Apple recently won the race to become the first company in the world to reach a $1 trillion market capitalisation. However, for the past year or so there were some who believed that the slightest blip in growth for the iPhone maker would hand the momentum to Amazon, the ecommerce, content streaming and cloud computing services juggernaut that just keeps on growing. Amazon was hot on the heels of Apple until the last but the latter posting forecast beating Q3 figures at the end of July finally drove the company’s share price over the line.
However, despite missing out on the kudos of getting over the $1 trillion mark first, many believe that of the two companies, Amazon has the greater middle to longer term growth potential. There is a limit to how much more growth Apple can squeeze out of the iPhone series that is by far the company’s biggest revenue driver and, at least for now, no obvious product to pick up the baton as successor. Amazon, on the other hand, have quickly growing and lucrative new verticals such as Amazon Web Services, its cloud computing as a service unit. The growth of the IoT sector means cloud storage capacity requirements will balloon in coming years and Amazon is positioned as a market leader. It’s also a far higher margin business than its core ecommerce operation, albeit the latter has huge scale.
The company also has plenty more revenue growth potential in the voice-activated assistant market, where its Alexa device is a market leader, as well as the online content streaming sector through Amazon Prime. However, there are another handful of verticals that are still either nascent or brand new that Amazon has moved into and could, if successful, provide huge revenue growth. Some analysts think that despite its already mammoth size, there is a chance that Amazon’s market capitalisation could surpass $2 trillion within the next few years.
So where is that huge growth expected to come from?
Online Ad Market
According to PwC’s IAB Internet Advertising Revenue Report, the global market for digital (online) advertising hit $88 billion in 2017, on annual growth of 21%. Google and Facebook, perhaps unsurprisingly, dominate the sector’s distribution of revenue, gobbling up over half of it between them. The two online giants also bestrode the growth figure, having accounted for 90% of it.
However, while currently a speck in the rear view mirror of the digital advertising duopoly, Amazon is emerging as a future competitor to the two. It’s an area that the company is now focusing on with strong early growth and against the backdrop of the success Amazon has had in the other business verticals it has moved into, its fellow FAANGs would do well to now consider it a competitor.
When Amazon delivered its most recent set of financial results to the market, analysts’ focus was understandably on its ecommerce and cloud computing units. The former contributes the lion’s share of the company’s revenues, and will bring in an estimated $235 billion this year. The latter, the high-margin Amazon Web Services, contributes over 50% of the group’s operating income from just 11% of revenue, though that is quickly growing. But another listing in the company’s financials, ‘other’, also didn’t go unnoticed. Contributing $2.2 billion over the first quarter, ‘other’ is not yet a major influence on Amazon’s balance sheet. But at a year-on-year growth rate of 130%, it soon might be. The bulk of that ‘other’ figure is online advertising revenue.
Amazon is increasing the presence of ads across its platforms, from its core ecommerce site to Amazon Prime content streaming service, video game streaming platform Twitch and online properties it owns such as film database IMDb. Online advertising is not an entirely new direction for the company, which has had offers for several years. However, those watching closely believe that it is an area that has moved from being almost an afterthought to one Amazon has now turned its attention to building out. In the background significant HR appointments have been made and technology invested in.
The wealth of consumer data held by Amazon is what makes it a real threat to Google and Facebook in this area. While the company’s overall footprint in the time spent online by consumers is small compared to the two digital marketing giants, it is also much more targeted. And it’s growing with Amazon Prime and other initiatives. But Amazon’s big advantage is the combination of the fact that visitors to its ecommerce site are already in a ‘buying’ mind set and its data on their consumer histories and behaviour patterns. This means targeted ads are more likely to be welcomed, or at least not considered intrusive, as well as the actual targeting being far more sophisticated than the comparatively imprecise algorithms of more established competitors.
That, and the fact that advertising on Amazon avoids the PR risks of appearing beside the wrong content on Facebook and Google’s platforms, is now being recognised by advertisers. A recent New York Times article on the topic cites a study by search and social media market company Catalyst, which polled 250 brands marketing on Amazon. Only 15% felt that they were currently making the most of the advertising options currently available and 63% responded that they intended to increase their current budget allocation to Amazon as an advertising platform for the following year. With significant efforts going into hugely improving and extending the company’s ad platforms and offer range, it can only be presumed that trend will continue over coming years and digital marketing will grow into a significant revenue generator for the company that will practically develop as a brand new unit.
Pharmaceuticals & Healthcare
Amazon is making a concerted move into the online pharmaceuticals business and healthcare more generally. In January, the company teamed up with investment bank JPMorgan Chase and Berkshire Hathaway (BH), Warren Buffet’s fund that has become one of the biggest 10 companies in the world to found a medical company focused on bringing down the soaring cost of medical insurance in the U.S. And in July this year, the company announced the acquisition of online, mail order pharmacy Pillpack.
