Sorry Amazon.com, Inc. (AMZN) Stock Holders, India Isn’t as Big as It Seems

Advertisement

On the surface, the news sounds compelling. India is home to more than 1.3 billion people, and the country’s economy is consistently growing at more than 7% now … far better than the global average.

Amazon.com AMZN

In that regard, it simply makes sense that Amazon.com, Inc. (AMZN) would want to invest in the fast-growing, populous country.

Before owners of AMZN stock pat themselves and each other on the back, though, a reality needs to be impressed. The country isn’t the profit panacea most U.S. consumers believe it is, nor is it a game changer for U.S. corporations’ bottom lines.

While Amazon may do relatively well there, when all is said and done, it may not significantly boost the value of Amazon stock.

It’s All Relative

The news came out this morning — e-commerce giant Amazon is investing another $3 billion in India, bolstering $2 billion already deployed there. While details of how the capital would be utilized weren’t offered, presumably CEO Jeff Bezos’ plan is to build more of the same already erected there — fulfillment and data centers.

All other things being equal, the replication of the proven U.S. business model overseas just makes sense. All other things aren’t equal though, and if AMZN stock holders are expecting huge things from India, they may not want to hold their breath.

It’s an often-overlooked dimension of foreign expansions, but consumers don’t earn the same amount of money in most other parts of the world as they do in the United States, or as they do in much of the western world. India is no exception to this norm. In 2013, the median annual income of an Indian was a mere $616 … yes, in U.S. dollars. The average income per capita in India that year was only $1455, again in U.S. dollars. That’s not changed much in the meantime.

For perspective, the average income in the United States in 2014 was $28,900 per person, or $53,600 per household.

U.S. consumers and their North American/Western European counterparts simply have more disposable income, on an absolute (though also a relative) basis.

This isn’t to suggest consumerism doesn’t exist in India. It does. The cost of living is also quite low there. Rent and groceries, for instance, cost 486% and 203% more in the United States than they do in India. Still, average wages in India are relatively lower, making it tough for most to come up with the disposable income that makes Amazon.com such a draw.

Not the (Whole) Point?

Granted, it won’t matter as long as any earnings created in India stay in India. Although prices of goods sold via Amazon.com in India are lower there than they are in the United States, so too are the company’s operating costs in the country. At some point in time, though, for that income to do owners of AMZN stock any good, it has to come home. Once it does, shareholders are going to see that a big market doesn’t always lead to big sales or big profits.

Of course, profits may not be the key objective. Amazon has already created 45,000 jobs in India, and given the size of cash injection in the queue, it could end up doubling that figure before it’s all said and done. For owners of Amazon stock who also enjoy participating in global economic development, the tepid return on any investment may not be a concern.

That’s not most investors, however.

Bottom Line for AMZN

While India may not be a big market in terms of per-capita opportunity, it’s still a market Amazon should work to further penetrate. There may be limited upside for the bottom line, but there’s power in perception.

Amazon’s ultimate plan is to integrate itself into the daily lives of every person on the planet. For it to become that centerpiece, it has to become the proverbial middleman for everyone, even if there’s not a lot of money in it in some regions.

Of course, even if there’s not a lot of profit to be turned in India, the company is running out of low-hanging growth opportunities in the all-important North American market. It’s got to do something somewhere else.

Just don’t expect an earth-shattering boost to the top or bottom line following this $3 billion investment.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

More From InvestorPlace


Article printed from InvestorPlace Media, https://investorplace.com/2016/06/amzn-stock-amazon-india/.

©2024 InvestorPlace Media, LLC