Questions among corporate strategy experts about its focus is raising as Amazon.com Inc’s ventures are going far beyond online retail, from cloud computing to movie making.
Its shares were pushed to an all-time high with a 23 percent jump in sales, as the Seattle-based company wowed Wall Street again this week. But investors may come to regard the company more like a conglomerate stock – worth less than the sum of its pieces, and these are the concerns among them in case blockbuster growth stops.
“High growth covers a lot of sins,” said Harry Kraemer, a partner at private equity firm Madison Dearborn Partners and a professor at Northwestern University’s Kellogg School of Management.
“Picture yourself running the company where one minute we’re talking about how we’re going to operate air cargo, and the next minute we’re going to talk about artificial intelligence,” he said. “I don’t think it’s sustainable.”
Because its businesses, although varied, all relate in some way to retail, analysts have balked at the idea of calling Amazon a conglomerate so far. And bringing packages to shoppers’ doorsteps are warehouses, trucks and planes. The very cloud-computing services that were built to meet the technology needs of Amazon.com are being sold to enterprises by Amazon Web Services.
“It’s not like General Electric Co having financial services and making aircraft engines,” Baird Equity Research analyst Colin Sebastian said.
However, seeming further afield are some initiatives such as a television studio in Hollywood. Increasing of sign-ups for a program that encourages people to buy more goods, more often has been possible by video foray which has allowed the company to stream unique programming to members of its Prime shopping club, Amazon says.
It is however difficult to assess the financial success of the investment. The company reported that in the first quarter, the revenue from Prime membership fees and other media subscriptions rose 49 percent. Prime Video service costs were estimated by an analyst to be more than $3 billion in 2016 even as it does not disclose the costs of content for it.
In the corporate world, conglomerates like GE are out of fashion these days. Amazon is worth about 10 times more than storied conglomerates Berkshire Hathaway Inc and United Technologies Corp. by a standard method of valuation – comparing a company’s share price to its earnings per share.
Partly because they believe the market allots money across industries better than a company can and partly because diverse businesses are tough to manage, investors discount conglomerate stocks.
while “focused” companies grew by 9.2 percent, conglomerates’ revenue on average grew by 6.3 percent per year from 2002 to 2010, found a 2012 report by McKinsey & Co consultants.
In an attempt to explain why its operating profit margin had thinned in North America, from retail in India to drones and artificial intelligence, Amazon Chief Financial Officer Brian Olsavsky rattled off a lengthy list of investments on the company’s earnings conference call on Thursday.
“I know I’m drifting a bit from North America, but it’s all part of the same theme,” he told analysts.
(Adapted from Reuters)