The United States of Amazon

The United States of Amazon... Drugs and cars are up next... How does Amazon keep growing?... Look past the quarterly statements... Think like Bezos... More 'food for thought'...

Red states. Blue states. We're all the United States... of Amazon...

Just this week alone, Amazon (AMZN), the online retail and logistics behemoth, and cloud company (and, and, and...) told the world it has more markets in its sights...

Its targets include one of the biggest parts of the economy – health care, or more specifically, prescription drugs.

And the other new target is pretty big, too – transportation, specifically the microchips that collect all the information about what your car or truck is doing.

In other words, expect to see even more of Amazon's blue, smiley-face trucks driving around the neighborhood...

Taking aim at the corner drugstore...

As Stansberry NewsWire editor C. Scott Garliss discussed this morning, Amazon announced earlier this week that customers can now buy prescription medications through its website and apps...

Amazon said customers can establish a secure pharmacy profile, which will allow them to include health insurance information and manage their prescriptions. Amazon Prime subscribers will get free, two-day shipping from Amazon Pharmacy as part of their service.

This is the latest step – and a more direct one – in Amazon's foray into the health care industry. In 2018, the company spent roughly $750 million on PillPack, which packages and sorts prescriptions before delivering them to customers.

Our colleague Thomas Carroll, a longtime health care sector analyst, told Scott that filling prescriptions is the perfect way for Amazon to start committing more heavily to the industry. As Thomas explained...

It's one of the easiest transactions in the health care system and shouldn't be made more expensive or difficult by the supply chain. Consumers have a real understanding of how to get their meds. And we all know how to use Amazon and other online purchasing platforms.

We sure do. Every time I (Corey McLaughlin) need to break down and throw out another Amazon cardboard box, I think there is another business idea to be acted upon...

Tracking your (car's) every move...

The other less-reported announcement from Amazon this week was its partnership with NXP Semiconductor (NXPI)...

This is a deal that links the semiconductor chips in cars and trucks that NXP makes with Amazon's massive cloud-based web services business, called Amazon Web Services ("AWS").

According to Scott, NXP hopes to use the data to help automakers "improve vehicle performance." That includes better security for "connected cars," according to the company... and we can imagine a variety of potential uses on Amazon's end, too.

In other words, Amazon's AWS business is going "all in" on cars and trucks, and automakers are similarly ramping up connected-car design. The trade magazine Electronic Engineering Times reports...

The auto industry, of course, has been talking up connected vehicles for a long time. Connectivity installed in vehicles, for example, already enabled carmakers to build and offer telematics services such as General [Motors'] OnStar. It also allowed users to download apps and other content to in-vehicle infotainment systems.

"Let's call them Phase I and Phase II of the connected vehicle," said Brian Carlson, global marketing director for vehicle control and networking at NXP. In Phase III, the new NXP-AWS partnership seeks to make "vehicle-wide data available to car OEMs [original equipment manufacturers]," he explained.

Carlson claimed carmakers can now transfer vehicle data – from "sensory data to algorithmic and behavioral data" – to the cloud... And the deal with Amazon opens the door for a lot of that previously unexplored data to be "mined" and examined.

These are huge deals...

NXP's revenue totaled $2.27 billion in the third quarter of 2020... And chips make up 45% of its business. The company is going to create a new chip that collects data from cars and trucks and shares them with AWS data centers.

We could see this paying off for Amazon's delivery network in unimagined ways, too.

And back to the first deal... Health care makes up about a fifth of the U.S. economy. To not have to leave your house to get your regular prescriptions? We think people will come around to this idea quickly and start adding prescriptions to their regular Amazon orders.

Here's the really interesting thing, though, from an investment point of view...

The market went ho-hum about this double dose of Amazon news this week. The company's shares bumped a little bit higher earlier this week on the online pharmacy idea, but they're pretty much flat over the past five trading days – remaining around $3,120 over that span.

This tells us that we're almost taking Amazon for granted today...

Oh, yeah, of course Amazon is looking to disrupt what seems like every industry on the planet...

But not every company can... And few companies do. Just disrupting or dominating one industry is enough of a challenge for most...

Few companies in history have done what Amazon has done at the scale it has over the past two decades. It has gone from an online bookstore... to a pharmacy... and everything in between.

You can find clickbait news stories about Amazon anywhere... or tips for how you can live like its billionaire CEO Jeff Bezos. But far less frequently, you'll come across an explanation of how and why the company has been so successful from a financial standpoint.

So today, we raise the question...

What's the secret sauce?

In exploring this question, we can see a few important lessons for any long-term investor to consider with any investment...

How does Amazon keep growing and growing?

