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?
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.
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.
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?
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.