Amazon joins Apple in trillion-dollar valuation club4 min read . Updated: 05 Sep 2018, 09:59 AM IST
Amazon shares rose as much as 1.9%, pushing the company briefly beyond a market valuation of $1 trillion, a milestone Apple reached last month
Seattle: Amazon.com Inc. shares rose as much as 1.9%, pushing the company briefly beyond a market value of $1 trillion, a milestone Apple Inc. reached last month.
It’s an historic accomplishment for Chief Executive Officer Jeff Bezos, who founded the company in his Seattle garage in 1994 as a small online book seller. Now Bezos is the world’s wealthiest person, running a diversified global enterprise with more than $200 billion in annual sales and more than 575,000 employees.
While Amazon has come a long way from its humble beginnings, things moved fast particularly in the past few years. The shares have more than tripled since 2015, reaching a high of $2,050.50 on Tuesday. After crossing the $1 trillion mark, Amazon’s valuation slipped to $988.8 billion at 12:27pm in New York. Tech competitors Alphabet Inc. and Microsoft Corp. are closing in on the mark, too.
Apple and Amazon aren’t the first trillion-dollar corporations. Energy company PetroChina Co. briefly crossed that valuation in late 2007 but slumped quickly as oil prices collapsed in the financial crisis. Still, the online retailer is among the most feared and menacing competitors across a broad swathe of industries. Just a hint of Amazon’s potential interest in a new business can send stocks tumbling.
Moving well beyond books, Bezos re-imagined the retail experience, seeing early on how the internet could connect shoppers with a selection of goods far larger than they’d find on shelves in nearby stores. He expanded the business from books to music and movies, then added toys and electronics.
In 2001, Amazon launched an online marketplace, looking to expand inventory more quickly by inviting independent merchants onto the site and charging them a commission on each sale. The marketplace now accounts for more than half of all goods sold on the site, and many of the merchants pay Amazon additional fees for warehouse storage, packing and delivery. This also lets Amazon offer a tremendous inventory without having to buy anything, a key competitive edge over retail competitors like Walmart Inc., which is now building its own marketplace.
Bezos again displayed his forward-looking prowess in 2006 with the launch of cloud-computing division Amazon Web Services. Just like shoppers shifted spending from stores to websites, businesses are now changing their technology operations. Rather than buying and maintaining their own servers, they rent computer power and data storage from centralized data centers run by Amazon and pay for it depending on how much they use like an electric bill. Cloud computing gives businesses greater flexibility to experiment since they can dial up computing power when they need it and scale back when they don’t, converting long-term investments like building their own data centers into a variable cost that’s easier to manage. Amazon now leads the cloud-computing market and Amazon Web Services provides more than half the company’s profit.
“This day would have either never come or not happened so soon were it not for the company’s cloud computing efforts, which have been a godsend for the company’s profitability and, ultimately, its share price," said Tom Forte, an analyst at DA Davidson & Co. “The fact that its fastest growing business is also its most profitable is why we are celebrating this landmark achievement today. Were Amazon a money losing e-commerce company we would not be here today."
It took investors a while to fully appreciate Bezos’ long-term strategies. The stock has surged in recent years, largely based on bets he made more than a decade ago.
“If everything you do needs to work on a three-year time horizon, then you’re competing against a lot of people," Bezos told Wired magazine in 2011. “But if you’re willing to invest on a seven-year time horizon, you’re now competing against a fraction of those people, because very few companies are willing to do that."
There were concerns that Amazon was a “nonprofit" because Bezos invested so heavily in growth there were often money-losing quarters or results with razor-thin margins. The failed Fire smartphone in 2014 was perhaps the company’s biggest flop. But Amazon came roaring back later that year with its Echo voice-activated speaker and Alexa digital assistant — a surprise runaway hit that lets users dim lights, stream music and order pizza via voice commands.
The biggest contributor to Amazon’s success is the Prime membership, launched in 2005. Bezos borrowed a page from discount warehouse shopping clubs and offered cheaper shipping rates to customers paying an annual membership fee that is now $119 in the U.S. Membership converts the occasional online shopper into an Amazon devotee eager to get their money’s worth on shipping. And Amazon keeps adding more perks, like video streaming, online photo storage and most recently discounts at Whole Foods Market, which Amazon acquired last year for $13.7 billion to jump-start its grocery business.
Amazon now has more than 100 million Prime members, which it uses to lure more inventory to its web store, where competition among merchants keeps prices low. Its annual Prime Day sale, sometimes called Christmas in July, generates tremendous publicity and helps attract new members seeking discounts. The latest offshoot of all the customers and products is a fast-growing and profitable advertising business.
For all of its strengths, there are a limited number of foreseeable threats to Amazon’s unstoppable march: Antitrust concern percolating in the US, and a proven strategy to replicate its US success abroad. Amazon’s reputation as a job-creation machine has helped keep US politicians in check so far. A public-bidding process to be home to Amazon’s second headquarters has only further motivated policy makers to be nice. And investors now mostly shrug off Twitter broadsides from the company’s highest-profile critic, US President Donald Trump.