In Silicon Valley, the word “disruption” gets thrown around with abandon. The perception is that a cool app with a hefty user base can conquer a lot of industries. But the truth is certainly more nuanced. The fact is that many startups ultimately fail.
If anything, there are really only a small number of companies that are true disruptors. One that should be top of the list is Amazon.com, Inc. (NASDAQ:AMZN) and Amazon stock.
Over the years, the company has grown its e-commerce business at the expense of many brick-and-mortar retailers — some of which have become defunct. It certainly helps that AMZN has invested huge amounts in its infrastructure as well as synergistic offerings like the Kindle. Another critical part of the strategy, of course, has been the Prime service.
What Makes AMZN Stock a Winner?
Along the way, the holders of Amazon stock have been handsomely rewarded. Since the company’s public offering during the mid-1990s, the return is over 55,000%!
Even the world’s greatest investor, Berkshire Hathaway Inc.’s (NYSE:BRK.A,NYSE:BRK.B) Warren Buffett, regrets not investing in Amazon stock. In a recent interview with CNBC, he noted the following about Jeff Bezos: “I’ve never seen a guy succeed in two businesses almost simultaneously that are really quite divergent in terms of customers and all the operations. I can’t think of another example like it.”
Despite all this, AMZN stock is not necessarily somehow a guaranteed ticket to unending riches. The fact is that the company faces tremendous challenges and risks. I’m sure that even Bezos would agree with this.
Actually, I think the most lethal threat could be another company from Seattle — that is, Microsoft Corporation (NASDAQ:MSFT).
Why could the much older MSFT be a true disruptor?
The reason is fairly simple. At the heart of the Amazon strategy is the cloud business (which is called Amazon Web Services or AWS). Without it, AMZN stock would see margins plummet to razor thin levels.
In the latest quarter, AWS posted revenues of $3.7 billion, up 42% on a year-over-year basis, and the operating income came to a hefty $890 million. By comparison, the core e-commerce business in North America reported revenues of $20.1 billion, but the operating income was well below AWS’, at only $596 million.
And yes, there is no secret that MSFT wants to get a much bigger chunk of this opportunity. To this end, the company has been investing heavily during the past few years to bolster the global infrastructure and revamp the product line.
Note that the latest earnings report highlights the progress. The Azure system, which is the alternative to AWS, grew at a torrid 93%. In fact, the Commercial Cloud business is ramping at a run-rate of $15.2 billion.