Amazon’s shares hit US$1000, and it’s not done yet
Tech giant Amazon’s share price touched US$1000 in the last week of May, registering a rise of about 33% in 2017. The e-commerce company which started operations 22 years ago has had a string of successful new products in recent years. Its various businesses have plenty of room to grow and the company’s share price is likely to continue its meteoric rise.
What has led to this spectacular increase in the company’s stock price? As recently as 2014, Amazon was in the red – in that year, it reported a yearly loss of US$241 million on revenues of about US$89 billion. But in subsequent years, its profitability spiked. In 2016, it registered US$2.4 billion in profits.
What’s driving Amazon’s share price?
A little over two years ago Amazon was trading at US$285. Since then, its price has almost quadrupled.
Cloud computing has quietly become a massive source of revenue and profit for the company. Amazon Web Services’ (AWS) customers include Netflix, the CIA, business messaging service Slack, and question and answer site Quora. Although Amazon is an industry leader in this segment, it faces a formidable set of competitors. Google and Microsoft have also invested large amounts in their cloud service businesses.
But for now, AWS seems unassailable. According to a recent report, Amazon’s market share in this business is more than that of Microsoft, Google, and IBM combined. The company’s “platform as a service,” (PaaS) is doing exceedingly well too. PaaS allows developers to write and host apps on the cloud. Here too, Amazon’s market share rivals that of its three largest competitors – Salesforce, Microsoft, and IBM.
How important is AWS to the firm’s profitability? In the first quarter of 2017, the company registered a total operating income of US$1.05 billion. About 89% of this, or US$890 million, came from AWS.
In addition to AWS, Amazon’s core e-commerce business continues to thrive. The company’s Prime membership is a major draw for US customers. The service that costs US$99 per year, provides several benefits including free one-day or two-day delivery for many of the items that can be ordered on Amazon’s website.
Although the company does not disclose the number of Prime subscribers that it has, estimates put the figure at around 66 million worldwide. That’s a massive number and it gives Amazon billions of dollars in fees alone.
Despite its large Prime subscriber base, there is still tremendous scope for expansion. The company is yet to build up the number of Prime subscribers in the high-potential markets of China and India.
Tech stocks are booming
Amazon is not the only tech stock that is scaling new heights. Alphabet, which is Google’s parent company, saw its share price rise to within a few dollars of the thousand mark. In fact, investors were waiting to see which company would be the first to breach the US$1000 level. Ultimately, it was Amazon, but Alphabet’s share price could soon climb to this level too.
While Google is in the cloud services business, it does not reveal revenues for this line. It includes these sales figures in its “Google other revenues” number. In the first quarter of 2017, this figure registered a jump of 49% compared to last year’s corresponding quarter, signifying that Google’s cloud services business volumes are growing.
Alphabet gets the bulk of its revenues and profits from the advertisements that appear on the Google sites. This business continues to be dominated by Google, although the company is facing competition from several rivals, notably Facebook.
Microsoft, another tech heavyweight, has also seen a sharp rise in its share price in the last twelve months. Currently trading at about US$70, its shares have gained about US$20 in the last year.
First quarter revenues climbed 8% to US$22 billion, while net income surged 28% to US$4. 8 billion. These stellar results disappointed some analysts. They had expected stronger revenue growth. However, Microsoft’s Surface tablet computer sales proved to be less than expected, resulting in a lower than expected top-line.
What’s next for Amazon?
In December last year, Amazon made its first commercial drone delivery to a shopper in Cambridgeshire in England. While the company’s drone initiative is yet to take off, the well-publicised delivery, which took place from a location about two miles from the customer, proved that Amazon is serious about this program.
The long-term plan is that Prime Air, the name of the drone delivery service, will become a key service differentiator for Amazon. However, the program faces a number of hurdles. The company will have to satisfy regulators, contend with aviation rules, and figure out how to tackle deliveries in bad weather.
If Prime Air does become a reality, the implications could be far-reaching. Amazon’s cost structure would undergo a huge change. The economics of its delivery service could allow the company to lower end prices to the customer, a step that would further strengthen its competitive position. The other advantage, of course, would be that deliveries would be made much faster.
Another surprise hit has been the Echo speaker launched by Amazon. It is controlled by Alexa, the company’s virtual personal assistant. A user can make voice commands to search the web, shop online and get instant weather reports. Amazon has recently unveiled the touchscreen Echo Show, a device that can be used to play videos and content from YouTube. Shipments will start on June 28th.
Amazon got its start by selling books online. Large numbers of traditional brick and mortar bookshops closed down as a result. Now Amazon has come full circle and plans to launch its own bookstores.
Can the company’s share price keep rising? The bulk of its profit comes from its cloud services where it has a significant lead over its rivals. The other part of its operations, retail e-commerce, could face competition from Walmart, a firm that is determined to take market share away from Amazon.
But Amazon still has plenty of scope for expansion. Currently, online spending in the US is about 15% of the retail market. According to a report, this could increase to 30% in the long run.
In the immediate future, the company’s share price seems likely to continue its upward trajectory.