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Podcast | Editor's pick of the day: Amazon hits $1 trillion market value milestone

Apple took almost 38 years as a public company to achieve the trillion dollar milestone, while Amazon got there in 21 years.

September 05, 2018 / 08:42 PM IST

The United States achieved this as a country in 1970; Japan in 1979; France in 1988, and Germany in 1998, as also the UK. It would take India 2007 to achieve this distinction – and all of these, let’s remind ourselves, are full sovereign countries! To join the ranks of these countries is now a company. It’s called Amazon. By now I am certain you have guessed what it is – Amazon is now at trillion dollar economy, and that is our Story of the Day.

Amazon.com Inc on September 4 joined Apple Inc in the $1 trillion club, becoming the second member of the group after its stock price doubled in 15 months. If the online retailer's share price continues at its recent pace, it will be a matter of when, not if, Amazon's market valuation eclipses that of iPhone maker Apple, which reached $1 trillion on August 2, according to Reuters.

Apple took almost 38 years as a public company to achieve the trillion dollar milestone, while Amazon got there in 21 years. While Apple's iPhone and other devices remain popular and its revenues are growing, it is not keeping up with Amazon's blistering sales growth.

Amazon has impressed investors by successfully diversifying its business into virtually every corner of the retail industry, altering how consumers buy products and putting major pressure on many brick-and-mortar stores. It also provides video and audio streaming services and bought upscale supermarket Whole Foods. Its cloud computing services for companies have become a major driver of earnings and revenue.

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"Amazon's a little bit more dynamic than Apple because the iPhone has become more mature. Amazon's cloud business is an extra growth driver that Apple doesn't have," said Daniel Morgan, portfolio manager at Synovus Trust in Atlanta, Georgia who describes Amazon's cloud services as its "crown jewel." In the second quarter the unit accounted for 55 percent of Amazon's operating income and 20 percent of total revenue, according to Morgan.

Apple started trading in December 1980 but its stock did not truly start to take flight for another 25 years, spurred by the iPhone, the breakthrough device that left competitors in the dust. Amazon, on the other hand - founded as an online book-retailer in Chief Executive Jeff Bezos' garage in 1994 - started trading on May 15 1997 at $1.50 on a split-adjusted basis.

By October 2009 it had risen to $100 and the stock hit $1,000 for the first time on May 30, 2017. It has held above that level since October 27, 2017. Just 10 months later, on August 30, Amazon shares hit $2,000 for the first time, just $50 per share away from giving the company a $1 trillion market value.

That milestone, just a month after it reached a $900 billion valuation threshold – an addition of $100 billion in market cap in the span of a month. Amazon shares were last up 1.1 percent at $2,035.69, pulling back slightly from the milestone level of $2050.2677. Amazon currently trades up 74.0 percent for the year to date. In comparison, Apple has risen about34.7 percent year to date.

Analysts expect Apple's revenue to jump 14.9 percent in its fiscal year ending in September, according to Thomson Reuters data, a hefty rise but still far short of Amazon's expected revenue growth of 32 percent for 2018 – almost two and a half times that of Apple’s revenue growth.

When Apple’s market value crossed a trillion dollars last month, the reason was widely thought of as quite simple – it makes devices a lot of people across the world want to have, and are willing to spend a lot of money on. Now, Amazon becoming the second American company to cross that once unimaginable line is a little more complicated than that.

Amazon captures 49 cents of every e-commerce dollar in the US. It employs more than 550,000 people and generates $178 billion in annual revenue. Amazon’s founder and chief executive officer, Jeff Bezos, is worth nearly as much as Bill Gates and Warren Buffett put together. Amazon sells everything from computing space to used books to garam masala to peanut butter to appointments with plumbers and electricians. But the thing it has always sold the most – to investors, to consumers, to the news media – according to The New York Times, is excitement.

A lot of us in India came to know of Amazon devices by way of the Kindle e-reader, a new way to read a book. And then there was CreateSpace, which was an exciting new way to publish. And then there was Amazon Web Services, which was an exciting new way to power the internet. An exciting new way to get deliveries just within a day – that was Amazon Prime. And then there was a lady who made your house a high-tech post – Alexa. So, at the heart of it all was an exciting new way of doing and consuming things.

