Watching Amazon often gives us déjà vu.  Were the results solid?  Yes. Are investments for the future climbing faster than expected?  Yes. Is the P/E ratio high?  This is impressive consistency. Amazon is a company that even from here has an extraordinary opportunity.
Here are some impressive takeaways from its latest quarterly report:

  • Third-party sales (that have a higher margin) are growing at double the rate as first-party ones.
  • Amazon Web Services revenue rose 45 percent, while profits in that segment rose 61 percent and imply a strong upward trajectory in the margin structure
  • Subscription services – where we see greater future pricing power – increased 25 percent. (This is your annual membership to Prime.)
  • Other revenue, which mainly consists of advertising, climbed a staggering 95 percent.
  • Meanwhile, international losses narrowed to 3.1 percent of revenue, from 5.1 percent.

So with all those positives, what sent the stock down 5 percent on Friday?  Well, naysayers point out that growth in the retail business is moderating to about 15-20 percent.  (Still pretty good growth by any objective measure.) It’s also true there’s little clarity as to when the international segment might become profitable.
However, the concerns over India are less compelling. YES, regulators in India have stopped allowing foreign entities to sell exclusive products, like the many Amazon-branded items that are becoming a bigger part of its retail business. While this policy aims to “protect” domestic players, in practice it hurts both local businesses working with Amazon and consumers, because it eliminates choice.  Any policy that hurts a highly-democratic nation’s citizens isn’t likely to last, so India is still very much in play for the future. And it’s worth a reminder that India represents only about 2 percent of Amazon’s business.
In the short-term, holes can be poked in any story, so it’s important not to lose sight of the bigger picture.  The future of Amazon is less about quarterly results but rather hinges on three big ideas on which the company is better positioned to capitalize.


Big idea #1: Amazon will continue to serve as a deflationary force for consumers, in the U.S. and around the world. That phenomenon results from both the explicit price of products as well as the implicit value of time savings efficiencies in the daily lives of Amazon customers.

No company helps people save time as well as Amazon.  Consumers can otherwise take a whole host of actions pushing back against the existing establishment, including for example quitting social media, cutting the cord with cable, or not upgrading from an old phone. But removing Amazon is almost a non-starter.
Amazon Web Services serves more and more businesses in some capacity, whether for streaming Netflix, powering start-ups, or backing up governmental agencies in the cloud.  But for consumers, the bigger Amazon (and AWS) gets, the faster, more efficient, and more personalized their commerce experiences become.
What some observers miss, however, is how Amazon is taking a page from Walmart’s playbook by entering the grocery business via its ownership of Whole Foods.  Currently, this is not a massive boost to financial performance, but it is still a $1 trillion market that is in general highly antiquated. Consider that the average American spends over 53 hours per year in the grocery store (about 40 minutes per visit, 1.5 times per week according to the Time Use Institute).  And that doesn’t even include the commute to and from the store, the time spent unloading groceries, and fighting for a parking spot.
Imagine a world where you can do your grocery and other sorts of shopping at the same time.  That’s what Walmart enabled consumers to do, starting in the early 1990s, by leveraging its infrastructure and logistical network, thereby seeing substantial earnings power and stock appreciation during that period.  This happened at a moment in Walmart’s history when retail growth was slowing, thus making it a clear analog for Amazon today.
Now imagine a world where there’s a company that can essentially save you about three days of time per year by leveraging a more refined infrastructure and logistical prowess. Amazon’s in a position to increase your available time by more than 1 percent just by eliminating trips to the grocery store.  How much are three extra days in the year worth to you?
Time savings is the most essential source of value in consumer technology companies and no company does it better or has it more ingrained into its company DNA than Amazon.  That’s why Bezos deserves to be the richest person in the world.

Big idea #2: The media industry’s demise enables Amazon to grab a growing share of the $600B global advertising market.

The three main components of the media complex – content creators, content distributors, content promoters (brands) – are on a collision course.  We call it the three Hindenbergs.
The transformation and partial demise of the media complex opens up a huge opportunity for Amazon, as brands scramble for ways to build relationships with consumers. Brands and advertisers devote substantial resources to promoting products in order to maximize premium shelf space in stores.  Well, the problem now becomes that shelf space doesn’t matter and alternative or private label options are just a click away. The only way brands can compete now is through a commitment to quality and building direct relationships with consumers.
Customer acquisition channels will still exist, but they will likely have to aggregate around several large platforms, much as they did with the three TV networks in the past.  Amazon is uniquely positioned by owning a platform for consumer attention, endless shelf space, and more information on purchase preferences than any other company.
With $600 billion in ad dollars up for grabs, it’s worthwhile to consider how much of that could go Amazon’s way. Sure, the growth rate may be uneven in the short term, but this transition is just beginning.  It is likely that advertising revenue growth for Amazon will accelerate in tandem with the fallout in media.

Big idea #3: Amazon uses your data in a better way than other platforms.

There’s a growing chorus of backlash against ad-based platforms where personal data becomes the product. As consumers become more educated about this, companies will face a non-negotiable demand to internalize their commitment to privacy. Ignoring this emergent trend will be a recipe for failure.
Companies today primarily use data for solicitation and targeting.  This provides virtually zero incremental utility for consumers.  Amazon, on the other hand, uses data to better personalize experiences and improve the efficiency of transactions and purchase decisions.  Again, this accrues very much to the consumer as time savings, as it lowers the hidden (implicit) costs of shopping and buying.
From a regulatory standpoint, Amazon only has about 4 percent share of the total retail market at the moment, so traditional antitrust rules don’t apply.  Couple that with its generally well-intentioned use of consumer data, and it becomes clear that Amazon is likely the best insulated big tech company from the scrutiny of regulators. When you think about how companies use your data, the odds are that Amazon doesn’t even come to mind.
Ultimately, while Amazon is not a cheap stock on an earnings basis, factoring in its growth profile turns the analysis upside down.  Amazon is one of the cheapest companies on the block from the perspective of its ratio of Price/earnings to growth rate. It trades at ~0.35x on that basis, compared to Apple, for instance, at ~0.55x, or high flyer Netflix at ~1.12x. Given the size and scope of the industries Amazon is tackling – grocery, media, healthcare – and its prowess in driving time savings for consumers, that’s a winning formula to fuel the stock back to $1T in market value. It seems likely that Amazon will continue to deliver for shareholders.