Amazon is an extraordinary company. The former bookseller accounts for more than half of every new dollar spent online in America. It is the world’s leading provider of cloud computing. This year Amazon probably will spend twice as much on television as HBO. Its own-brand physical products include batteries, almonds, suits and speakers linked to a virtual voice-activated assistant that can control, among other things, your lamps and sprinklers.
Even so, Amazon’s shareholders are working on the premise that it is only getting started. Since the beginning of 2015, its share price has jumped by 173%, seven times quicker than in the two previous years and 12 times faster than the S&P 500 index. With a market capitalization of some $400 billion, it is the fifth-most-valuable company in the world. Never before has a company been worth so much for so long while making so little money: 92% of its value is due to profits expected after 2020.
That is because investors anticipate both an extraordinary rise in revenue, from sales of $136 billion last year to half a trillion during the next decade, and a jump in profits. The hopes invested in it imply that it probably will become more profitable than any other company in America.
Ground for skepticism does not come much more fertile than this: Amazon will have to grow faster than almost any big company in modern history to justify its valuation. Can it possibly do so?
It is easy to tick off some of the pitfalls. Rivals will not stand still. Microsoft has cloud-computing ambitions, and Wal-Mart already has revenues nudging $500 billion and is beefing up online.
Nonetheless, the striking thing about the company is how much of a chance it has of achieving such unprecedented goals.
This is largely due to the company’s unusual approach to two dimensions of corporate life. The first of these is time. Amazon is resolutely focused on the distant horizon. Amazon’s CEO, Jeff Bezos, emphasizes continual investment to propel its two principal businesses, e-commerce and Amazon Web Services, its cloud-computing arm.
In e-commerce the more shoppers Amazon lures, the more retailers and manufacturers want to sell their goods on Amazon. That gives Amazon more cash for new services—such as two-hour shipping and streaming video and music—which entice more shoppers. Similarly, the more customers use A.W.S., the more Amazon can invest in new services, which attract more customers. A third virtuous circle is starting to whirl around Alexa, the company’s voice-activated assistant: As developers build services for Alexa, it becomes more useful to consumers, giving developers reason to create yet more services.
So long as shareholders retain their faith in this model, Amazon’s heady valuation resembles a self-fulfilling prophecy. The company will be able to keep spending, and its spending will keep making it more powerful.
Their faith is sustained by Amazon’s record. It has had its failures—its attempt to make a smartphone was a debacle—but the business is starting to crank out cash. Last year cashflow, before investment, was $16 billion, more than quadruple the level five years ago.
The company’s list of current and possible competitors, as described in its annual filings, includes logistics firms, search engines, social networks, food manufacturers and producers of “physical, digital and interactive media of all types.” A wingspan this large is more reminiscent of a conglomerate than of a retailer, which makes Amazon’s share price seem even more bloated: Stock markets typically apply a “conglomerate discount” to reflect their inefficiencies.
Some think that Amazon could become a new kind of utility: one that provides the infrastructure of commerce, from computing power to payments to logistics.
There, however, lies the real problem with the expectations surrounding Amazon. If it gets anywhere close to fulfilling them, it will attract the attention of regulators. For now Amazon is unlikely to trigger antitrust action. It is not yet the biggest retailer in America, its most mature market. America’s antitrust enforcers look mainly at a company’s effect on consumers and pricing. Seen through this lens, Amazon appears pristine. Consumers applaud it, and it is the most well-regarded company in America, according to a Harris poll. A.W.S. is a boon to startups too.
As it grows, though, so will concerns about its power. Even on standard antitrust grounds, that may pose a problem: If it makes as much money as investors hope, a rough calculation suggests that its earnings could be worth the equivalent of 25% of the combined profits of all listed Western retail and media firms.
Amazon’s business model also will encourage regulators to think differently. Investors value Amazon’s growth over profits, which makes predatory pricing more tempting. In the future companies could increasingly depend on tools provided by their biggest rival. If Amazon does become a utility for commerce, the calls will grow for it to be regulated as one.
© 2017 Economist Newspaper Ltd., London (March 25). All rights reserved. Reprinted with permission.
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