Amazon briefly touched $1 trillion in market capitalization on Tuesday, barely a month after Apple topped $1 trillion. The companies share the letter A and 12 zeros, but the similarity largely ends there.
Apple is a cash machine, with a small suite of high-end products and an uncertain post-iPhone future. It is a mature company trading at a reasonable price with no end to its massive profitability in sight. Amazon is an octopus with tentacles seemingly everywhere, yet it is far less dominant in many arenas than is widely believed. It has, in theory, vast potential growth, perhaps limited only by governments, individually or collectively, rising up to say “Enough!”
Ask most denizens of the coasts what Amazon’s share of US retail spending is, and you’ll get wildly inflated figures. As large and seemingly dominant as it is, Amazon still has a small share of the retail market. In part, that’s because e-commerce remains smaller than most think. As of mid-2018, e-commerce represents 9.6 percent of retail sales in the United States, double what it was in 2011. Amazon accounts for nearly half of all e-commerce in the US. But it is still dwarfed by Walmart and others. Amazon grossed more than $50 billion its last quarter; Walmart grossed more than $120 billion, with more than 95 percent coming from physical stores, even as its e-commerce division grows rapidly.
But Amazon is valued at nearly four times Walmart. That’s because Amazon has so much room to roam. It may also owe something to some investors’ predilection to idealize all things digital and disdain most things physical. But again, its market penetration in any segment other than books is modest. It bought Whole Foods and has made inroads into the grocery business, but it lags national chains and Walmart. Its fastest growing segment is Amazon Web Services, the cloud-hosting unit that is by far its most profitable division, and could generate about $25 billion in revenue this year. AWS is the dominant player in cloud hosting in both the US and globally, with about one-third of the market. But competitors ranging from Microsoft to Google to Alibaba are also growing strongly, which means AWS is not gaining much in market share.
Amazon’s international footprint is even smaller, with local e-commerce companies often dominating their respective countries in places such as India, Brazil, and China. Amazon has made tremendous inroads, but it is nowhere near the limits of its potential. It is still losing money internationally, just as it did domestically for years. CEO Jeff Bezos has shown an unusual willingness to spend at a loss to build a franchise, and that has paid off handsomely.
And that is why the company trades at such a rich premium. It has been able to spend more and match its competitors almost everywhere on price and ease. There have been hiccups, of course, such as Amazon’s Fire smartphone, which registered few sales and was killed barely a year after its debut. But none of those hiccups have caused lasting damage or halted Amazon’s trajectory. It has reached $1 trillion in market cap and yet remains a growth company that could double, triple, or quadruple in size and still not dominate specific market segments.
Amazon’s biggest risk may not be any single competitor—though challengers such as Alibaba or Google could dent its growth—but governments that tend not to stand idly by in the face of such size and scale. President Trump’s rants about Amazon’s deal with the US Postal Service may reflect his pique about Bezos’ ownership of The Washington Post, but they’re still a warning shot that government may not sit back. Earlier battles over Amazon collecting state sales taxes were resolved without much disruption to its business, but will that remain true going forward?
In recent months, Senator Bernie Sanders (I-Vermont) has made Amazon a target in his populist campaign against corporate America and wage inequality. He introduced the Stop Bezos Act this week that would tax Amazon and other companies to support public assistance programs that their workers participate in because their wages are relatively low. That bill is entirely for show right now, but what if populist anger at the extreme wealth of a few corporate behemoths grows? Already, the European Union is taking a much harsher stance against Apple and Google, and it would be unwise to assume that the same won’t soon happen in the US.
Amazon will be difficult to corral under existing antitrust laws. Other than book sales, it just doesn’t dominate a market vertically or horizontally in familiar ways. If e-commerce becomes 25 percent of all sales, as it likely will a decade from now, and if Amazon captured half of that, it will then be vulnerable to those laws. But it might not have a decade before governments attempt to preempt and curb that growth, or tax its profitability.
For starters, governments could squeeze Amazon’s ability to acquire other companies. While much of its growth has been organic and internal, it has ramped up its M&A activity in the past few years, with large buys like Whole Foods and PillPack, and smaller deals to take out nascent competitors. Curtailing such mergers might not be a lethal blow, but it would make growth a bigger challenge.
It’s very unlikely that Amazon will alter its strategy to avoid government scrutiny. But it could do more to anticipate the public pushback and address it. In that, it could learn from Walmart, which has become a corporate leader in sustainability and a trend-setter in raising employee wages both to counter negative publicity and to build a viable franchise that has a long-term social license to operate. Like many companies that germinated in the tech culture, Amazon can be tone deaf to the human consequences of its love of disruption. That’s a great source of energy; it can also be a liability.
Amazon will almost certainly continue to grow wildly. That doesn’t mean its stock price and valuation will stay at lofty levels, but it’s a rare behemoth that, looking at its pieces, seems closer to the beginning of its trajectory than the middle or the end. At some point, the company will face a crisis: Regulators will find a way to curtail it; Bezos will retire and his successor will be unable to manage the beast; who knows? For now, however, Amazon is all runway, with one hell of plane.
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