A lot of folks forget... But as recently as 2016, it was considered a big deal when Amazon put four profitable quarters together in a row. Today, that's less of a concern.

The company has made at least $2 billion per quarter dating back to the middle of 2018, and that number has trended higher... Last month, Amazon reported $6.3 billion in net profit in the third quarter of this year.

But that's still just a fraction of its overall sales... Fueled by pandemic demand, the company's revenue grew to $96 billion last quarter. This low profit-to-sales ratio has been a point of criticism from Wall Street analysts over the years.

While Amazon's balance sheet might not scream "all profit" on its annual tax forms and while it doesn't pay a dividend, that doesn't mean it's not capital-efficient...

It's deliberately spending or allocating money – almost $90 billion last quarter – on other things. The important point is... Amazon spends most of its cash reinvesting in its own business. That's a trademark of any high-quality company.

In a video interview a few months ago, Retirement Millionaire senior analyst Matt Weinschenk described Amazon's business model in the context of how to value a company. According to Matt, it comes down to two things... 1) how it wants to grow, and 2) how it wants to preserve its income...

Amazon does not make a lot of income because they make money on the products they sell, and especially their cloud computing business, but they plow those earnings back into the business... one, to expand, and two, to reduce their taxes. You pay taxes on measured income. They don't want to pay taxes so they put it back into the business.

They grow, they get into new markets, they expand their infrastructure. So when you look at Amazon, what you would consider their earnings power in a way – how good that business is at making money – is not necessarily reflected in the earnings number that you look at for this year.

For this reason, Amazon looks 'overvalued'...

Back in 2017, when our colleague Dr. David "Doc" Eifrig recommended that his Retirement Millionaire subscribers buy shares of Amazon, it was trading for less than $1,000 per share. Doc noted that people back then thought Amazon was just that... overvalued.

On the surface, the valuation – 176 times its earnings – was scary high... And on the surface, Amazon Prime – its still-growing business – was a "money loser."

But often, the skeptics weren't looking at the big picture... Or at the very least, they weren't matching a potential investment in the company to the timeline that Amazon itself uses to measure success.

In other words, they weren't truly understanding how the business works (which we'll get to). But first, this brings up an important point...

With any investment in which you put your hard-earned money, you also want to truly understand the business and consider if hitting "buy" right now aligns with your timeline and goals for your portfolio.

There's short-term trading, of course... If you're doing that with Amazon, you might experience some surprises and volatility. And then, there's longer-term thinking... If you're interested in the latter, as Doc wrote in the June 2017 issue of Retirement Millionaire...

In investing, you can instantly claim an advantage over everyone else in the market by adopting (and more difficult... sticking with) a long-term view.

Thousands of fund managers and millions of individual investors are trying to find good investments for this quarter or boost their returns for this year. If you can widen your view to five years, you're playing a different game and the competition disappears.

That's an important lesson for subscribers to Retirement Millionaire in general. And Jeff Bezos takes the exact same approach with Amazon.

"If everything you do needs to work on a three-year time horizon, then you're competing against a lot of people," Bezos said in a 2011 interview with Wired magazine. "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."

In the case of Amazon, you want to look at other metrics when analyzing the company...

Something like operating cash flows can really show how healthy and valuable that business might be over the long run.

At the time of Doc's recommendation – remember, back in 2017, when the company was turning "little" profit – he noted that Amazon had $9.5 billion of free cash flow ("FCF")... $25 billion in cash on hand... a small amount of debt... and was growing sales by 20% annually.

And despite opinions to the contrary, Doc said the long-term outlook for the company was great. As he wrote...

Just like Bezos, you have to think long term as an Amazon shareholder. Its share price could be volatile in the short term given its valuation.

However, if you give it three to five years, you can pretty much guarantee a few developments...

First, Amazon will be bigger in the future than it is today. Unlike so many flash-in-the-pan tech companies, Amazon has major competitive advantages and an infrastructure that cannot be replicated.

We often hear about how digital sales are killing other retail stores... But lost in all that hype is the fact that online purchases still account for roughly 10% of retail spending.

Whether you think that online spending will account for 30%, 50%, or 90% of spending in the future, it's clear that it will be multiple times larger than it is now. And the primary beneficiary will be Amazon.

Of course, when the pandemic hit this year, Amazon started to become an essential utility for a lot of folks who didn't want to (or couldn't) leave home... And importantly, the company was capable of adjusting on the fly to increase demand. As Doc continued in his June 2017 issue...

Second, you can be sure that Amazon will have the ability to be massively profitable at any time. It may wait a long time to turn on the profit spigot, but it's there waiting.

This seems to just be starting, as I noted earlier. And then, as Doc concluded...