Amazon is creating actual excitement now – venturing into TV and film production. The Amazon shows like Transparent, Mozart in the Jungle, Jack Ryan etc are creating waves in the TV space, whereas films – including those by Woody Allen – are also gaining traction. Manchester by the Sea was nominated for a Best Film Oscar and went on to win Casey Affleck a Best Actor Oscar.

Even before tinseltown and sparkly lights, Amazon had perfected the art of creating excitement among customers. No other company had ever managed to turn its lack of profit into such effective drama or the question of what its next move would be.

Amazon’s search for its second headquarters – the company having run out of room in Seattle – set off a nationwide frenzy among politicians in America. Mr Bezos even gamified his philanthropic plans, asking on Twitter what he should do. One suggestion was that he pay his warehouse workers more. Would Amazon collapse or would it eat the world, is the question The New York Times asks. It was the corporation-as-reality series, and it has been a long running rates monster.

The thing about Amazon is that it is an embodiment of the American Dream. “I might be in the dust today, but I will run faster tomorrow, and spread my arms wider tomorrow, and you will like me,” is the kind of Paradise – the kind of technoparadise idea – that Amazon continues to sell. To be fair, Facebook, Twitter, and Google also did the same thing, but in the age of fake news and misinformation, those entities have come to be a little suspect whereas Amazon continues, for some reason, its sheen. (Of course, Bezos owns Washington Post – one more reason for Donald Trump to rail against Bezos in tweets where he likes to call the stories vanguard of Washington politics, an Amazon outpost.)

Amazon has retained its allure even as many of its ventures have tanked or have taken far too long to get off the ground, or in one case, fall to the ground. Case in point – Amazon’s Drone program. It was first announced on the program “60 Minutes”, in December 2013. Thousands of features were written about it, many of them mostly talking about just how cool it all was. Well, what was the Drone program do? It would deliver packages by drones.

Over the years, Amazon kept raising its stakes as if they were not high enough already. It even applied for patent a few years ago for something called an Aerial Fulfillment Center, which would float at 45000 feet above sea level. Drones would fly out of it with your order and glide down to your backyard. Furthermore, Amazon got a patent this year to more or less ‘bomb’ people with their packages, as the New York Times went on to note. The drone would drop your chapati or the film you want to watch from a height of as much as 25 feet, in theory cushioning the fall with an airbag.

Having said all of that, none of this is actual reality. But that hasn't stopped Amazon’s strides in the market or dented the perceptions of the consumer. “Companies like Amazon will make routine drone deliveries to customers by 2025,” is what Mr Kesterloo, who is the senior editor of the news site DroneDJ, went on to say. Yes, it might eventually be a reality, but it was not the timeline that was promised. Especially during a time when heads of companies are taking huge blowbacks (hint Elon Musk) for failing to meet deadlines. The same problem, in the case of Amazon, simply does not seem to have affected the company or its founder.

The success of Amazon and Apple has also brought to sharp relief the phenomenon of the rise of powerful megacompanies. This has been a recent phenomenon. Take for example 1975 – 109 companies collected half of the profits produced by all publicly traded companies in America. And today, those winnings are captured by just 30 companies, according to research by Kathleen M. Kahle, a University of Arizona finance professor, and René M. Stulz, an economist at Ohio State University.

The difference between how much it costs American companies to make their products and how much they sell those products for — a metric of the power that a company possesses in their markets — is at its highest level since at least 1950, according to a 2017 paper by two economists from University College London.

This year alone, five tech companies – Facebook, Apple, Amazon, Netflix, and Google parent Alphabet – have delivered over half of the gains made by the S&P 500 stock index.

The question now among Wall Street investors is this – which would be the company that would hit the two trillion dollar mark? Would it be Apple or would it be Amazon? And the vote was overwhelmingly in favour of Amazon. Why? Because quite simply what Amazon sells is dreams, and fantasy (often realised, to be fair) is always better than reality. Or as the Times put it, “dreams will always triumph over devices.”

And just for the sake of completion, a trillion is one followed by twelve zeroes.

1, 000, 000, 000, 000.

Phew.
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