The longer term strategy behind the joint venture healthcare initiative between Amazon, JP Morgan and BH is not yet clear. Initially, the three companies will service their own 1.2 million employees and hope to significantly bring down medical insurance costs for them by developing technology solutions. However, it is believed that longer term the trio have wider ambitions. While the initiative was stated as intended to be ‘free from profit making incentives’, and a for the benefit of the alliance’s employees, there is speculation that this could change longer term.
Commenting on the announcement of the appointment of Comcast alumni Jack Stoddard as COO of the initiative this week, Leerink Partners LLC analyst Ana Gupte stated:
“We believe the Stoddard hire clearly shows that [the venture] is looking to own the digital front door to healthcare.”
In the U.S. alone, $3.5 billion is spent on healthcare, which is the equivalent to a whopping 18% of GDP. In the UK 9.8% of GDP is spent on healthcare. And it’s rising. By 2026, an estimate 20% of U.S. GDP is expected to go to the sector, or $5.7 trillion. Much of that is spent on health insurance and the incumbent system has been disparaged by Berkshire Hathaway boss Warren Buffet as:
“..a tapeworm of American economic competitiveness”.
Shorter term, the Pillpack deal shows that Amazon has zeroed in on the potentially hugely lucrative online pharmaceuticals market. It is also still a relatively nascent market and isn’t yet well developed. However, analysts have estimated it could be worth $40 billion to Amazon and by putting its resources behind Pillpack, Amazon will hope that it can take mail order pharmaceuticals mainstream. Financial markets clearly think that Amazon will become a major player in the space with $6.5 billion wiped off the value of Walgreens Boots Alliance, the largest international pharmacy company, immediately after the deal was announced.
Pharmaceuticals and healthcare is also a high risk market and a PR minefield. Mixing up an order could result in death. It is also highly regulated and dominated by entrenched players that will not give up their market share without a fight. However, Amazon will have plenty of confidence they can take the fight to them and win. International markets will of course be the next step once market share has been developed in the USA.
This is a big one and what could really drive Amazon’s growth over the next decade, though it will also be capital intensive and could take time to turn into strong profits. But it is clear that the company has ambitions to dominate the groceries market in a way comparable to how it took control of first the publishing sector through its online bookstore and then Kindle, as well as the wider ecommerce market for consumer goods.
Groceries, particularly the online purchase and deliveries market, has much tighter margins and more complex logistics as a result of the perishable nature of many products. That leaves less room for innovation. But Amazon is now moving to combine online groceries shopping and delivery, where profitability is dubious, with bricks and mortar groceries retail.
The company acquired organic and speciality groceries chain Whole Foods last year in a deal that took the sector by surprise and set alarm bells ringing for traditional groceries chains. Whole Foods, while a significantly-sized chain is also somewhat niche and targeted at a wealthier consumer profile than the biggest groceries companies. However, it is big enough for Amazon to use as a testing ground to get to grips with a new bricks and mortar retail business model involving highly perishable goods.
It is in Amazon Go, however, that many suspect the company’s wider ambitions lie, with Whole Foods the pilot project. The first Amazon own-brand bricks and mortar groceries store of what is expected to roll out as a major chain over the next decade, opened in Seattle in January of this year (2018). The second two opened over the past couple of weeks.
The Amazon Go concept is groceries stores that are almost fully automated and as close to operating with no human staff as possible. There are no cashiers and there isn’t even a check-out, with the contents of customers’ shopping baskets tracked using computer vision and other AI technologies and the cost automatically deducted via their contactless card on the way out of the store. As well as automating bricks and mortar groceries shopping, Amazon hope that its logistics and big data expertise will add value to its ability to manage the new venture and optimise the revenues generated.
The groceries market is Amazon’s biggest bet. It’s a hugely valuable industry but one whose value is based on fine margins and will require huge capital expenditure to build a bricks and mortar presence over the next decade. Get it right and Amazon will move onto a new level as a corporate empire. Getting it wrong, however, could wipe out a big chunk of the cash war chest the company has built up.
All of the nascent verticals expected to drive future Amazon growth could fail to meet expectations or become outright and hugely expensive white elephants. However, within the context of Amazon’s track record so far that would seem unlikely. The company’s stock might appear expensive to some investing online and betting on significant future growth from today’s giddy heights is of course a risk. However, this author believes that it is far more likely that five years from now Amazon will be worth over $2 billion than it is that this extraordinary company’s value will fall.