Amazon.com, Inc. (AMZN) has a mixed record when it comes to breaking into new categories, but at least it’s way out in front of the overhyped Internet of Things.
Your home is the ground zero for the Internet of Things. The idea is that everything from your refrigerator to your robotic vacuum will be online.
Not only will you be able to control such devices remotely, they’ll be smart, too. Imagine a refrigerator that knows when you’re out of milk, or a water pitcher that knows when its filter is almost done — and contacts AMZN to send some more.
AMZN planted a flag in this green field with Amazon Echo. This tube-shaped, voice-controlled speaker may not seem like much, but it’s Amazon’s way of trying to become platform of choice for your Smart Home.
Naturally, Alphabet Inc’s (GOOG, GOOGL) Google and Apple Inc. (AAPL) are looking at what they have to offer in the Internet of Things, and AMZN can’t afford to be caught flat-footed again. The company missed out on cellular phones and is an also-ran in tablets. If Amazon can become a leader in this next wave of technology, it will easily continue to justify the big premium on its shares.
So it should be heartening to Amazon’s long-term investors that it was quick to act on this new opportunity.
AMZN Stock Trades on Promises
The long game is what makes AMZN stock worth its outsized premium. At last check, Amazon changed hands at 68 times forward earnings and 462 times trailing earnings. Even after conceding that AMZN prints quarterly losses almost by design, those multiples show that investors are confident in Amazon’s ability to keep growing at a phenomenal rate.
That’s why initiatives like Amazon Echo are so important. Amazon has a long-term growth forecast of 40% a year for the next five years, according to a survey of analysts by Thomson Reuters. But we’re talking about a company with a market cap of $270 billion here.
At some point, the market will start to worry about the law of large numbers.
If investors begin to fret that Amazon is getting too enormous to add anything really material to the top line, its price-to-earnings ratio will collapse, and so will AMZN stock. Just look at what the market has done to Apple since last summer.
That’s why Amazon Echo is reassuring. If the “smart home” becomes a thing, it will offer a flood of new revenue opportunities. And if AMZN can get folks to choose its own hardware and services to open the garage door, it’s a blow to Apple and Google.
Amazon is kind of like a big shark always on the hunt for outsized growth. If it stops swimming, AMZN stock dies.
If the descendants of Amazon Echo can keep feeding the shark, there’s no telling where the stock’s multiple tops out.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
