There seems to be no end to the good news with Amazon.com, Inc. (NASDAQ:AMZN). It’s as if the company can do no wrong — and Wall Street continues to buy up Amazon stock.
For the year so far, the gain is about 27%. Something else: During the past five years, the average annual return for Amazon stock is a sizzling 41.12%.
But with the company’s market cap now at $719 billion, it’s going to get tougher to pump out the returns. This is why AMZN needs to focus on markets with massive scale. Niche market opportunities are really just a waste a time.
In light of this, it should be no surprise that AMZN is getting serious about the health care industry. Note that about 18% of the United State’s GDP is spent on the industry.
More importantly, there is a need for major changes. One of the biggest problems is that costs continue to escalate. Based on data from the Centers for Medicare & Medicaid Services, annual expenditures are projected increase by 5.6% through 2026 — hitting an astounding $5.7 billion.
But there are other issues with the healthcare system. It is highly complex, with mind-numbing rules and regulations. There are also many examples of fraud and waste.
In other words, there are opportunities for technology disruption — and this should be ideal for AMZN stock. Over the years, the company has certainly demonstrated an ability to rethink old approaches, greatly improve customer service and find ways to lower costs.
Amazon Stock and Healthcare
Amazon’s moves into the healthcare market are in the nascent stages and the involve two efforts. One is a partnership with Berkshire Hathaway Inc. (NYSE:BRK.A) and JPMorgan Chase & Co. (NYSE:JPM) to form a nonprofit organization. The focus is on pooling resources to derive cost synergies.
For AZMN, this is critically important since the company’s headcount has expanded significantly over the years (it is now about 566,000). A big part of the increase has come from the acquisition of Whole Foods.
However, the partnership is likely to be a source of new ideas, which could ultimately turn into interesting business opportunities. In fact, this could prove useful for the next major initiative for AMZN — that is, the move into distribution of medical supplies.
This may seem mundane but the business is massive. By 2021, the market is expected to reach a hefty $136 billion.
No doubt, AMZN has many advantages to capitalize on the opportunity. The company has enormous financial resources and thousands of talented engineers. There is also an extensive supply chain, with warehouses and distribution centers. Oh, and AMZN has been building its own delivery system, which could allow for same-day shipments of medical supplies.
The company also has some ideas to bring innovation to the process. Note that AMZN is exploring the concept of creating an online marketplace, which would allow for more transparency and simplicity. Hey, it’s worked with many other industries, right?
Definitely. AMZN also has the advantage of sophisticated systems for machine learning, big data and AI (Artificial Intelligence), which are likely to be transformative.
Granted, there is already lots of pushback in the healthcare industry. The current approach is to have long-term contracts with distributors like McKesson Corporation (NYSE:MCK), Cardinal Health Inc (NYSE:CAH) and AmerisourceBergen Corp. (NYSE:ABC) to allow for better safety and avoid stocking out.
But whenever there is change, there is resistance. What’s more, this is actually good news for AMZN stock. The company has a knack for overcoming problems.
Bottom Line On Amazon Stock
Amazon’s focus on healthcare will certainly take time. But CEO Jeff Bezos knows how to play for the long-term. After all, he did this with the creation of AWS (Amazon Web Services), which was widely criticized in the early days.
Although the health care investments will likely take longer to bear fruit — let’s face it, the regulatory requirements will be a major factor — Amazon’s move into healthcare should be worth it.
What’s more it will help maintain the momentum of Amazon stock.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.