This Should Silence Amazon Stock Bears
Dear reader, I’ve written plenty of articles about Amazon.com, Inc. (NASDAQ:AMZN), on everything from speech recognition tech to cloud computing. Since the company is always expanding, it earns a new tailwind for AMZN stock almost every week.
That said, there’s one story I don’t cover very often: Amazon’s retail business. I know this seems counter-intuitive, because online retail is what the company is best known for. It makes up the biggest chunk of Amazon’s revenues, to be sure.
But that is exactly why I don’t write about it often. Investors already view Amazon as a titan of retail, which means that AMZN stock already reflects that view. To put it another way, the market has already priced in Amazon’s dominance. Or has it?
Consider this little piece of history.
On July 23, 2015, news broke that Amazon had officially eclipsed Wal-Mart Stores, Inc. (NYSE:WMT) as the biggest retailer by market cap. Amazon stock shot up 9.8% over the next 24 hours. (Source: “Amazon Passes Wal-Mart as Biggest Retailer by Market Value,” Bloomberg, July 23, 2015.)
But why? If the market had already assumed Amazon’s dominance of retail, then why would AMZN stock surge after its market cap surpassed that of Wal-Mart? There’s only one explanation: Amazon’s potential in retail was not fully priced into AMZN stock.
Even though a year has passed, and Amazon stock has done well, I still think that statement stands true. Investors have not fully absorbed the vastness of Amazon’s ambitions, which is why the stock is trading below its fair price.
If you don’t agree, please check out this chart:
For clarity’s sake, I want to reiterate the point made in this chart. According to information from company reports and Baird estimates, Amazon sells six times more than other online retailers combined. That’s a crushing statistic.
This chart couldn’t be more devastating if it held a nuclear warhead; it couldn’t pack more of a punch if it was a right hook from Mike Tyson. But better still, this chart suggests that Amazon’s retail dominance is more complete than we had ever guessed.
How Can Amazon Stock Preserve This Lead?
Wal-Mart sees this imbalance as an existential threat. Earlier this summer, it bought Jet.com—an e-commerce startup—for $3.3 billion. Wal-Mart was trying to bolster its online presence through consolidation, but there’s little chance that will work. (Source: “Wal-Mart to buy Jet.com in $3.3 billion deal,” CNBC, August 8, 2016.)
Amazon stock is far too insulated. The company even created a pseudo-holiday called “Prime Day,” in which its premium members can access special discounts. It’s similar to the Friday before Thanksgiving, except it locks customers into their service.
So far, the allure of Prime Day sales has drawn customers into the “Amazon Prime” membership program. Consider it an all-access pass. Prime members get free two-day deliveries, free access to a Netflix-style streaming service, access to student loans, grocery deliveries… the list is ever-expanding.
Since a Prime membership only costs $79.99 per year, it has become wildly popular among middle-class Americans. Moreover, research has shown that Amazon Prime members spend more on Amazon than those without the membership.
Luring customers into a Prime membership is Amazon’s way of securing a bright future for AMZN stock. The company is effectively raising customers’ cost of switching to another service by adding extra benefits.
In doing so, the company has virtually guaranteed the safety of Amazon stock. When it comes to e-commerce, and indeed the future of retail, Wal-Mart is a tiny minnow compared to the whale that is Amazon. Perhaps I should mention that more often.
That being said, there are other stocks which have helped Amazon stock achieve its “wunderkind” status. Its cloud computing division was responsible for pushing the company into the black; that much is well known. What investors might not know is that a little supplier got rich by doing business with tech titans like Amazon.
This company is truly one of a kind. Its share price has doubled over the last two years, which is just the tip of the iceberg. We could continue to see enormous gains from this little-known stock, but you should act now before the window of opportunity closes. Click here to read more.