It is absolutely staggering how many businesses Amazon.com, Inc. (NASDAQ:AMZN) has entered over the years, particularly recently.
Even an incomplete list of the company’s niche opportunities, and the value of Amazon’s direct targets, shows just how much value AMZN stock theoretically could drive as its realm expands:
- Amazon Go convenience stores target a massive market, where industry leaders Alimentation Couche-Tard (OTCMKTS:ANCUF) and Seven & I Holdings (OTCMKTS:SVNDY) combined have a market capitalization over $60 billion.
- Amazon Echo is a first step into the Internet of Things (IoT) realm, where Amazon will compete with giants like Alphabet Inc (NASDAQ:GOOGL), Samsung (OTCMKTS:SSNLF), and mid-sized (albeit billion-dollar) players like Netgear, Inc. (NASDAQ:NTGR), Digi International Inc. (NASDAQ:DGII), and many others.
- Amazon Music Unlimited takes on Pandora Media Inc (NYSE:P), worth over $3 billion, and privately held Spotify, reported to be valued at $8 billion.
- Amazon Prime Video is going head-to-head with $53 billion Netflix, Inc. (NASDAQ:NFLX).
- Amazon Marketplace has challenged $33 billion eBay Inc (NASDAQ:EBAY), with some success.
- And Amazon Business – revealed in court filings as a “top priority” for management – looks to take share from Staples, Inc. (NASDAQ:SPLS) and W W Grainger Inc (NYSE:GWW) — combined worth over $20 billion — in office and industrial supply.
In these businesses alone, Amazon is going after verticals where industry leaders are worth over $200 billion. And yet it’s not even close to a full accounting of Amazon’s plans for expansion.
Amazon Restaurants is trying to take away $3 billion GrubHub Inc’s (NYSE:GRUB) business. Amazon Home Services will try to outcompete Angie’s List Inc (NASDAQ:ANGI) and many other startups. The company even is selling cars online — goodbye TrueCar Inc (NASDAQ:TRUE)! — and its Amazon Prints business represents a direct threat to Shutterfly, Inc. (NASDAQ:SFLY).
This discussion doesn’t even account for the largest e-commerce business in the world – which is almost an afterthought at this point. It doesn’t include Amazon Web Services, which has taken a big lead over Microsoft Corporation (NASDAQ:MSFT) and Oracle Corporation (NYSE:ORCL), and which one analyst has valued at $150 billion.
And it almost certainly is missing plans Amazon either has announced or yet to announce; such is the scope of Amazon’s ambition. (Reports last week even suggest the company is working on an “Uber for trucking” app.)
The sheer volume of opportunities seems to support the endless optimism toward Amazon stock.
It’s why the stock’s valuation remains disconnected from traditional fundamental metrics like earnings and cash flow.
It’s why many argue that what is now the sixth-most valuable company on U.S. exchanges could be the first company worth $1 trillion, and why the stock has soared:
And it also raises two key questions:
How on Earth can one company manage so many businesses? And is there a risk of a massive, widespread failure on that front — a risk that perhaps is not being priced in?
Can Amazon Go Horribly Wrong?
Clearly, there’s not much risk priced into AMZN stock at the moment: At a current price of $761, the stock is trading at more than 86 times next year’s estimated EPS. It’s a multiple that seems to assume success in most, if not all, of Amazon’s endeavors — which is an assumption that might be generous.
To his credit, CEO Jeff Bezos repeatedly has admitted that Amazon fails often. But investors may be ignoring the chief in not realizing that many of those failures look an awful lot like some of the recent initiatives.
Amazon’s Fire Phone was a massive, and expensive flop; the company failed to dislodge Apple Inc. (NASDAQ:AAPL) or Samsung in hardware, and paid the price. The lesson there should be that even Amazon can struggle when it’s late to market — a potential problem across a number of its recently announced new products and services.
Amazon’s Local Register was supposed to take down Square Inc (NYSE:SQ); it lost.
Amazon tried the travel industry with Destinations and the daily deal industry with its own Amazon Local and the acquisition of LivingSocial; neither has come close to succeeding against first-mover Groupon Inc (NASDAQ:GRPN) — a long-struggling stock. Might that not project similar troubles in online contractor services, or restaurant delivery – or even music and video streaming?
To be sure, past failures don’t doom the current projects. But the optimism behind AMZN stock is simply incredible: Shares are up 60% just since February, adding about $140 billion to the company’s market capitalization. These new opportunities certainly are supporting at least some of that bullishness, as each new business allows Wall Street analysts, in particular, to build ever-increasing “upside models” that assume dominance in all of these new verticals.
But there has to be some consideration given to the risk that at least some of these initiatives will fail.
Bottom Line on Amazon Stock
Online businesses often are winner-take-most spaces, and Amazon is entering many of them very late. Its video ambitions challenge not just Netflix but behemoths like Walt Disney Co (NYSE:DIS) and CBS Corporation (NYSE:CBS), who have muscle of their own. Failure in, say, Amazon Restaurants doesn’t imply 40% downside in the stock itself – but a lack of success in these new bets certainly reduces some of the upside bullish investors are expecting.
And at some point, there has to be a question of just how efficient a use of capital, and management resources, this all is. Prime Video and unlimited music support the core Prime membership and expand Amazon’s “ecosystem.” But does Amazon Restaurants really offer much benefit? Or a trucking app? Is it worth hiring the best executives in all of these industries — and paying them millions of dollars each — to be the second- or fifth-largest player, when the winners are worth only a percentage point or two of AMZN’s total value?
And can one company really compete with dozens of the world’s largest, most successful companies at the same time?
There’s a sense that Amazon is moving out of its lane, and perhaps too far. The core strategy no longer is that clear: the focus at AMZN used to be on increasing customer satisfaction and penetration. Its strategy now just looks like it wants to sell everything to everybody. That’s a great idea in theory, and in Wall Street models. It’s much more difficult in practice.
And it’s hard not to wonder if those grand ambitions won’t meet mundane reality at some point.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.