On its unstoppable march toward conquering the world, Amazon.com, Inc. (NASDAQ:AMZN) has fired across the bow of traditional grocery stores. While investors wonder what the heck Jeff Bezos is doing with all the money AMZN socks away, and if Amazon stock can ever truly be valued on any metric, the company has launched a new grocery initiative called Amazon Go.
The concept is simple. Enter grocery store. Login to Amazon app. Pull items off shelf. Exit. Technology determines what you purchased, and your account gets charged as you leave.
If only the execution were so simple. It’s only in beta, and in one 1,800 square foot store in Seattle. Yet, for those who are annoyed about Amazon stock because it never seems to generate real and sustainable earnings, we have a clearer picture of why that’s the case.
Drilling down into this concept further reveals that execution can actually be quite complex.
Amazon Stock: Part Venture Capital
Items have to be properly recorded, and if returned, not charged. There are probably other problems, but Amazon isn’t revealing very much. Here’s the thing, though. This is going to develop, and I think the learning curve is going to be steep.
AMZN has already created incredibly efficient stocking, storing and fulfilling processes at all of its shipping and distribution points. It is probably light years ahead of grocery stores in terms of collecting data, creating algorithms, using AI and tinkering with machine learning to the point that it will know exactly what products to stock, in which stores, on what days and times. And thus, manage inventory better than any grocery store ever could.
Additionally, this will thrill consumers who never have to wait in a line or fumble through self-checkout. Time is money, which means Amazon Go could potentially charge convenience store prices and generate higher margins, as well as save on labor. Oh, hello, higher margins.
Further down the road, Amazon Go will even be likely to predict what food you’ll shop for, and it’ll just have it delivered via Amazon Fresh, saving you the trip.
You know how grocery stores are going to respond to this? They won’t do a darn thing.
Nobody has the vision that AMZN has, and those traditional stores are just going to sit there and not respond because they will be in denial. Think about it. What major innovation has any grocery store made in the past twenty years, other than the scanner and the self-checkout kiosk.
I’ll wait.
Oh, I thought of another. Those motion-sensor lights that turn on the lights in the frozen food section when someone walks by.
Amazon stock has been bid up enormously because some people just see it as the future. And why not? This is the company that destroyed the brick-and-mortar bookstore.
It found a way to make money off a very low-margin business. Thus, it makes sense that it could smash another low-margin business by applying many of the same techniques.
Bottom Line for Amazon (AMZN) Stock
This comes even as Amazon now opens up the same brick-and-mortar bookstores it put out of business. It makes sense in a weird way. Chase the competition out altogether with an online model, then take over their physical footprint. Who knows what other businesses could be targeted?
So what does this mean for Amazon stock? Nothing at the moment. This does explain, however, how AMZN is part-venture capital, which is in many ways funded by its retail business.
Perhaps the long-term vision here is to generate tons of revenue and cash flow to generate capital for high-margin businesses. Time will tell.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, he has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
