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Alexa CAN Drive, Inc. (AMZN) Stock … Someday

Alexa and Amazon Echo devices aren't driving huge profits for Amazon yet. But they still add to the bull case for AMZN stock

    View All, Inc. (NASDAQ:AMZN) continues to roll along. AMZN stock trades just off all-time highs at the moment, having gained over 2,000% over the past 10 years.

Alexa CAN Drive, Inc. (AMZN) Stock ... Someday
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While some investors point to the price-to-earnings ratio of Amazon stock as a potential danger sign, I think that view is short-sighted. The company’s legacy business continues to change the face of U.S. retailing. Witness the sharp decline this week at Target Corporation (NYSE:TGT), which seems directly attributed to Amazon’s online success.

Of course, online retail isn’t the only area where AMZN is having success — or where increased profits can drive Amazon stock higher. The company’s Amazon Web Services (AWS) business has become a dominant player in cloud.

And, of late, the company’s Amazon Echo, built on the Alexa Voice Service, has added another layer to the bull case for AMZN stock.

Though I remain bullish on AMZN, I don’t think Alexa really changes the value of Amazon stock — at least not yet. Amazon is too big and Amazon Echo usage is too spotty, for Alexa and/or Echo to drive impressive sales or profit growth on their own.

But both products highlight the success of Amazon’s long-term strategy; Alexa, in particular, may become a bigger point of the AMZN story in the future.

Why Alexa And Echo Aren’t A Big Deal For AMZN Stock Yet

For any other company, Echo would be considered a monster hit. Amazon hasn’t broken out sales figures, but it did say in December that it had sold “millions” of Echo devices. An outside firm pegged the number at over 5 million. With the average sales price for Amazon likely around $100 (including retail markup and sales of lower-priced Amazon Dots), that implies as much as half a billion dollars in sales for AMZN.

That’s a huge number — for anyone but, Inc. AMZN generated more than $135 billion in revenue in 2016, meaning Echo-related sales were likely a fraction of 1% of the overall total. Those sales almost certainly come at higher margins for Amazon than, say, shipping a book at the company’s usually tiny markup. But from a profit standpoint, Echo seems likely to offer at most a 1%-2% boost, and thus little impact on the fair value of AMZN stock at the moment.

Meanwhile, the long-term prospects for Echo aren’t completely clear. Usage tends to diminish over time (a trend certainly seen in my household). Echo isn’t necessarily being used as a shopping device, either. Rather, the predominant uses are to set a timer, play music, and listen to news summaries.

All told, while I do think there’s a strong bull case for AMZN stock, that bull case isn’t necessarily predicated on Echo. I wouldn’t expect that by the end of the decade, consumers across America are ordering Bounty paper towels via drone through Alexa.

But that doesn’t mean Alexa doesn’t matter for Amazon stock.

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