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Amazon is edging closer to the $1 trillion mark: Here's why it could soon outgun Apple
Watch out Apple, because Amazon is coming for your crown. The e-commerce giant came within touching distance of the elusive $1 trillion valuation mark on Friday, when its share price crossed the $2,000 level for the first time ever, peaking at $2,026.
Amazon has been edging towards that figure for a while, but it now feels like a matter of when and not if the company catches up with its Silicon Valley rival by hitting the $1 trillion level.
Last month, Apple became the first company in history to reach that figure. To do so, Apple's share price rose by 22.6 pc in eight months and nearly 40 per cent over the past year.
But compare that to Amazon. The Seattle-based company's share price performance during the same period has left its rival trailing. In just under a year, the company's shares have risen by almost 107 pc from $980.6. In 2018 alone, it grew by 70pc. If this were a race on growth numbers alone, Amazon would have already won.
Amazon reported record global profits in its last earnings report to Wall Street in July thanks to strong growth from its cloud computing and Prime subscription services.
Chief executive Jeff Bezos became the richest person alive after his fortune hit $150bn (£113.1bn) after a share price jump on Amazon's Prime Day, the annual sales blitz when the retailer chops prices on a range of products.
It may have been beaten to the $1 trillion valuation level, but Amazon could yet steamroll past Apple and reach $2 trillion in record time.
That's because the e-commerce giant's scope for future growth remains enormous - while it's hard to see how Apple can match it without the creation of killer new products like the iPhone.
"It's not so much where the share price is, it’s where your business is. Apple is very largely in the device business and struggling to get out of it," argues Nick Elverston, partner at Ashurst, the law firm. Amazon's diversified business, which mainly falls into the strands of online retail and cloud, could put it in a more stable position for growth, he says.
It could overtake Apple despite having the least market share of all the tech giants and being a relatively compact business, says Baird equity research managing director Colin Sebastian. Amazon still has less than 5pc of overall global retail, less than 5pc of technology and less than 5pc of media spend. "Whereas Google is already the largest media company in the world, Amazon is still half the size of Walmart," he says.
The fastest growing parts of Amazon’s business are the most profitable parts of the business: Amazon Web Services (its cloud business), advertising and the 3P Marketplace, its retail selling system. Sebastian expects it to disrupt companies that together would total over a trillion dollars of market cap in retail, technology, media, healthcare and logistics.
In the UK business is booming. Amazon made a bid for Homebase stores to boost its delivery arm in the UK earlier this year, and expanded its Cambridge-based Alexa startup Evi as it doubled in revenue and headcount.
It has tried to swat aside criticisms of working conditions for its workers, pushing back against claims that its warehouse workers are underpaid and work long hours with daunting targets.
Amazon is also investing in a lot of new revenue-generating businesses that all involve an element of interaction with consumers, creating a company that is tough for competitors to beat.
Retail customers are more likely to engage with Amazon Prime, for example, and then subscribe to the company's on-demand video streaming offering. Amazon pushes for more customer brand loyalty by offering discounts that they can't resist. Investors are keenly aware that this same formula could be applied to any kind of new service that Amazon could choose to offer.
That's why even a rumour - like Amazon's potential foray into insurance- caused comparison sites' shares to suffer convulsions.
These days, the biggest potential obstacle standing in Amazon's way is the potential threat from competition regulators, especially in Europe. For the EU to take action, however, it must first prove that Amazon abuses its dominant market position says Adam Rose, partner at Mishcon de Reya.
"At some point when you become so big you risk becoming a dominant player in the market, there is always a risk of competitive action," he says. "But there is an argument that it [Amazon] is less at risk because it is more diversified."
In the UK Amazon might not be so lucky. The Government said it was considering proposals to levy a tax on tech revenues, rather than profits - a move which would affect both Amazon and Apple. More specifically, Chancellor Philip Hammond raised the prospect of an "Amazon tax" for online retailers amid fears that they were putting high street shops out of business.
Nevertheless, the UK is a small part of Amazon's global business so the impact would be limited.
"The only thing that would stop it would be a forced breakup of the business," Elverston says. Although there are precedents (Microsoft and Google), the company's distinct market segments mean that they are unlikely, at least for now, to face too much scrutiny.
So if the regulators don't bite, and Apple fails to diversify, there's little that stands in Amazon's way. Unless, that is, someone works out how to disrupt the disruptor.