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

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? 

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. 

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. 

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? 

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Comments from our Foolish Readers

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  • Report this Comment On April 16, 2014, at 7:13 PM, JAVKO wrote:

    The biggest hype of the century.

    How can a Co continue to survive if it doesn't make money?

    As you mention, AMZN is now challenging the big guys with its almost free service-products!

    Why isn't the analyst commuity pressuring AMZN to break down sales by sector?

    How long has it been since the Mk't gave AMZN the benefit of the doubt? Growth should eventually mean profit. In AMZN's case, the Mk't is too foregiving or too crooked.

    The only thing AMZN is good at is destroying other businesses.

    Finally, please do not compare Berkshire with AMZN or Mr. Buffet with Bezos: the former has been consistently making tons of money for half a century whereas the latter is just a WS toy that soon will be dumped by the very same corrupt players.

  • Report this Comment On April 16, 2014, at 8:39 PM, EquityBull wrote:

    Well said JAVKO.

    Amazon enters businesses and loses money at all of them. Each one is generally a commodity type business with tons of competition and Amazon's goal is to compete on price and break even or lose money as long as Wall Street keeps the flow of cheap capital to subsidize it. Once this free money stops it's going to get ugly for Amazon.

    They will have to raise prices to make money and once they do they will no longer be competitive in the many many separate businesses they have entered.

    As a consumer I love Amazon. I order from them a few times a year. However they aren't making profit and are just growing revenue. The more revenue grows the higher the expenses and continued lack of profit. At some point when they are forced to raise prices growth will stall and how does one price a no growth company in commodity businesses? Wal-Mart is typically around 10 times. Commodity phone makers all losing money except samsung/apple. Hosting co's all cutthroat and slashing prices and not making any real money there.

    Bezos is great in getting everyone to believe the dream. Someday we'll make profit. 15 years and counting and still no profit. 15 more coming without profit. How long will people believe in the future and supply cheap cash for Bezos to play

  • Report this Comment On April 16, 2014, at 10:35 PM, mobileking wrote:

    The reason Amazon has to keep growing for growths sake is that is where the cash flow comes from. Because they have a negative cash conversion cycle (they get $ in faster than they pay suppliers), the more they sell, the more cash flow they have. That is the secret to why Bezos has been able to keep up this game. If he wasn't getting money from this he'd need to go to investors all the time to fund his growth and all of the sudden the jig would be up. Therefore Amazon always needs to tell the story of future growth even if it comes at a cost of non-existent margins.

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