Amazon (NASDAQ:AMZN) is a much smaller corporation than the three giants standing in the way of it and a $1T market capitalization. But I don't think that matters. Amazon has huge growth opportunities in the near future and has shown how effective it is at producing value for shareholders in the past. Beyond that I believe that Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) and Alphabet/Google (NASDAQ:GOOG) (NASDAQ:GOOGL) possess weaknesses that will prevent them from growing very rapidly in the near future. Just maybe Amazon can capitalize on these weaknesses and climb to the top as the largest company in the world.
Why not Apple?
Apple is the largest company by market capitalization and currently (as of June 20th) the closest to reaching the $1T market cap threshold. Unfortunately, there are some big barriers between it and that threshold that I think will prevent it from being the first to do so.
First and foremost, Apple is a one trick pony. It's been said over and over again, but I don't think that the point investors are making is getting through to the company. In fact, it's becoming more of a "one trick pony." Examine the table below which shows net sales broken down by product for Q1 2014, Q1 2015, Q1 2016 and the most recent information released in the 10-Q by Apple for Q1 2017.
|Q1 2014||Q1 2015||Q1 2016||Q1 2017|
Despite the fact that it has been trending slightly downward lately, iPhone sales have accounted for, on average between 2014-2016, nearly two-thirds of all of Apple's revenue. That's hardly the point though. A company with a market capitalization of over $750B has, on average, 84.8% of its revenue completely dependent on the ability to sell three lines of products (iPhones, iPads and Macs). ANY slowdown in the ability to sell any of these lines of products will result in the slowdown of the company completely.
We are already seeing revenue growth stagnating to some degree. Not necessarily enough to worry investors, but certainly enough to not be on pace with the amount of growth (and growth potential) Amazon has been experiencing lately. Investors always seem to have high expectations for Apple, any deviance from their lofty forecasts results in a sharp drop in share price.
It certainly wouldn't be a surprise to see revenue growth continue to slow. Apple's products are priced at a premium to many others on the market. This is hardly an issue as it's been part of its business for quite some time now; however, this is changing slightly. Apple continues to increase its prices; for example, you would've paid $650 for the 128GB iPhone 7 upon launch compared to $1,000 for a 128GB iPhone 8 at launch (Business Insider). While the prices for the iPhone are skyrocketing, wages in the US are stagnant despite a growing economy (see more). As prices increase, Apple's products slip further and further from the reach of the current population. Sure, there will always be those who can afford it, but more people will be holding on to their phones instead of upgrading as prices continue to increase. Similar trends are observed with both the Mac and iPad.
Apple certainly has other streams of revenue coming in outside its three major product lines, but the amount of revenue they occupy in percentage terms has remained virtually the same since 2014. Failing to capitalize on its acquisitions and integrate those revenue streams into its core business exposes it to a large degree of risk regarding computer, tablet and cell phone industries. And that risk definitely exists in the prices of its products exceeding wage growth, the demand for tablet computers (currently occupying a 7.4% chunk of Apple's net sales) falling and the ultra competitive industry the products fall into. Apple will be around for a long time, and it's a financially strong company with plenty of growth potential, but it won't be the first company to reach a $1T market cap.
Why not Alphabet?
Alphabet is second in the race to a $1T market cap with a current market capitalization of $676B. It's a strong company with a long history of stable growth since it went public nearly 13 years ago. Though I see its growth continuing, I don't see it expanding at the same rate I do for Amazon.
I would like to start off with the fact that Alphabet too exposes itself to too much risk (and potential lack of growth/slowing revenues) due to 88.7% of its revenue being made up solely by advertising (Alphabet SEC Filings). Additionally, I think it's worth mentioning that advertising too is a very competitive space to operate within even for an enormous company like Alphabet. I know, I know, diversification within a company isn't everything and why change a working formula, right? This is where I notice a divergence in what I see wrong in Alphabet and what I see wrong in Apple.
Alphabet having all of its eggs in one basket (to me) isn't entirely what's going to prevent it from reaching the $1T mark. Its market share within the industry has remained stable recently and is expected to grow. However, I do see this as a hindrance to it; the advertising space is only so big, and even though it's growing, its growth is limited. If Alphabet only limits itself to advertising (at least if that's the majority of where its revenue comes from), it has a glass ceiling it will be pushing up against every year. Sure, it can thrive and become more and more profitable but only to a certain extent.
Now, I could list a number of potentially awesome ventures that I've read about Alphabet being involved in, but where is the money associated with them? In August 2015, Alphabet tried to become more serious about its other business ventures turning "Google" into a subsidiary of the new parent company "Alphabet". Though we've seen increases in its revenue under "Other Bets" as it likes to call it, the gains are marginal in the scope of the total amount of money the company brings in (the money that contributes the majority of the value to its stock).
Alphabet is certainly set to grow and hopefully in some time its "Other Bets" will become a large part of its business, but its growth is currently limited by the scope and growth of the advertising industry. It currently rakes in 78% of all search engine ad revenue, this is only expected to be bumped up to 80% of all ad revenue through 2019. This 2% movement, projected growth in search engine advertising and potential growth of its other bets won't catapult Alphabet to $1T at the speed it needs to outpace Amazon.
Why not Microsoft?
