Amazon.com, Inc. (NASDAQ:AMZN) doesn’t like not being the biggest and best at something. It’s an attitude that’s helped fuel investor confidence and push AMZN stock up more than 30% this year.
This is the company which essentially pioneered and is now the undisputed leader of the e-commerce space. It’s also the company that runs the market’s biggest cloud computing business as a side gig.
Oh, and it’s the company that is rapidly eating market share in the grocery world through its acquisition of Whole Foods Market, Inc. (just look at how search interest related to Whole Foods has been spiking recently).
So it shouldn’t be surprising that CEO Jeff Bezos and company also want to run the best streaming video platform in the world. While it failed to win any of its 16 Emmy award nominations at last night’s event, Amazon Studios is dramatically rethinking its strategy in order to a create high-end drama series with global appeal; in fact, it wants to make the next “Game of Thrones”.
Can Amazon actually do that? That does seem like a tall order for an e-commerce giant.
But it’s also Amazon, and if AMZN has taught the market anything, it’s that betting against the company’s growth initiatives is a bad idea.
So will Amazon Video be a more formidable competitor in the streaming video on demand space in two or three years? Almost undoubtedly.
The Amazon Size Advantage
Amazon is big. Really big. And they have a lot of customers and even more transactions.
Big companies with a lot of customers and transactions have a ton of data. They know which customers are buying which goods. They know the demographic clusters of these buying habits (e.g., teens are buying fidget spinners or people in California are buying dash buttons) and the trends of these buying habits (e.g., wearables sales are starting to pick up).
All together, Amazon knows consumer buying behavior and trends better than pretty much anyone else in the world.
If you know what someone is buying on a regular basis, chances are you know what they want to watch, too. Teens who buy cosmetics and fashion-forward products are more likely to watch a show like “Life of Kylie”. Adults who buy next-gen tech products are more likely to watch a futuristic, science fiction show like “Black Mirror”.
Because of all this data at Amazon’s fingertips, it’s not unlikely that the e-commerce giant produces the next global hit. According to Variety, Amazon is currently leveraging this wealth of data to decide what types of show will have global appeal.
After that, it simply comes down to Amazon producing a good show.
The Netflix Challenge
But there’s one problem with that. A company called Netflix, Inc. (NASDAQ:NFLX) that’s already producing content of all sorts with global appeal.
While Amazon has struggled to gain legitimate traction in the original content space, Netflix has churned out original hit after original hit. The list includes fan favorites like “Stranger Things”, “Orange Is The New Black”, “House of Cards”, and “The Crown”. The streaming service won 20 Emmys this year.
In order for Amazon to increase the reach of its video platform and grow its Prime membership base, Amazon Studio needs to pump out original content that is better than or at least on par with Netflix’s original content.
That is a tough challenge. Particularly so because Netflix hasn’t really had a hiccup in its original content strategy.
But it is also doable. Amazon has enough data to create a show of unparalleled global appeal. And I think that is exactly what they will do in the foreseeable future.
Bottom Line on AMZN Stock
AMZN stock has been range-bound for some time. It’s trading at an ultra-rich valuation — 223x — and investors are seemingly scratching their heads and asking: “now what?”. The retail business is already dominating the world and actually running a profit in the U.S. The AWS cloud business is the unchallenged leader in its space.
So what is the next leg of growth that will power this stock higher?
Most investors are looking at Whole Foods for that next leg of growth. Huge market share gains for the grocer will drive robust operational growth for Amazon and consequently power AMZN stock higher.
But that next leg of growth could also come from Amazon Studios. If the company is successful in producing a few hit shows with global appeal, that will undoubtedly boost the value proposition of an Amazon Prime membership. The Prime subs base will grow, and more high-margin dollars will flow through the system.
I think Amazon can do that, given the wealth of data the company has on consumers worldwide.
With the biggest retail business on the internet, the biggest cloud business in the market, the most exciting grocery store in the world right now, and a movie business that is about to get a major face-lift, AMZN stock seems like a good investment now and into the foreseeable future.
As of this writing, Luke Lango was long AMZN and NFLX.