Years ago, in a profile of Costco Wholesale (NASDAQ:COST), I was struck by the story of a hard-pressed supplier confronting its CEO and saying, “What are you, the low price police?” To which the CEO is said to have replied, “Well, yes.” The best way to understand Amazon (NASDAQ:AMZN), and why analysts think Amazon stock could hit $3,000 per share, is to understand it as the low cost police.
While most reporters are chasing the story of AMZN raising its minimum wage to $15 per hour, that is a floor for domestic wages. Amazon isn’t getting ahead of the market.
Amazon is taking what Costco did for prices and adapting it to costs, creating the lowest-cost method for products to get from producers to consumers ever seen.
The Infrastructure Company
Amazon’s Web site, cloud, automated warehouses and delivery infrastructure mean it can break bulk for less than it costs merchants to offer goods in a store because it has less shrinkage. Everything about the company stems from this low-cost infrastructure, including its ability to open its own stores.
That means it can do what Costco has done and create store brands like AmazonBasics. Walmart (NYSE:WMT) and Kroger (NYSE:KR) have done this for years, producing goods in competition with suppliers. The fact that “Amazon Basics” now includes foam mattresses should not be a surprise. So, yes, why not buy into a homebuilder?
Extending the reach of its infrastructure, not just through the cloud and delivery but throughout the global supply chain, is Amazon’s next frontier. So it is turning Iridium Communications (NASDAQ:IRDM), which Motorola failed to turn into a global satellite phone company, into a hot stock by using it to track products from their point of origin, wherever that happens to be.
Low-cost infrastructure, and the steady cash flow of Amazon Prime, mean Amazon can afford the best writers and producers for new shows, all of which will help boost the AMZN stock price in the years to come. The Fire line of Internet streaming devices, by the way, isn’t just a conduit for its own programming. It also sells Netflix (NASDAQ:NFLX) and other Amazon competitors.
One of my recent “finds” on the Fire stick was Tubi, offering old TV shows and movies with ads, as a stream. It must have been a good deal, because Amazon’s IMDb is launching a competitor. Think of it as AmazonBasics TV.
The steady traffic of people looking for goods and services, through the Fire stick, AMZN website and Alexa voice interface, means Amazon can not only sell digital advertising at prices competitive with Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Facebook (NASDAQ:FB), it can sell ads focused on what people are buying, not just what they should be buying.
The Bottom Line on Amazon Stock
All this has been obvious from when I first bought Amazon stock in 2013, at an average price of $330. But at $2,000, you’re spending over $4 for each $1 of sales, even if the company hits its 2018 revenue target of $235 billion in revenue.
While this will include nearly $22 billion in AMZN cloud revenue, for which investors happily pay 10 times revenue, and $10 billion in Amazon Prime revenue, which is free money, you’re still paying $700 billion for $200 billion in retail revenue, which should be priced at a discount to sales … not a premium.
It’s true that growth covers a multitude of sins, and Amazon may easily hit $350 billion in revenue by 2020, with expanding margins. But even that bull case for AMZN stock looks fully valued at $2,000 per share.
This explains an Amazon stock chart that, at least over the last month, has stalled out. If you’re a 30- or 40-year-old investing for retirement, this is the stock you start with. If you’re looking for a quick profit, look elsewhere.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in AMZN.
