Is Amazon.com, Inc. Just Growing for Growth's Sake?

Amazon has expanded into numerous new markets in the last five years, but is that creating any value for shareholders?

Apr 16, 2014 at 7:00PM

Amazon.com (NASDAQ:AMZN) has grown its way to being a dominant player in retail, cloud computing, and streaming, building a $142 billion market cap along the way. Investors have clearly bought into the company's growth potential and given Jeff Bezos free reign to enter any market he sees fit. 

The question long term is whether or not Amazon can succeed in so many diverse businesses? It just released a set-top box for TVs, and rumors have leaked that Amazon is building a smartphone to go along with the Kindle line of tablets. There are even tests to get into the grocery business. That's right, a grocery-delivering smartphone company! 

Outside of Berkshire Hathaway, which is run as a holding company, there aren't many companies in the Fortune 500 who run such diverse businesses, and I wonder if Amazon can do it successfully long term? 

Amzn Kindle Tablet Family Image

Amazon's line of Kindle devices was one of the first big moves into a new market but it won't be the last. Source: Amazon. 

Growing into the unknown
In the last few years alone, Amazon has gone from its roots as an online retailer to building tablets, cloud infrastructure, providing streaming, creating media content, and now smartphones. Growth is great, but it's only valuable if it adds to long-term value for shareholders and that's where Amazon is complicated at best. 

The success of these businesses is hard to quantify, particularly because Amazon doesn't break out much specific data. What makes it even harder is that Amazon barely makes a profit, so calculating ROI in a traditional sense is impossible. 

Amzn Box Image Tmf

Boxes like this from Amazon's online sales are still the company's core, but that's changing.

Even the expansion of services to Prime is difficult to quantify because Amazon doesn't make money on retail and is now providing free services to go along with free shipping for Prime members. Not to mention, shipping costs are rising as a percentage of sales

So, Amazon is growing, but how do we quantify if that growth is good for shareholders? 

Can a tech company diversify beyond its core?
The debate companies and investors will eventually have is whether focusing on core businesses is the right move or whether diversity is good. Even giant conglomerates like 3M or General Electric have some sort of core competency that defines most of their product lines. In 3M's case, it's making nearly every kind of film imaginable, and for GE, most of its products are still somehow geared around generating or using electricity.

Amazon's businesses are starting to stray further and further from its core of online retail, and it's taking on bigger and bigger rivals. Taking on Wal-Mart with a different business model is one thing, but taking on Google (NASDAQ:GOOG)(NASDAQ:GOOGL) and Apple (NASDAQ:AAPL) at what they do best is something else entirely. 

Aapl Tv Image

One of Amazon's biggest competitors in devices is Apple, who is still the dominant player in mobile devices. Source: Apple.

What is the device strategy?
The question I have is what is Amazon's strategy with this expanding line of tech devices? It's clearly going after the lower end of the market with lower price points, and Jeff Bezos has explicitly stated that Amazon will make money only if consumers use its devices, but are they? 

In the fourth quarter of 2013, Apple's iPad accounted for 97.5% of e-commerce according to Monetate, and IBM said that the average purchase made on an iOS device was $93.94 versus $48.10 on Google's Android, which Amazon's products are based on. 

Amazon is also a huge problem for Google, who is basically providing software with little benefit because Amazon has built its own store and ecosystem, essentially shutting out Google. So, Amazon is relying on Google to provide updated software while Amazon gives little back. 

Like Google, it seems as if Amazon has a strategy of getting more Amazon devices in people's hands, but it doesn't have a strategy for making money on those devices. But Google makes a fortune on mobile search and gets lots of data from those devices. Meanwhile, Apple is making money so fast it can't give it back to shareholders fast enough. Amazon may sell more e-books, but without a reported profit, it's difficult to see the side effects of devices in other businesses. 

Diversification isn't always good
Look across the market, and you'll see cases of companies selling "non-core" assets because they take away from managing a great core business. As Amazon diversifies itself into devices, creating media content, managing the cloud, delivering groceries, developing drones, or any other number of distractions, I just wonder if Jeff Bezos and team can manage all of it. 

We know now that Bezos can create disruptive businesses, but one thing he hasn't proven is the ability to build a long-term profitable business. When you're starting from an unprofitable base, it's difficult to see how that core business will perform anything but worse than if Bezos had his full attention on online retail. 

At the end of the day, is Amazon growing for growth's sake, or is it adding value to shareholders with these new businesses? 

Your cable company is scared, but you can get rich
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple. 

 

Travis Hoium manages an account that owns shares of 3M, Apple, Berkshire Hathaway, and General Electric Company. Travis Hoium is short shares of Amazon.com. The Motley Fool recommends 3M, Amazon.com, Apple, Berkshire Hathaway, Google (A shares), Google (C shares), and Netflix. The Motley Fool owns shares of Amazon.com, Apple, Berkshire Hathaway, General Electric Company, Google (A shares), Google (C shares), and Netflix. Try any of our Foolish newsletter services free for 30 days.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers