Amazon is on track to become a US$1 trillion company in 18 months, and it could beat Apple to the punch
While many are focused on Amazon’s cloud business, an analyst sees plenty of growth potential in its core e-commerce business, as well as in its healthcare, advertising, and the smart-speaker market
By Troy Wolverton
Alexa, what tech company will be the first to get a trillion valuation?
If Amazon’s businesses, including its popular Alexa smart home devices, continue to perform, the online retail giant has a shot of claiming the title in 18 months.
That’s according to Daniel Ives, a financial analyst at GBH Insights, which predicted in a research note on Monday that Amazon’s market capitalization could hit US$1 trillion in that timeframe.
Ives’ note did not comment on whether Amazon would beat Apple to become the first trillion company, but the roadmap detailed in the research note makes a strong case for Amazon’s trajectory.
Amazon appears set to grab a greater share of e-tail sales, its profitable Prime membership service continues to grow, and the smart home business it pioneered with its Echo smart speaker looks like a huge market opportunity, Ives wrote. Additionally, the company looks like it’s well positioned to stake sizeable claims in the advertising and healthcare markets, he said.
“We expect considerable strength from Amazon across the board over the coming quarters,” Ives said in his note. “While a trillion-dollar market cap will not happen overnight, we believe the path is now set for this to occur over the next 12 to 18 months.”
As part of his note, Ives raised his price target on Amazon to US$1,850 a share from US$1,500.
Amazon’s stock closed regular trading Monday up US$21.95, or 1.5 per cent, to $1,521.95 a share. The company’s valuation stood at US$737 billion, meaning it would have to appreciate about 36 per cent to hit US$1 trillion.
Apple, the world’s largest publicly traded company, is currently closer to the trillion dollar mark than Amazon. Apple currently boasts a market valuation of US$908 billion, but it has not been able to gain much since reaching that level in November, as investors worry about demand for its new generation of iPhones.
Of course, Microsoft is also in the running, with a US$735 billion valuation.
It’s not about the cloud
Ives is not alone in his bullishness on Amazon. But for many investors and analysts, the source of their optimism about the company is Amazon Web Services, its cloud computing business. AWS dominates the cloud-computing market and has been growing rapidly as corporations shift their IT operations from their own data centres to the cloud.
Despite pulling in far less revenue than Amazon’s e-commerce operations, AWS provides the lion’s share of the company’s profits.
But instead of concentrating on AWS, Ives’ report focused largely on Amazon’s core e-commerce business. The company’s share of the US e-commerce market appears set to grow from about 44 per cent to around 50 per cent by next year, he said. Meanwhile, the number of Prime members is already 90 million, and that number should grow 30 per cent this year.
Those customers are hugely desirable for Amazon, because they spend about twice as much as non-members, Ives said. And the company has a big opportunity to get those customers to spend more by luring them into Whole Foods stores, which it acquired last year.
“Amazon continues to have an ‘iron grip’ on the e-commerce market heading into 2018,” Ives wrote.
The company’s Echo smart speakers and the Alexa voice assistant that powers them are opening up other opportunities. Echo owners can already easily order products from Amazon just by talking to their smart speakers. That feature could meaningfully boost the company’s retail sales.
Ads, AI and Alexa
Alexa also could help Amazon pull in advertising dollars, as companies want to market their products to Echo owners. And Amazon could see additional benefits by convincing more Prime members to buy Echo speakers and making it easier to use Alexa to buy more products.
All told, the Echo and Alexa smart home “ecosystem” could be a US$20 billion market for the company in the next three years, Ives wrote.
“We believe a broader strategy around advanced AI, ad targeting, and further driving the ‘Amazon consumer flywheel’ is the golden opportunity behind the Alexa ecosystem that is in the very early innings of playing out,” he said.
Advertising and healthcare also represent big, but largely untapped markets for Amazon. With the bulk of product searches on done through Amazon’s services, the company has an opportunity to cash in through search advertising, Ives wrote. He estimated that the company’s advertising revenue could grow from around US$5 billion this year to US$15 billion by 2020.
Similarly, its healthcare-related revenue looks primed to expand, he wrote. Amazon recently launched a line of over-the-counter medications and is reportedly planning to launch a full-scale pharmacy business. It also recently signed a deal with JP Morgan Chase and Berkshire Hathaway to launch a healthcare company with the goal of lowering insurance costs. That effort could have broader implications, Ives said.
Amazon’s move into healthcare will likely be gradual, rather than immediate, he said. But the company stands poised to disrupt the pharmacy business and the wider healthcare industry, Ives said.
“We ultimately believe a major foray into this all-important area of the consumer lifestyle has already begun and will be a key ... expander for the Amazon machine over the next three to five years,” he said.