September 5, 2018

Breakingviews: Ever-growing Amazon

by Breakingviews.

A $1 trillion market capitalization is as impressive as it is meaningless. Amazon hit that threshold on Tuesday, joining smartphone maker Apple and literally no other company. Market capitalizations, though, are a mathematical fiction. A far more substantial target would be to achieve a 13-digit top line. No other company has come close, but Amazon might.

Jeff Bezos’s colossal online retailer made $208 billion of revenue in the past four accounting quarters. That’s still substantially behind Apple, at $255 billion. It’s also less than half the $510 billion reaped by supermarket chain Walmart and puts Amazon 16th among globally listed companies, according to Eikon data. Those numbers represent actual activity – unlike market values, which are packed with assumptions about growth and apply today’s share price to all shares in issue, regardless of whether they are ever likely to be traded.

The real question, then, is who gets to be the first $1 trillion revenue generator. It’s probably not Apple. Tim Cook’s company already accounts for 39 percent of all smartphones sold in the United States, according to Kantar Worldpanel. There’s not much more it can do besides enticing customers to upgrade the phones they have already. And the title almost certainly won’t go to Walmart. Despite huge sales, a relatively meager $284 billion market value reflects slow growth, at less than 3 percent a year.

Amazon, though, has a shot. While the company now has almost 50 percent of all U.S. online sales, according to eMarketer research, those are still a relatively small slice of the total amount of stuff that American consumers purchase. Amazon’s total share of U.S. retail sales is about 5 percent. Bezos’s cloud-computing business is also getting rapidly bigger, by almost 50 percent a year. That leaves scope for expansion.

Consider some theoretical math. Amazon’s overall revenue grew at around 30 percent last year. At that rate it would take six years to snag the trillion-dollar title. Halve it, and it would take twice as long. Amazon could keep up the pace by taking on real-world stores as it did when it bought Whole Foods, or cutting prices to win customers from Walmart. Hardly great for profitability – which has never been Bezos’s top priority. But it would get it closer to that weightier milestone.

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