is in talks with the FAA on how best to incorporate drones into air traffic regulation. It even built a research facility outside Paris to test drone technologies. This will be a reality sooner than you expect.
3. Amazon Is Taking on Netflix
Amazon is getting into the video streaming business, and consequently the film business. It seems to be going pretty well so far. Its first motion picture, Manchester by the Sea, was nominated for six Academy Awards. It won two. More to the point, Amazon is competing with Netflix, Inc. (NASDAQ:NFLX), trying to outbid it for the rights to air popular TV shows.
4. Amazon’s Prime Membership Ties It All Together
What gives you free one-day delivery, music streaming, and video streaming all in one package? Amazon Prime. It is the all-access pass to Amazon. For about the same price as Netflix’s monthly membership cost, Prime members get a lot more than a video streaming service. This has proven a winning strategy for the company, particularly because Prime members tend to spend more.
5. Alexa Is Getting Smarter
“Alexa” is Amazon’s artificial intelligence bot. It is constantly tweaking Amazon’s software to ensure the highest performance standards. This affects everything from the matching engine to the cloud computing APIs. Alexa is always learning and getting smarter.
6. The Echo Is Selling Incredibly Well
Alexa also powers Amazon’s new line of hardware products. This line began with the Amazon Echo, and has since extended to the “Echo Dot,” “Echo Tap,” and “Echo Look.” You can talk to these devices. You can ask them to order groceries, switch on your television, read you the news…the possibilities continue to expand as Alexa gets smarter. Tens of millions have already been shipped across the U.S.
7. Amazon Is Already Leading the “Internet of Things” Market
“Internet of Things” is a major buzzword in Silicon Valley. It basically means that regular household items—like vacuum cleaners, washing machines, and thermostats—will eventually be “connectable.” Most people think this means you’ll be able to switch them on from your smartphone, and they’re right, but that won’t be the winning strategy. I think Amazon has already found the winning strategy with its Echo series. Imagine controlling the thermostat by just saying out loud, “Alexa, set the temperature to 72 degrees.” It’s a lazy thing to do, but people will love it.
8. Amazon Opened a Bookstore
Amazon is pouring salt on old wounds. Years after crushing Barnes & Noble, the internet behemoth opened a physical bookstore in Seattle. Why? Because it realized that people like brick-and-mortar stores. People like going out, walking around a mall, testing out new products. They just don’t like paying brick-and-mortar prices. I feel like this is a major insight that Amazon is going to harness in unexpected ways.
9. Amazon Web Services Is the Backbone of the Internet
Time for the big ticket items. Amazon Web Services (AWS) is probably the only reason that Amazon is turning a profit. The e-commerce division famously operates on razor-thin margins, but AWS does not. It rakes in the big bucks. And you can hardly be surprised at that, because huge chunks of the Internet are running off Amazon’s cloud services.
10. Amazon’s International Expansion Is Going Well
India is a key piece of Amazon’s growth strategy because, well, it’s got more than one billion people living in it. But doing business in India is tough. Many foreign companies have failed to break into the market. Amazon is not one of them. The Seattle-based company is now a major player in the burgeoning Indian e-commerce space, which bodes well for Amazon’s upside.
Investors often forget that investing is about companies. Not stocks.
The daily movement of a stock price is meaningless, because over the long term, it always gravitates towards the underlying strength of the company.
Once you grasp this, investing becomes a whole lot simpler.
It means you can read a stock’s future in its business. Amazon, for instance, is a growth machine because it redeploys capital faster than Usain Bolt runs the 100-meter dash.
By Bezos’s guiding hand, the company stays lean and hungry. He is perhaps the savviest businessman in the world, which makes it easy for investors.
They just hand him the money and sit back. It’s one hell of a ride.