Amazon.com (NASDAQ:AMZN) is a unique company for several reasons, but what makes it stand out can best be seen through a comparison with its fellow tech titans.
Of the five tech companies that have come to dominate the stock market, all have done so by excelling in one line of business -- Apple in gadgets like smartphones; Alphabet in search; Microsoft in office software; and Facebook in social networks. All of those companies make investments in order to strengthen their positions in the markets they dominate.
Amazon, however, operates differently. While the company no doubt has a dominant position in e-commerce, it's also a leader in cloud computing, the No. 2 video streamer, and a leader in e-books and voice-activated technology like Alexa, and it's growing in a number of other categories it competes in. The company resists conventional definitions, which is part of what has made it so attractive to investors.
But the best metaphor to understand Amazon may be to look at it as a growth investor or a venture capital firm inside a giant company.
Acting like a growth investor
Amazon approaches emerging markets and technologies as a growth investor does, looking for blockbuster returns that will offset the flops that inevitably result from other investments. Many of Amazon founder and CEO Jeff Bezos's mantras revolve around this philosophy. He willingly embraces failure, having said, "I've made billions of dollars of failures. Companies that don't embrace failure and continue to experiment eventually get in the desperate position where the only thing they can do is make a Hail Mary bet at the end of their corporate existence." At the time, Bezos was referring to the Fire phone, a flop that led to a $170 million
At the time, Bezos was referring to the Fire phone, a flop that led to a $170 million write-down. The Amazon Founder also likes to say that the company is always at Day One, meaning it is always innovating like a startup, rather than becoming a complacent stalwart.
Acting on this philosophy, the company has pursued emerging opportunities in e-commerce, cloud computing, video streaming, voice-activated technology, e-books, tablets, restaurant delivery, a new social network, home service like furniture assembly, and many others.
The company has clearly had its share of failures. Among them is the Fire Phone, and a misguided investment in Living Social, the daily deals site that led to a loss of $169 million. In 2015, Amazon shut down Amazon Destinations, an online travel agency that had been launched a few months before. It ultimately yielded to Shopify, shutting down its own Webstore, and in 2014 closed its Paypal competitor Webpay.
The list goes on, but the flops have been far outweighed by Amazon's successes, and one in particular.
The big winner
Amazon never thought its cloud computing division, Amazon Web Services, would be responsible for half of its market value. The idea started out as an in-house project, a way for the company to support its own computing and storage needs, but its success allowed Amazon to begin selling the service to outside customers, and the growth since has been dramatic. AWS is on track this year to contribute more than $15 billion in revenue and, more importantly, $4 billion in operating income. The service is more profitable than its North American e-commerce operation and is growing much faster. Sales are up 42% this year, and operating income has increased 44%. That one bet on cloud computing has made up for Amazon's failures many times over.
AWS is on track this year to contribute more than $15 billion in revenue and, more importantly, $4 billion in operating income. The service is more profitable than its North American e-commerce operation and is growing much faster. Sales are up 42% this year, and operating income has increased 44%. That one bet on cloud computing has made up for Amazon's failures many times over.
The lesson for growth investors
Amazon's success has come in part from spreading out its bets and investing in so many different emerging markets and technologies. Growth investors would be wise to think the same way if they're not already doing so. After all, you have the risk of losing money in one stock but make it back in another. A ten-bagger then goes a long way, so trying to find the next moonshot can be a rewarding way to invest if you spread out your bets and find one that takes off.
Amazon may have lost hundreds of millions on flops like the Fire phone and Living Social, but the billions coming from AWS means investors never have to worry about that. It's no wonder then that Amazon is the ultimate growth stock.