Repeated Failures Are A Big Part Of The Bull Case For Amazon Stock

Investors need to embrace the fact that flops are a virtue for AMZN stock

Amazon (NASDAQ:AMZN) has had no shortage of failures, but they’ve done little to slow down Amazon stock. AMZN stock now has a market cap of almost $925 billion, second at the moment only to Microsoft (NASDAQ:MSFT). And Amazon has a reputation as one of the world’s most innovative companies.

Repeated Failures Are A Big Part Of The Bull Case For Amazon Stock
Source: Amazon

Of course, that reputation and those failures are two sides of the same coin. Amazon will try almost anything. As CEO Jeff Bezos wrote three years ago, Amazon is “the best place in the world to fail.” Sometimes those efforts turn into Amazon Web Services, the company’s cloud business that by one estimate should be worth $350 billion in a couple of years.

More often, however, those efforts don’t work out. Indeed, the list of Amazon’s failures is long — and got longer last week. But, again, that’s part of the strategy and in more ways than one, that’s a good thing for AMZN stock.

Amazon Restaurants Closes Shop

The most recent addition to the list of Amazon businesses to be shut down is Amazon Restaurants. Amazon confirmed that the U.S. side of the business will close this month after the U.K. business met the same fate last year. Grubhub (NYSE:GRUB) stock gained on the news, though that company still has to deal with Uber (NYSE:UBER) and privately held DoorDash, among others.

But again, this isn’t Amazon’s first misstep. Business Insider has highlighted several, including the company’s pop-up stores, the $545 million Quidsi acquisition, Amazon Local (a Groupon (NASDAQ:GRPN) clone), and Amazon Wallet. The most notable was the Fire Phone, which led to a $170 million write-down after its discontinuation back in 2015 .

Is this an issue for Amazon stock? Not really. I fretted back in late 2016 that the company might have too many irons in the proverbial fire but performance since has proven those worries to be short-sighted. If that’s the case, the constant failures actually are good news for AMZN stock for two key reasons.

The “Try Anything” Case for AMZN Stock

The first reason is that, as seen with Amazon Web Services, it only takes one big success to make the failures worthwhile. AWS did not begin, as the myth seems to suggest, with the company randomly selling some spare capacity. It was an outgrowth of a management-led effort to design an outsourced technology platform for other companies. It was only possible because of the company’s broader strategy to make bets on new initiatives.

And that strategy is still succeeding. The Echo has made Amazon a clear leader in the connected home, well ahead of Alphabet (NASDAQ:GOOGL) and Apple (NASDAQ:AAPL). The Whole Foods acquisition hasn’t been a game-changer, but it’s given the company a toehold in brick-and-mortar retail that it likely will expand.

There’s another aspect worth considering, however. AMZN stock obviously isn’t cheap, though I still believe it’s undervalued. A roughly 35x multiple to 2020 EPS estimates prices is quite a bit of growth.

But those earnings include costs spent or, put another way, investments made in these new efforts. And those costs will come down over time, if only as a percentage of revenue. Like Alphabet with its money-losing “Other Bets” businesses, the core business is more profitable than the headline numbers show. And thus Amazon stock isn’t quite as expensive as it looks.

Should Amazon Move Other Stocks?

That said, it’s worth remembering that AMZN has to be a bet on the core businesses, which essentially are e-commerce and AWS. Similarly, investors should keep in mind that Amazon isn’t always the dominant competitor investors assume.

Indeed, when Amazon enters a market, the stocks in that market usually plunge. We’ve seen that with Shutterfly (NASDAQ:SFLY), even though Amazon Prints appears to have made little progress. Shares of Kroger (NYSE:KR) and other grocers fell after the Whole Foods deal. GOOGL stock has been pressured by worries about Amazon’s advertising growth (though I believe that fear is grounded in reality).

Spotify (NYSE:SPOT) took a hit in April when Amazon seemed ready to expand its presence in music. Investors in CVS Health (NYSE:CVS), Rite Aid (NYSE:RAD), and Walgreens (NASDAQ:WBA) are waiting for Amazon’s acquisition of Pillpack to disrupt that market.

But Amazon doesn’t always win. In fact, quite often it doesn’t, as seen in restaurants and video and cell phones and many other markets. Still, that’s good news for Amazon stock, even if it doesn’t seem like it. The company wins often enough — and continues to win big in the markets that matter most to AMZN stock.

As of this writing, Vince Martin has no positions in any securities mentioned.


Article printed from InvestorPlace Media, https://investorplace.com/2019/06/repeated-failures-bull-case-amazon-stock/.

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