Why Amazon Is Worth a Trillion Dollars
A couple weeks ago, Amazon became the first company to achieve a market value of over $1 trillion. If you don't know, that means if you add up every single share of Amazon stock at the current market price, it equals $1 trillion.
Pretty amazing. And the fact that it didn't last long doesn't matter. The fact that Microsoft and Apple have made it to trillion-dollar land doesn't matter, either. In fact, it might be tempting to say getting valued at $1 trillion is even more amazing for Amazon...
After all, Apple sells around $200 billion worth of iPhones a year. And it's got like $200 billion in cash sitting in the bank.
As for Microsoft, it sells basically the default operating system, word processor, and office tools software for businesses around the world. (Of course, here at Angel, we use Linux stuff. It's free, and almost no one writes spyware for Linux.)
Both Apple and Microsoft make and sell the products that make modern life what it is. Of course there is value to that. But Amazon? Yeah, sure, it sells the products that make the world turn. But it doesn't make many of them. Amazon is mostly a reseller. Online retail.
That's why it has a retail-like profit margin of about 5%. Apple's profit margin is 22%, and Microsoft comes in at nearly 30%.
In a general sense, companies that have such tight margins are just not worth as much as companies that keep more of every dollar that passes through their hands. Check the price-to-sales ratio...
Walmart does over $500 billion in revenue a year — more than any other company in the world. And yet add up every share of Walmart stock at the current market price, and you get $292 billion. That's a price-to-sales (P/S) ratio of 0.57.
Apple has a P/S ratio of 3.7. Microsoft trades at nearly eight times its revenue. And Amazon? It has a P/S ratio of... 4??
Why Amazon Is Awesome
Look, you had to see that coming. I mean, I titled this article, "Why Amazon Is Worth a Trillion Dollars." You think I'm going to start off by saying Amazon is overvalued? That would be silly...
But the fact is, Amazon isn't overvalued. At all. Almost exactly two years ago, I wrote here in Wealth Daily that Amazon was cheap when it was $900 a share. And today I'm going to tell you it's probably still cheap at $1,900 a share.
In 2017 (in what is still one of the best articles I've ever written), a simple cash flow analysis did the trick. For today's rabbit out of the hat, we've got to go back to a Bezos Mandate from 2002 that set the stage for Amazon to stand among the world's most valuable companies...
Bezos made six demands:
1. All teams will henceforth expose their data and functionality through service interfaces.
2. Teams must communicate with each other through these interfaces.
3. There will be no other form of interprocess communication allowed: no direct linking, no direct reads of another team's data store, no shared-memory model, no back doors whatsoever. The only communication allowed is via service interface calls over the network.
4. It doesn't matter what technology they use. HTTP, Corba, Pubsub, custom protocols — doesn't matter. Bezos doesn't care.
5. All service interfaces, without exception, must be designed from the ground up to be externalizable. That is to say, the team must plan and design to be able to expose the interface to developers in the outside world. No exceptions.
6. Anyone who doesn't do this will be fired.
Think about all these for a second. Because this set of demands is pretty intense. And don't worry if you don't understand some of the terms. I don't understand all of them. Like, I know what an interface is, though I don't understand exactly what it means in this context. I definitely don't know what a shared-memory model is.
But the details aren't the point.
Bezos said teams weren't allowed to communicate directly. All communication — anything another team might ask, need, misunderstand — had to be handled in a systematic, programmed way.
And everything they did to accomplish this amazingly complex task had to be exposed to anyone who wanted to see it. In fact, Bezos was demanding that Amazon give all of this away to developers from other companies, so they could simply duplicate the years of work Amazon did!
You'd think the guy was insane — or had a vision that not many people shared at the time...
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The Amazon Platform
Bezos was making Amazon into a platform. Like if you wanna sell something on eBay, you don't have to talk to anyone. All the tools you need to sell something are available right there. You can set up your own ad, it embeds and encrypts contact info, there's customer service, notifications... everything you'd need.
That's a platform.
At Apple's App Store, you don't need permission from anyone to launch a game or an app or a podcast. The tools are there for you, and you do it. And you'll get paid if your thing is a success. That's a platform, and it means Apple is about way more than phones. The phone gets you into the system. Apple wants the platform — the App Store — to be so awesome that it keeps you there.
And you know who makes the App Store awesome? The users do. Apple set it up and let it go. It's the users, the developers, the customers that create actual content that makes the App Store valuable. Same with all those stupid games on Facebook. Is that brilliant or what?
So, Amazon. Yeah, you can open your own store there, sell what you want, have customer service tools (which is critical; somebody waits five seconds for help and they are pissed), and it's all automated. But these are basically storefronts. It's the small pond.
Amazon Web Services is the big pond, where the big fish are. Sure, you can just host a website at AWS. Or you can implement every tool that's available and build the entire backend of your business. You wanna know who's there?
Disney. Netflix. Slack. Spotify. Pfizer. Samsung. Comcast. NASA. Johnson & Johnson. BMW. Adobe. Airbnb. Expedia. Zillow. The list goes on and on.
Quite literally, Amazon has created the backend platform for any company in the world. Doesn't matter how big — Amazon can apparently handle it. This really isn't just Amazon selling something. Amazon is a true partner to the world's businesses.
And I can tell you, this will only get bigger. So, $1 trillion valuation? Sure, why not?
Until next time,
A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.
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