Can the tech companies continue to grow? Case study: Amazon
The big tech companies have benefited from the pandemic, but can they continue to get even bigger or will their revenues fall back to Earth?
By Jeffrey Cole
Most of us were unprepared in the middle of March to move our work, learning, buying, and almost everything else online within a day or two. But one sector had been preparing their entire existence for this kind of disruption: the tech companies.
The pandemic was their victory lap.
These companies—Amazon, Apple (since 2007), eBay, Netflix (after 2011), PayPal, Zoom, Google, Facebook, and others—were all founded on the belief that more and more of life would take place online. Their leadership, business models, technologies, and logistics were designed and ready for the transition to online living.
The companies vulnerable to disruption—brick and mortar stores, banks, movie theaters, and traditional work environments—were all in the tech companies’ collective sights long before any threat of a pandemic.
One of the most traditional companies, Disney, whose business needed fans to leave their homes for movie theaters, theme parks, and cruise ships, saw its one bright light during COVID come from Disney+—the stay-at-home, online streaming service it started in November of last year.
But when the pandemic came and everything that could not be done online closed, the tech companies seamlessly filled the vacuum. In the process, they found new customers, earned more business out of existing customers, and built great loyalty. There is strong evidence that the tech companies will solidify the gains made during COVID even when their competitors go back to business.
The tech companies have been richly rewarded for their disruptive visions and preparedness. Overall, tech stocks are up 62%. Since March, Apple is up 100% and became a $2 trillion company. Alphabet (Google) is up 40% (disappointing for a tech company—but advertising is down). PayPal is up 120%. Netflix is up 73% and eBay is up 100%. Zoom is up an extraordinary 420% (and in the process became a verb). These are stunning numbers.
All this was happening as most other businesses suffered and declined.
Some realists might argue that the tech companies were able to take temporary advantage of a once-in-a-lifetime seismic event. As soon as it is over, their profits and valuations will fall back to Earth. The sheer force of gravity would seem to make it impossible to do otherwise. There couldn’t possibly be any more runway for growth.
Although it seems silly to say this for companies valued at $1 trillion or more, they are at the beginning of their stories. The available runway is long. They picked up many new customers and fans during the pandemic, and there are far more yet to be found.
Let’s look at Amazon
Since March, Amazon’s stock grew 100% (and it was already at high levels in March). Its income has grown 97% while revenue is up 40% (that’s for a $1 trillion company). And Amazon’s market cap rose over 50% in six months to $1.56 trillion. The laws of physics don’t apply. This is financial performance only possible in the past with small start-ups who could easily see 60% growth off $1 million in revenue.
Can Amazon continue to grow? Will it get even bigger? Could it possibly be a good investment at over $3,000 a share? The clear answer is yes (but remember: this is not an investment column)!
During the pandemic, Jeff Bezos, already the world’s richest man by a wide margin, saw his personal wealth climb to over $200 billion, and that’s after paying $65 billion in a divorce settlement. His ex-wife, Mackenzie, became the world’s wealthiest woman. For the first time in history, the world’s wealthiest man had been married to the world’s wealthiest woman. The record books don’t have a chapter for that.
Founded in 1994, Amazon is now one of the world’s “oldest” tech companies. Of today’s big tech companies, only the original Apple (before Jobs reinvented the company in 2003 with the iPod) and Microsoft are older.
Bezos’ plan is to make Amazon the biggest company in the world and to put everyone out of business. He is almost there. In my talks, I only partially joke that somewhere in the most secure bank vault in Seattle (or perhaps in Bezos’ shirt pocket) is a list of the industries he plans to disrupt and in which order.
He is only at the top of his list.
Amazon has made immense inroads in e-commerce. In 2018 it accounted for 49% of all e-commerce in the U.S., compared to Walmart at seven percent and Target at two percent. Now, Amazon is well over 50%. Amazon has become such an essential part of our buying behavior (more so since March) that 130 million people in the U.S. and millions outside pay $120 a year for preferred access to the company by joining Prime.
Our work has shown that—of the people who had never bought anything online when the pandemic started in March of 2020—within four weeks 37% were using e-commerce. Most of that new business went to Amazon.
Some realists might argue that the tech companies were able to take temporary advantage of a once-in-a-lifetime seismic event. As soon as it is over, their profits and valuations will fall back to Earth. The sheer force of gravity would seem to make it impossible to do otherwise. There couldn’t possibly be any more runway for growth. I disagree. Although it seems silly to say this for companies valued at $1 trillion or more, they are at the beginning of their stories. The available runway is long. They picked up many new customers and fans during the pandemic, and there are far more yet to be found.
As much as Amazon has conquered online retail, it still has room for massive growth in the U.S. It has also expanded to about 15 other countries where the potential is even greater.
Beyond retail, Amazon has made important efforts in devices (Alexa) and entertainment (Amazon Prime Video). Both have already achieved significant success: Alexa is already a part of the culture, and Amazon’s movies and television shows have won Oscars and Emmys. Prime Video now produces more content than any of the Hollywood studios. Both devices and entertainment are relatively nascent efforts with immense room for expansion both in the U.S. and internationally.
It is in the cloud (Amazon Web Service, or “AWS”) where the company has earned most of its profit. Amazon was a first mover (2006) in cloud services, and it saw before almost anyone else (when digital storage costs were high) the potential of hosting the infrastructure of the world’s biggest companies.
AWS is the world’s biggest cloud company with about 31% share, with Microsoft (Azure) at 20%, and Google at six percent. Amazon currently hosts the CIA, Netflix, Unilever and countless others. Dollar for dollar, AWS has been even more financially rewarding than e-commerce. In 2019, AWS accounted for 13% of Amazon’s total revenues but 52% of its operating income.
Business forecasts for increased corporate spending in the cloud over the next five years run from 140% to 650%. It is a sector where a third of the business already goes to Amazon.
The real growth for Amazon comes from the industries it has only begin to disrupt or is planning to conquer. Its moves into healthcare and banking are still in their infancies.
In the Center’s disruptive industry work, asking Americans which companies they would feel comfortable turning to in order to administer their health care or to replace their banks, Amazon comes in a strong #1 on both lists.
Over the next ten years, Amazon will become a stronger presence, if not the leader, in automobile sales (as dealerships are disrupted), real estate, insurance, and other industries that we cannot even conceive in 2020. (Remember Bezos’ list)
The revenue numbers, market capitalization, income, and personal wealth achieved by Amazon passed staggering a decade ago.
Amazingly, the tech disruptors are just getting started.
Jeffrey Cole is the founder and director of The Center for the Digital Future at USC Annenberg.
See all columns from the center.
October 7, 2020