Amazon.com, Inc. (NASDAQ:AMZN) continues to roll along. AMZN stock trades just off all-time highs at the moment, having gained over 2,000% over the past 10 years.
While some investors point to the price-to-earnings ratio of Amazon stock as a potential danger sign, I think that view is short-sighted. The company’s legacy business continues to change the face of U.S. retailing. Witness the sharp decline this week at Target Corporation (NYSE:TGT), which seems directly attributed to Amazon’s online success.
Of course, online retail isn’t the only area where AMZN is having success — or where increased profits can drive Amazon stock higher. The company’s Amazon Web Services (AWS) business has become a dominant player in cloud.
And, of late, the company’s Amazon Echo, built on the Alexa Voice Service, has added another layer to the bull case for AMZN stock.
Though I remain bullish on AMZN, I don’t think Alexa really changes the value of Amazon stock — at least not yet. Amazon is too big and Amazon Echo usage is too spotty, for Alexa and/or Echo to drive impressive sales or profit growth on their own.
But both products highlight the success of Amazon’s long-term strategy; Alexa, in particular, may become a bigger point of the AMZN story in the future.
Why Alexa And Echo Aren’t A Big Deal For AMZN Stock Yet
For any other company, Echo would be considered a monster hit. Amazon hasn’t broken out sales figures, but it did say in December that it had sold “millions” of Echo devices. An outside firm pegged the number at over 5 million. With the average sales price for Amazon likely around $100 (including retail markup and sales of lower-priced Amazon Dots), that implies as much as half a billion dollars in sales for AMZN.
That’s a huge number — for anyone but Amazon.com, Inc. AMZN generated more than $135 billion in revenue in 2016, meaning Echo-related sales were likely a fraction of 1% of the overall total. Those sales almost certainly come at higher margins for Amazon than, say, shipping a book at the company’s usually tiny markup. But from a profit standpoint, Echo seems likely to offer at most a 1%-2% boost, and thus little impact on the fair value of AMZN stock at the moment.
Meanwhile, the long-term prospects for Echo aren’t completely clear. Usage tends to diminish over time (a trend certainly seen in my household). Echo isn’t necessarily being used as a shopping device, either. Rather, the predominant uses are to set a timer, play music, and listen to news summaries.
All told, while I do think there’s a strong bull case for AMZN stock, that bull case isn’t necessarily predicated on Echo. I wouldn’t expect that by the end of the decade, consumers across America are ordering Bounty paper towels via drone through Alexa.
But that doesn’t mean Alexa doesn’t matter for Amazon stock.
Why Alexa (In Particular) Could Be A Big Deal For AMZN Stock
Of course, part of the genius of Amazon CEO Jeff Bezos is that Amazon’s moves aren’t based on the short-term. For all the complaints about AMZN stock’s P/E ratio, the company almost certainly could cut costs substantially, and boost earnings, any time it wants.
But Amazon continues to play the long game. It continues to expand its addressable markets, taking chances on major successes. (AWS remains the most obvious case of how that strategy has played out well.)
From that standpoint, Echo and Alexa are off to a strong early start.
Admittedly, direct Echo revenues are a tiny fraction of overall sales, and Echo-directed e-commerce revenue appears small. But Amazon still benefits from both products. For one, Alexa gives the company a toehold in the important artificial intelligence (AI) space. It allows Amazon to take on Apple Inc.’s (NASDAQ:AAPL) Siri as well as Alphabet Inc (NASDAQ:GOOGL). Google Home sits in second place at the moment.
For Alexa, in particular, the opportunities go beyond Echo. Alexa appears in Amazon Tap and the company’s Fire Stick. Amazon wisely has opened the platform to third-party developers. They have created thousands of so-called “skills,” which create a virtuous cycle. The more skills there are, the more valuable Alexa is. The more valuable Alexa becomes, the more skills are created. And the more consumers fall in love with the product.
Where Alexa Goes From Here
That opens the door to the real potential value in Alexa.
Alexa isn’t about driving e-commerce sales through Echo. It’s about creating the dominant AI framework in the world. Alexa can be used in automobiles, to allow for safer multi-tasking. There are endless potential industrial applications. Because AMZN wisely has opened that system, it’s far more likely to see those applications than Siri or Google’s AI.
That’s the value in Alexa: its possibilities seem almost endless at the moment. To be sure, that doesn’t mean Amazon necessarily will make billions of dollars off Alexa in two years, or in twenty. That’s not the point, however. The point is that Amazon.com continues to innovate, and continues to be an ever-increasing part of its consumers’ daily lives. From there, the argument goes, the business end will take care of itself, as will AMZN stock.
Certainly, it has worked so far.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.
