Even though Amazon.com (NASDAQ:AMZN) is 24 years old, the company has not lost its startup ways. It seems like the company has created a perpetual growth machine!
Note that AMZN stock is up 60% this year. Hey, this is better than many IPOs. Although, the market cap is a staggering $908 billion.
Now this does not mean AMZN stock is not without risks. As seen with Facebook (NASDAQ:FB), mega tech operators are not immune from steep drops in their stock prices.
Yet I still think AMZN is a good play, and here are three key factors why.
AMZN Stock: Secular Growth Trends
In light of the scale of AMZN’s revenues, it is not easy to keep up the growth momentum. Then again, the company has been aggressive in targeting many large market categories.
There is AWS (Amazon Web Services), which is perhaps the most important. In the latest quarter, the revenues from this segment soared by 49% to $6.1 billion, and the earnings came to $1.6 billion. Keep in mind that most of these revenues are recurring.
What’s more, AWS is also a laboratory for new innovations, such as with AI (artificial intelligence), business intelligence, AR (augmented reality), VR (virtual reality), containerized applications and next-generation databases.
Next, Amazon’s ad business is rapidly becoming a major revenue generator. In the second quarter, there was a 129% surge to $2.2 billion.
Note that Amazon is often considered the No. 3 player in online advertising, behind FB and Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG). A key part of the success is that the company has been able to leverage its e-commerce platform, which has helped better tie ads to monetization.
And finally, AMZN has been making some interesting acquisitions to target various large market opportunities. Some of the recent deals include PillPack (an online pharmacy) and Ring (a popular DIY home security system).
AMZN Stock: An Innovation Machine
Jeff Bezos has made his share of bad decisions. In an article for Fortune, he noted:
“I’ve made billions of dollars of failures at Amazon.com. Literally billions. … Companies that don’t embrace failure and continue to experiment eventually get in the desperate position where the only thing they can do is make a Hail Mary bet at the end of their corporate existence.“
No doubt, Amazon has a strong culture of innovation, and this will continue to be critical for the long-term success of the company. But the Bezos playbook also includes a focus on building ecosystems, which can make new technologies even more powerful.
Just look at Alexa. Over the years, the company has built core technologies for AI and voice recognition. But at the same time, AMZN has made the technology easily accessible to third-party developers. The result is that Alexa has over 45,000 skills and is integrated with more than 13,000 smart home devices.
As Bezos said in the latest quarter: “We want customers to be able to use Alexa wherever they are.”
AMZN Stock: Economies of Scale
Despite its many businesses, much of the revenue for AMZN still comes from the e-commerce business. And yes, the margins are razor thin.
Yet AMZN has been working hard to drive efficiencies and economies of scale. Part of this has been the focus on controlling headcount as well as looking for ways to implement automation.
There have also been adjustments to the business model. For example, a majority of e-commerce sales come from third-party merchants, which means lower inventory costs. Oh, and AMZN recently increased the pricing for its Prime service.
All in all, AMZN has been generating substantial profits. In the second quarter, they came to $2.5 billion. In fact, the company has posted $1+ billion in profits for the past three quarters.
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.