Not far behind Alphabet is Microsoft at a market capitalization of just about $550B. I don't believe Microsoft's product line to be an issue here, so I won't be sounding like a broken record here touting failure to operate in many business segments as Microsoft's reason for being outpaced by Amazon. Its software and operating systems are greatly woven into corporations around the world. Its products are effective at what they are used for, there aren't truly any good replacements for them (in my eyes) and anyone who has worked for a large corporation before can tell you what a headache it would be to upgrade an entire computer system away from existing software. Its products and services aren't going to be displaced anytime soon and it isn't going to lose market share to any dramatic extent within the near future.
Frankly, I don't see anything wrong with the company itself, its business model, product line or ability to maintain any of these things in the near future. My issue with Microsoft is its stock. Its stock that has quietly crept up 37% over the past year. Its stock that has been artificially propped up by share buybacks and dividend increases both of which are unsustainable. Its stock that has nearly doubled in value over the past 4 years despite modest (relatively speaking) revenue growth in the company.
It's not Microsoft's business that will prevent it from reaching the $1T mark before Amazon, it's the fact that it shouldn't be ahead of Amazon in the first place. The stock is overvalued and due for a sizeable drop which will translate into a drop in market capitalization as well.
Okay, so Apple, Alphabet and Microsoft aren't going to reach the $1T mark first, but that doesn't explain why Amazon would. Without diving deeply into each company it seems unlikely that a company with a market cap of less than $480B will beat out companies with market caps of $550B, $676B and $750B. But I certainly believe that to be the case. Beyond the number of weaknesses amongst Alphabet, Microsoft and Apple, there are a number of strengths Amazon possesses that set it to grow at an extremely rapid rate.
I want to start off by examining where Amazon derives revenue. Obviously, it has its website which has over 398M different products for sale on it as of Jan. 4th. It pulls in revenue on its site through retail sales (products it sells as a retailer) and third-party sales (products it sells for anyone else that chooses to put them on its site). Below is a list of Amazon's other current major sources of revenue:
- Amazon Web Services
- Amazon Kindle product line
- Amazon Prime
- Whole Foods acquisition
- Amazon Echo
Apple, Alphabet and Microsoft are all sitting on over $100B in current assets while Amazon continues to pour money back into its business promoting growth. Amazon is constantly putting money into making sure it's ahead of the curve in terms of technology, prices and market share, and it's paying off. In 2012, Amazon only captured 25% of online retail sales in the US, just four years later that share almost doubled to 43% of all US online retail sales (Business Insider). Prime subscriptions went from 10M in 2012 to 80M this past April (Business Insider).
As retail establishments begin to lose out more and more to online retailers, eCommerce certainly isn't a shrinking industry. Selling goods online is fast moving and extremely competitive, but Amazon has proven itself more than competent by not only maintaining market share but vastly expanding it. It is a definite edge it has over its competitors and something that doesn't appear to be going away.
But its retail business isn't the only thing keeping it afloat. Services such as Amazon Prime give users access to a wide library of music, TV shows and movies along with free 2-day shipping securing a $99/year annuity for the thriving company. In addition to Prime, Amazon also has a segment called Amazon Web Services. AWS provides a plethora of answers to digital needs, including cloud storage, databases, artificial intelligence, mobile technology and developer solutions. With 80M Prime users paying $99/year, Amazon generates roughly $7.92B off it alone. In 2015, Jeff Bezos revealed that AWS brings in $5B in revenue (and that it was expanding rapidly).
In addition to what it's doing well online, I want to point out what its acquisition of Whole Foods (WFM) really means. It has done a great job as a company growing organically since its inception and has proven itself competent at doing everything from selling fidget spinners online to offering a variety of digital solutions to bringing voice activated technology inside your home. Now, it's further expanding its breadth of what it can do in the best way possible, acquiring a company that's already doing it well. A fast-paced company like Amazon doesn't have the time to wait to develop a grocery infrastructure. I don't know precisely what it has planned for Whole Foods, but I assure you it will enable it to be even more successful.
To sum it up, Amazon's biggest strength is its demonstrated ability to spur growth through targeted investments in itself and its future growth potential. It brings in revenue in many different ways and has proven itself very effective at operating within its major industry by garnering enough brand recognition and customer loyalty to consume almost half of all online US retail sales. It continues to show us that it's committed to improving value for its shareholders by spending available capital to stay on top of the game and widen its reach as opposed to sitting on over $100B in current assets. It is set to expand rapidly and I have no doubt it will be the first company to reach $1T in market capitalization.
I think it's important to reiterate here at the end of this article that I do not believe Apple, Alphabet or Microsoft to be garbage stocks. Though the points I made about each company certainly introduce some doubts about the future growth of each one, that's not what I'm driving at. My point is that Amazon has a much more diversified, growth-oriented business model that poises it to outpace all three companies in the very near future. I believe this trend will continue and Amazon will soon be the biggest company in terms of market capitalization. I would certainly sell off the majority shares you own in Apple, Alphabet or Microsoft and invest them in Amazon. It's still a large, financially sound company ensuring your portfolio isn't going to take a large hit in a worst case scenario. But Amazon offers much stronger upside potential than the other three companies I've mentioned.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.