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When Amazon Breaks the Stock Market Scale

Dan Newman
October 24, 2013

In this year's letter to shareholders, (NASDAQ: AMZN) CEO Jeff Bezos writes: I frequently quote famed investor Benjamin Graham ... "In the short run, the market is a voting machine but in the long run, it is a weighing machine." ... We want to be weighed, and we're always working to build a heavier company.

With this analogy, there are times when the market's scale could add some pounds that Amazon lacks -- that is, the stock could be overvalued. But looking at history, Amazon constantly ends up weighing more than what the market believes, and then outperforms in its weight class.

So, what about now? It would be crazy to think this trend of outperformance will keep going for a $150 billion company that reports losses instead of profits, right? Here are some reasons to the contrary.

Market opportunity
Amazon, of course, began selling books. Now it enters any industry it deems lucrative. Even though it operates in a breadth of industries from Web services to publishing to video entertainment, and it seems like there aren't many more industries to take on, it can still grow through depth. To Amazon, it's all about the customer experience, and giving incentives and features that will attract new customers and keep old ones. If this strategy proves effective, it could grow its share in any of its many businesses.

Take retail sales as an example. Only about 8% of U.S. retail sales happen online. And, Amazon accounts for only 15% of this 8%. Not all retail will happen online in the future, but it seems there is still plenty of the market that online retail, and Amazon, can gobble up. And this is especially true as one of the largest negatives of ordering online -- having to wait for the thing to ship -- is negated with same-day shipping.

Or take its Web service business. At the end of last year, it was estimated to have a 36% share in the infrastructure-as-a-service market, and 18% share in the platform-as-a-service market, and both of these markets are only 15% of the total infrastructure service marke