Very few companies have changed our lives quite like Amazon.com, Inc. (AMZN). What initially started out as a book-selling venture operating from founder and CEO Jeff Bezos’ garage has transformed into a multi-billion dollar empire. In the process, AMZN has become the quintessential disrupter.
Department store titans like Macy’s, Inc. (M) and J C Penney Company Inc (JCP) have seen traffic and market share plummet. On the other side of the coin, Amazon stock is up over 285% in the last five years. The scary thing for AMZN competitors? The e-commerce giant is just getting started.
First, we have the undeniable fact that not only is AMZN expanding its already massive footprint in retail, but also, the consumer market cannot get enough. Amazon Prime — the company’s premium subscription service — has a retention rate that almost defies logic.
Amazon Stock Is Unstoppable
According to data compiled by Consumer Intelligence Research Partners, 73% of 30-day trial subscribers keep the service. After one year, the retention rate jumps to 91%. However, by year two, retention yet again, grows to 96%. Even though the subscription is $99, there’s more than enough value-add that is drawing consumers in like wildfire.
Although exact statistics are hard to pinpoint, there’s evidence that the company’s premium service has had a strong impact on Amazon stock. According to Time, there were approximately 4 million Prime subscribers in fall 2011. By early spring of 2013, that number doubled.
Subsequently, in the same year, Amazon stock investors turned a handsome profit of 55%. In contrast, 2011 was a dud for AMZN stock, which fell more than 6%.
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A second development, though, has companies outside the pure retail sector hot under the collar. Amazon Web Services — a cloud-based service that allows businesses to use the company’s computer network — has been generating considerable sales growth.
That obviously has Alphabet Inc (GOOG, GOOGL) and Microsoft Corporation (MSFT) worried. This is especially true for Microsoft, which is aggressively leaning towards the cloud after their smartphone disaster left a bad taste.
However, the cloud is no guarantee for either MSFT or GOOG. Citigroup analysts forecast that the digitization industry could account for nearly a third of all IT spending. But to the chagrin of anyone not buying Amazon stock, the analysts went on to label Microsoft and Google as the “chimps” to Amazon’s “gorilla.”
Seeing as how the cloud is already a disruptive technology, there’s a possibility that AMZN could do to tech companies what it did to retailers.
In other words, AMZN is a few steps away from total domination. Not only did the e-commerce company steal market share from brick-and-mortar retailers, Amazon has essentially become the market. In fact, the annual returns on Amazon stock could eventually replace the University of Michigan‘s Consumer Sentiment Index as a more accurate and timely barometer.
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Here’s my reasoning. Between the years 1999 and 2009, Amazon stock and the Consumer Sentiment Index shared a direct correlation, albeit a weak one at 32%. Generally, as consumer confidence grew, so too did Amazon stock.
However, there were times when AMZN stock either skyrocketed or tumbled, regardless of what was going on with the consumer. That’s to be expected, since the company was still going through growing pains.
But from 2010 onwards, the correlation has increased to 52%.
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Aside from one outlier in 2014, the trend is readily apparent — the stronger the consumer confidence, the more likely it is that AMZN stock will produce stronger gains.
Interestingly, consumer sentiment is down 3% year-to-date, and below 2% against 2015’s average rating. Likewise, Amazon stock is up 7.5% YTD — a weak performance, given the 37% average returns in the decade so far.
Due to the company’s rabid fan base, the market dynamics for AMZN provide important insight into how far discretionary spending can be stretched in a less-than-favorable economy.
The blitzkrieg pace of Amazon stock is shocking enough. But the potential for it to build on those gains puts AMZN in a whole new level. While the era of high triple-digit growth may have passed, the company’s dominance ensures a strong future for AMZN stock.
In addition, if Amazon could affect cloud computing as it did with retail — and there are plenty of reasons to believe this — it could spark another industry-wide revolution.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
