The Biggest Threat to Amazon.com, Inc. (AMZN) Stock? Microsoft

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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.

The Biggest Threat to Amazon.com, Inc. (AMZN) Stock? Microsoft

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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.

But what makes Microsoft’s cloud business so powerful is the company’s multiple franchises, such as Windows, SQL Server, Skype and Office. For example, during the quarter, Office 365 Commercial reported more than 100 million monthly active users, up 35% on a YOY basis. MSFT has also built a variety of useful cloud tools like Microsoft Teams (a chat system for the workplace), OneDrive (storage) and StaffHub (for human resources).

What’s more, there have been savvy acquisitions, as seen with the purchase of LinkedIn. As a result, MSFT now has the largest professional network, with over 500 million members.

Bottom Line on Amazon Stock

Of course, MFST is not the only threat to AMZN stock. There are other mega operators that are investing enormous sums into their cloud businesses, such as Oracle Corporation (NYSE:ORCL), Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) and International Business Machines Corp. (NYSE:IBM). Interestingly enough, it would not be surprising that there will be a prolonged price war in the industry.

Now this does not mean that Amazon stock is in immediate danger. The competition will take time to make an impact. But it is still worth keeping a eye on, especially as AMZN stock continues to hit new highs.

Tom Taulli runs the InvestorPlace blog IPO Playbook as well as OptionExercise.com, which provides interactive tools & services for employee stock options of pre/post IPO companiesFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Tom Taulli is the author of various books. They include Artificial Intelligence Basics and the Robotic Process Automation Handbook. His upcoming book is called Generative AI: How ChatGPT and other AI Tools Will Revolutionize Business.


Article printed from InvestorPlace Media, https://investorplace.com/2017/05/amazon-com-inc-amzn-stock-biggest-threat-microsoft/.

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