If you own a business and you expect Amazon.com (NASDAQ: AMZN) to leave you alone, think again. A company that generates over $50 billion in sales in three months, must constantly look for new markets to enter, to maintain the ridiculous growth investors expect. From books, to general merchandise, to cloud services, Amazon"s expansion has already been an incredible run. In the short-term, Amazon Web Services (AWS) is the clear growth driver, with near 50% annual revenue growth. That being said, Amazon is making moves into three different industries and one of these new ventures in particular, could become the next great growth driver for the company.
Trying to secure revenue growth
One of the key changes occurring within Amazon, is the company is moving toward becoming a services company. In the last quarter, 60% of Amazon"s revenue came from product sales, and 40% from service sales. This trend looks to continue, as service sales jumped by more than 59%, whereas product sales increased by just under 29%.
Each of the industries Amazon is moving into focuses primarily on providing services to customers, with product sales being a small piece of the puzzle. The first business Amazon wants to disrupt is a relatively new development. Amazon acquired Ring in April of this year. Selling security systems to do-it-yourself customers is job one. In true Amazon fashion, the company isn"t afraid to undercut its competition to try and take market share.
Company | System Cost | What"s Included | Monthly Cost |
ADT | "Installation starts at $199" | You have to call to get a quote (depends heavily on what your needs are) | $36 per month |
Ring Alarm Security Kit | $199 | Base, keypad, motion sensor, contact sensor | $10 per month or $100 per year |
SimpliSafe "The Foundation" | $229 | Base, keypad, motion sensor, contact sensor | $15 per month |
(Source: Web sites for ADT, Ring, and SimpliSafe)
ADT is a well-known leader in home security. Unfortunately, the company"s monthly plans are far more expensive than either SimpliSafe or Ring. When it comes to self-installation, Ring and SimpliSafe offer similar products, and SimpliSafe says, "97% of our customers set SimpliSafe up themselves."
The reason Amazon wants in on home security is it fits with the push of Alexa-enabled devices. At $10 a month or $100 a year, this is a cheap way for Amazon to cross-sell security along with other devices and services. The home security market currently is worth about $10 billion. In the next 4-5 years, estimates have the market growing to as much as $50 billion, on the back of self-install options like Ring. If Amazon can capture even 5% of this overall opportunity, at present the company would bring in an additional $500 million in sales. This doesn"t sound like a lot for a company selling billions, but it"s a relatively simple add-on. Over the long-term, monitoring fees would increase the subscription revenue that is driving Amazon forward.
The connection of car to home
It"s no secret that Amazon, Apple, and Alphabet (NASDAQ: GOOG) are battling it out for your smart-home dollar. Apple"s CarPlay and Android Auto have been integrating into vehicles for years, but Amazon isn"t going to let its large cap peers have all the fun.
At present, it seems Android Auto is winning the race for the largest footprint. Alphabet claims that Android Auto works with, "over 500 models." According to Apple, CarPlay works presently with, "over 400 models." Since Amazon got a late start in this game, it"s hard to find a hard number of vehicles that work with Alexa. However, if we look at a list of compatible vehicle systems, there are models including high-end vehicles like Lexus, Infinity, BMW, and Mercedes. The non-luxury brands are well represented as well, such as: Ford, Nissan, Toyota, and Fiat Chrysler.
Amazon isn"t just waiting for vehicle manufacturers to allow it into their systems either. There are multiple third-party devices for getting Alexa into your car. One example is the Garmin Speak, which is essentially an Alexa-enabled speaker that sticks to your windshield.
Though much is made of autonomous vehicles, many analysts expect there will be a much larger layer of the market that has smart car capabilities like maps, auto, multimedia streaming, and more, inside of a traditionally controlled vehicle. This "connected car" market is estimated to be worth about $35 billion to as much as $50 billion today. Depending on who you ask, this market could growth to as much as $219 billion in less than ten years.
Using a conservative estimate that Amazon only takes 5% of this market, would imply somewhere in the $2 billion range of additional revenue for the company. Looking less than 10 years out, Amazon could be doing $10 billion or more a year, at just 5% of the connected car business. If Amazon is able to take say 15% to 20%, the company would generate as much in sales from this business by 2025 as it does from all of its product sales today.
$557 billion reasons to crush this market
To even discuss the advertising market, we must at least acknowledge that even Amazon has an uphill road going against the likes of Google and Facebook. In their respective quarters, Google generated over $28 billion in advertising revenue, while Facebook produced about $13 billion. Most investors don"t think of Amazon when it comes to advertising, but that"s exactly my point.
Amazon puts advertising in the "Other" category of its earnings report. This "Other" category generated $2.2 billion in revenue, which doesn"t seem to be too significant when we compare to the duo listed above. However, Amazon isn"t ignoring this business as the category listing might suggest.
In fact, Amazon"s advertising business turned a significant corner late last year. Through the first half of 2017, the advertising business grew significantly by 50% to 60% annually. The latter half of 2017 and moving into 2018, Amazon clearly realized the potential and expanded its offerings.
The company offers sponsored product listings, which were revamped at the beginning of 2018. Each Kindle device gives Amazon a prime (pardon the pun) opportunity, to serve up advertising on the lock screen. In addition, with an estimated 100 million Prime members, there are a lot of eyes on Amazon pages, which makes the site more valuable to traditional advertisers as well.
In the last three quarters, Amazon"s advertising revenue jumped by over 120% or more on an annual basis. At $2.2 billion in revenue, advertising represents about 4% of Amazon"s overall revenue. This business reminds me of the infancy of AWS. Years ago, smart investors were pounding the table about the potential for AWS to Amazon. Advertising has climbed from 2.6% last year to 4% this year. The business is growing at more than double the rate of AWS and is a massive market opportunity.
In 2018 alone, the global advertising market is expected to reach $557 billion. Using our same 5% thesis as before, Amazon"s take would be nearly $28 billion. This would also be a massive shot in the arm for Amazon"s margins as well. At present, Facebook has an operating margin of 44%, and is guiding that this will land somewhere in the mid-30s. Alphabet (aka. Google) carries an operating margin of over 24%. By comparison, Amazon"s operating margin is currently just under 6%.
The bottom line
Analysts are expecting a slowdown in revenue growth for the online giant from 32% annual growth this year to 22% growth next year. If Amazon can capture even 5% of the three industries we"ve talked about, this would add as much as $30 billion to the top line. Admittedly this is an aggressive assumption, but even half of this amount would push Amazon"s revenue growth next year from 22% to 28% annually.
Amazon stock is hard to call cheap, at more than 75 times 2019 projected earnings. However, the company has been crushing analyst estimates, by an average of 48% over the last four quarters. If Amazon can make inroads into home security, connected cars, and advertising, this string should continue. Knowing where Amazon"s next leg of growth comes from, gives long-term investors just another reason to buy the shares.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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