On Monday, Amazon briefly broke its all-time record share price on the NASDAQ exchange, hitting a high of $269.30, and closing at $268.51. The company now has a market valuation of a shade under $121 billion; that's roughly half a Google, twice a Facebook, or 44 Netflixes. This is despite most other big tech stocks like Apple or Google being down or flat on the day (with the exception of Netflix, which briefly broke $100 again on some good news). It's also despite Amazon losing $274 million last quarter, giving Amazon a ridiculous price to earnings ratio of 3569.50 over the last four quarters. In short, all the traditional metrics are telling Wall Street to run away. Instead, traders are snapping up Amazon stock like cab rides on New Year's Eve.
So what do Amazon bulls know that we don't? Let's round up the relevant recent news:
Amazon owns e-booksAmazon now has unprecedented pricing power in the publishing industry. The Department of Justice ruling dismantling agency pricing mandated subsequent agreements between major publishers and retailers. Now that Amazon can set its own e-book prices, they've been driven down to record lows. Digital Book World estimates that best-sellers now average just $8.23 per title, down more than 50 cents from just a few weeks ago. The drop is almost entirely attributable to deep discounts in e-book sales over the holidays. Amazon has free rein to move the product, whether on Kindles, iPads, or any other device under the sun.
- Amazon Instant Video is getting better. The division is licensing more shows (exclusively or not), making those shows easier for viewers to find, getting closer to device parity with Hulu and Netflix, and developing solid exclusive content that Amazon owns outright. If Instant Video follows the trajectory of Amazon's other businesses, it will lose money for a long time until suddenly it doesn't, as competitors fall away. With Amazon, investors appear okay with waiting for profits to materialize.
The future's looking really cloudyThat's partly because Amazon's cloud business, already widely seen as the market leader, may be an even bigger steamroller than we've thought. A new report from financial services and research firm MacQuarie Capital estimates that Amazon Web Services will book $2.1 billion in revenue this year, growing to $3.8 billion in 2013 and $8.8 billion by 2015. Those kind of numbers make AWS a $19 billion business in its own right today if it were spun off or sold. But by keeping the cloud division in-house, Amazon has a steady stream of cash that can keep it invested in any media or consumer business it wants, for as long as it wants.
- Any of these might be good reasons for Amazon's stock to jump a little. But the prime mover here is a new Morgan Stanley report charting Amazon's growth in global digital retail. Here, too, it's not about the present, but the future trajectory. Morgan Stanley analyst Scott Devitt projects that e-commerce will nearly double, moving from a $512 billion business in 2012 to a $1 trillion business worldwide in 2016. What's more, Devitt predicts Amazon will earn the lion's share of those revenues: 23.5 percent, or $166 billion bought and sold on the web. Based on these numbers, Morgan Stanley has set a price estimate for Amazon of $325 a share. If anything, the investment bank is saying, Amazon is actually undervalued. The company is positioned to only strengthen its position as the world's storefront, a virtual global Wal-Mart where the sun never rises nor sets.
Amazon's on track to make almost a quarter for every digital dollar It's a dangerous proposition to mark any company as an inevitable juggernaut, especially in still-fluctuating fields like digital media, public cloud services, or e-commerce in new global markets. It's even more dangerous when the company in question is showing profit numbers reminiscent of the old dot-com boom and bust, which Amazon survived. And if you don't have any money in the market, you just want to read the books and watch the movies you like without having to worry about your service's web hosting going down, you may be asking why any of this should matter to you in the first place.
The future nest is very well-featheredIt matters because with support from the markets like this, Amazon is free to invest in all of the things you enjoy. E-reader growth slowing down? No problem. The R&D group wants to try to make a smartphone or a television box? If it works out, Amazon can undercut the entire market. Need to rebuild an east coast data center? The money's available. Competition in Japan looks robust? Amazon will wait. Netflix morphs from a competitor into a choice takeover target? A stock swap gets it done.
With the bulls at its back, Amazon is free to fail. It's free to reinvest and reinvent. It's free to choose where it wants to grow, and free to throw money at whatever future it imagines.
Update: an earlier version of this article misstated MacQuarie Capital's projected revenue from Amazon Web Services due to a transposition error.