Last month, Business Insider compared the rapid expansion of Amazon (AMZN), the online shopping behemoth, to that of Wal-Mart (WMT) in the 1980s.
If the analogy holds, then Amazon, and AMZN stock, both have plenty of room for growth. Investors should buy Amazon stock at the price it trades at now, or else they will risk missing out on large gains in the future. One of Warren Buffett’s biggest mistakes was being too cautious on buying Wal-Mart stock, which he estimated cost Berkshire Hathaway (BRK.A) $8 billlion.
So: Can Amazon keep expanding?
AMZN is worth $300 billion, but should still have room for growth. Here are three reasons why:
Amazon Web Services
Sales at Amazon Web Services, the cloud computing arm of AMZN, are now over $10 billion, and the platform has over 1 million users worldwide. This is all the more impressive when you take into account that AWS is only 10 years old. Ten years ago, there was a great deal of skepticism over Amazon Web Services, with observers thinking the idea was foolish. Now Amazon Web Services is the main source of profit for AMZN, generating $1.9 billion out of Amazon’s $2.8 billion operating profit.
AWS is tops in the cloud computing by market share, and this is in a large and rapidly growing industry. Cloud computing is projected to grow at a 30% annual rate to 2020, when it will be a $270 billion industry. Last year, Ben Schachter at Macquarie Securities valued a standalone AWS at $75 billion. Deutsche Bank forecasts that sales at Amazon Web Services would reach $16.2 billion at the end of 2017, which would give Amazon Web Services a $160 billion valuation.
Opportunities for AMZN in Shipping
Amazon is looking to expand its role in transportation, as profits are being squeezed by rising shipping costs. During the fourth quarter of 2015, shipping costs rose to 12.5% of sales from 10.9% a year earlier. Shipping is critical for AMZN, as faster delivery and lower transport costs would give Amazon an edge over other retailers. But the shipping industry is very inefficient (last year it took 90 hours for forwarders to respond to quote requests). This is an opportunity for Amazon.
AMZN is taking bold steps to build up its global supply network and fulfillment infrastructure. In November, a subsidiary of Amazon in China received an ocean shipping license from the US government, getting Amazon into a $350 billion a year industry.
Amazon has leased 20 Boeing 767 cargo planes and is supposedly in talks to buy an airport in Germany near an AMZN fulfillment center. This would speed up package delivery for Amazon within Europe, as the entire continent is within range of a Boeing 737-F transport.
Amazon has a track record of moving things in-house, scaling them up to reduce costs, and then offering them to third-party customers, like it did with Amazon Web Services. Analyst Colin Sebastian at Robert W. Baird reckons that logistics could be a $400 billion opportunity for AMZN.
Amazon Echo: A Smart Move
AMZN is getting into the smart homes sector with Amazon Echo, a smart speaker with a virtual assistant, Alexa, which responds to the owner’s voice and can do everything from playing music to ordering pizza.
A report from Consumer Intelligence Research Partners estimates that 3 million of the devices have been sold. In January, Ford (F) announced that it would integrate Amazon Echo with SYNC, Ford’s technology platform, which would allow users to stay connected to their homes while on the road.
Amazon Echo puts AMZN in the rapidly growing smart home market, which is projected to grow at a 17% annual rate to 2020, when it will be worth $56.18 billion. Additionally, Amazon Echo will lead customers, particularly Amazon Prime users, to do more shopping with Amazon — they can use Alexa to order things which Amazon will deliver.
AMZN Stock Has Room for Growth
Amazon has clearly defied the market’s expectations in the past. With these three engines of growth powering the retail powerhouse, there’s no telling how big it might get. If you sell AMZN stock now, you may be making a mistake like Warren Buffett made when he passed on buying Wal-Mart in the 1990s.
As of this writing, Lucas Hahn did not own any of the aforementioned securities.
