by Clement Thibault
Amazon (NASDAQ:AMZN), the US-based e-commerce and cloud computing company, will report earnings on Thursday, July 27, after the market close. Analysts are looking for $1.4 of earnings per share on $37.2 billion in revenue.
Amazon is a disruptive company. Disruption appears to be hardwired into its DNA. It has completely changed the way we think about shopping, the way we compare prices, not to mention our attitude toward physical, brick-and-mortar stores. As Amazon continues its domination of the retail sector, sales at many long-established and once leading emporia such as Macy's (NYSE:M), Sears, and even Home Depot (NYSE:HD), have plunged, while Amazon's revenue has been growing at an average of 25% each quarter over the past year.
To be honest, we don't believe that once it has completely finished disrupting the retail landscape Amazon will stop. They're already actively looking to branch out into additional industries where they believe they might have an advantage.
Below, seven recent moves Amazon has made in order to keep expanding their business.
1. Groceries
While Amazon is a dominant force in online shopping, groceries aren't one of its strengths. That's understandable. Stocking and selling books, toys or electronics, which have a long shelf life and can be stored relatively easily and without any significant additional equipment is a very different proposition from delivering fresh perishables on a daily basis.
Still, groceries are a $630 billion market in the U.S, largely controlled by low tech companies such as Walmart (NYSE:WMT) and Costco (NASDAQ:COST). This is why Amazon's purchase of Whole Foods (NASDAQ:WFM) this past June makes a lot of sense; we covered it at greater length here.
As well, two of the e-commerce giant's leading food-related initiatives, AmazonGo and AmazonFresh, are currently being beta tested in Seattle, Amazon's home turf. However, each effort may still be at least a year away from a restricted, public launch. There might be some growing pains in this sector for Amazon, but buying an existing chain of grocery stores will help assuage those pains and allow for a smoother transition into the world of groceries.
2. Meal Kits
Just two weeks ago, Amazon began offering fresh meal kits on their site, called simply 'Amazon Meal Kits.' The premise isn't new—customers receive all the ingredients for the meal they've ordered already prepped, with instructions. All that's left for the customer to do is mix the raw elements together according to the instructions provided and cook.
This obviously steps on newly IPO'd Blue Apron's (NYSE:APRN) toes, but we suppose that's the point. Blue Apron IPO'd on June 29 at $10, but the news that Amazon would become a competitor brought its shares to an all-time low of $6.2. Right now, Amazon Meal Kits are available to select Amazon Fresh customers. But the prospects are promising: Blue Apron generated $795 million in revenue in 2016, providing Amazon with another billion dollar industry to disrupt.
3. Prime Wardrobe
This is Amazon's big step forward in the world of apparel. Prime Wardrobe allows customers to choose from three to 15 items of clothing, shoes and/or accessories and get them delivered within two days.
Customers have seven days in which to try on the clothes, decide what they'd like to keep, and send the rest back to Amazon free of charge—the box and prepaid shipping label are part of the service. StitchFix, which offers a relatively similar service—you receive five items they choose for you—recorded $730 million in sales in 2016. Another billion dollar industry, but this time one that Amazon already has a piece of since it's been selling clothing for years and has bolstered its presence in the sector with related acquisitions such as the shoe site Zappos.com in 2009 and clothing e-tailer Shopbop in 2006.
Amazon Wardrobe is in beta right now, available to only select users, prior to the full public reveal. It's unclear when the service will be fully available, but it could be the final nail in the coffin of apparel retailers.
4. Partnership With Nike
Nike (NYSE:NKE) recently confirmed a partnership with Amazon. They'll be testing the efficacy of an online Nike store on Amazon's platform. Amazon already owns Zappos, so it isn't completely new to the retail shoe business.
However, this deal underscores Amazon's efforts to cut out the middleman, and expand the scope of its brand by proving that it's prepared to sell first class brands directly, from the manufacturer straight to the consumer. As well, the expectation for Amazon is that the association with the Nike brand via this more high-profile pipeline will drive additional traffic and establish Amazon as the place to buy sneakers and sports apparel.
5. Voice Controlled Appliances
Amazon has announced it will start selling Sears' Kenmore branded appliances on the site. To enhance the appeal, the Kenmore appliances Amazon sells will be integrated with Amazon's Alexa technology, thereby allowing users to voice control such things as air conditioning and other home appliances.
This is a new arena for Amazon, and may serve a dual purpose, expanding Amazon's product range while enabling consumers to embrace Alexa's smart home capabilities.
6. Amazon Pay Places
Amazon Pay has been available since 2007. The newest initiative from this division, Amazon Pay Places, was announced last week. For the first time, the Amazon Pay app allows customers to use Amazon Pay at participating brick-and-mortar stores, as if they were shopping on Amazon. Currently, the service is available at TGI Friday's locations. Customers can use Amazon Pay as if it were TGI Friday's own native app.
This is an initiative that's a bit different from those discussed above. With Amazon Pay Places, the company is looking to generate an additional revenue stream from its already popular app. As we understand it, the revenue from this initiative is modeled on Amazon Pay's fee structure—2.9% + $0.3. Currently, Amazon is closing additional Pay Places deals with other merchants.
7. Amazon Spark
With Spark, Amazon is stepping into the world of social media. Spark is an app designed to let users show off their recent Amazon purchases.
We've listed it last because the idea seems a bit weird to us: using an app for the sole purpose of seeing what your friends recently bought. That would make the app you're using essentially a continual advertisement for Amazon products. We see this as directed exclusively at shopaholics.
We're not convinced that the average person has any need, or desire, for this app. However, if at some point Amazon offered special discounts or referral fees to Spark users it could turn into an appealing venture.
Conclusion
It certainly seems as if Amazon wants to take a piece of every pie in the marketplace. Undoubtedly, not every venture will succeed. However, much like Alphabet (NASDAQ:GOOGL), Amazon keeps innovating in order to create better services and more attractive offerings.
There's little to add about Amazon's current valuation. Like the rest of the stock market (and technology shares in particular), it's currently trading at an all-time high, having closed yesterday at $1053. Its 198 P/E ratio is not indicative of performance since the company has not yet fully made an effort to increase profitability. For the past 12 months, net profits were $2.5 billion.
The expectation that Amazon will triple its net income by 2019 is based on the view that Amazon is a growth play, a company that's trying to dominate—and own—anything and everything shopping related. It's often referred to by investors as a company they 'believe' in. We agree that it has done enough to earn its place at the top of the retail food chain.
However, the company is trading above its 3 year median Price-to-Book ratio (23 vs 20), Price-to-Sales ratio (3.6 vs 2.6), and Price-to-Free Cash Flow ratio (54 vs 51). An entry point in line with previous valuations is 12% lower than today's, at $920. If you are interested in Amazon but wary of the lofty valuation, we recommend waiting for a dip back below $1,000.