Third, Amazon will have more big hits. We don't know just what they are yet, but it will have multiple products that succeed and transform the company, as AWS and Prime have already.

Don't let valuation and short-term thinking keep you from investing in one of the best businesses in the world. We may see some volatility, but a long-term perspective will provide great returns for shareholders.

Today, Amazon as we mentioned is priced above $3,100 per share. Subscribers who took Doc's advice are up more than 225% – including almost 70% this year alone.

The question now is whether the company can sustain its valuation. Doc and his team believe it can...

Amazon has already had its most profitable year ever...

Wall Street recently didn't like the company's estimates of a $1 billion profit for the fourth quarter – down from $4.5 billion. But that's not seeing the big picture...

Even before the holiday season, Amazon had already made a record yearly profit through the end of September – close to $14 billion.

Amazon is one of the companies hiring people today... Its workforce recently eclipsed 1 million worldwide. It's now going to send people their pills and take in data from cars... So it can stomach what it says will likely be $4 billion in costs associated with COVID-19 this quarter.

It can eventually make up billions like no other company can... via its Amazon Prime subscribers. The company now has more than 150 million Amazon Prime subscribers worldwide, almost all happily paying either roughly $13 per month or $119 per year. That's all recurring revenue.

Perhaps most important, Amazon looks like it will be one of a select few companies to dominate the cloud-computing era that is just getting started... And that, we remind you, was made possible by a longer-term bet years ago overlooked by some...

Kudos to Doc and his team on another great call.

If you want to get their most recent thoughts on Amazon, as well as the rest of Doc's excellent research on investments and retirement ideas, and haven't tried his work before, we encourage you to check out this special offer... You can claim six months of Retirement Millionaire for just $29 today. Click here to get started.

The newsletter constantly ranks among the highest-rated publications in our comprehensive Report Card each year. And you can see why with this glimpse at Doc's research today.

More 'food for thought'...

We got some favorable feedback on our "food for thought" item this time last week that touched on the golf industry. So we'll follow it up here today...

First off, I saw more data to support the idea that people are playing this outdoor sport built for social distancing more than ever before.

According to market-research firm Golf Datatech, in September, golfers played 12 million more rounds in the U.S. compared with a year ago... That represented a 26% jump.

And in August, consumers spent a record $331 million on clubs, balls, gloves, and other gear. That was up 32% over the same period a year ago.

What does this tell us?

Well, aside from the obvious takeaway that people are playing more golf (and probably pretending they are "working from home" while doing it), a lot of people often forget that the consumer – you, me, and everyone who buys things – is responsible for 70% of the American economy.

That's why we said back in May that "the recovery will happen when we say it will." These words are truer than ever again today...

So when a pandemic – and the government's response – essentially shuts down the U.S. economy, 30 million people lose their jobs, and everyday spending grinds to a halt... well, we should not be surprised that "bad" things happen.

And as the reported numbers of COVID-19 cases spike again in many parts of the country, it's worth considering again...

Some people are frightened to near death, and might not want to go back to normal life until zero COVID-19 cases are reported anywhere. Some don't care at all. Most folks are probably somewhere in the middle, but the mainstream media doesn't like to hear from those people. They don't make for click-bait headlines and emotional stories.

Yet collectively, each and every American – whether they are interviewed by the national news or not... will determine precisely if or when the economy recovers with the decisions they make and how their outlook changes over the next day, week, month, or year.

It might not feel like it if you've been told to stay inside after dark – because of a virus – but we the people have the power to make our own decisions... from golfing... to how many things we buy on Amazon... to how dangerous we think the spread of COVID-19 is... to what we think about anything.

And this – we the people – will drive prices. If nobody wants to buy a new iPhone anymore, the price will eventually go down... or the product won't exist at all.

I recently read a quote from Wall Street hedge-fund manager Stanley Druckenmiller, speaking about bitcoin (which is trading near $18,000 today, by the way) that provides another good example...

Bitcoin is like anything else: it's worth what people are willing to pay for it.

Too often we forget this – about anything and everything.

New 52-week highs (as of 11/18/20): Cresco Labs (CRLBF), GrowGeneration (GRWG), W.W. Grainger (GWW), and KraneShares CICC China Leaders 100 Index Fund (KFYP).

In today's mailbag, feedback on Mike Barrett's Tuesday Digest about the death of the conventional "60/40" portfolio. Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Thanks for a very interesting article. I have always been fascinated when I hear investors swear by a particular formula for investment success, like 60/40 or 75/25 allocation of stocks/bonds, or even Harry Browne's Permanent Portfolio (25% stocks, 25% bonds, 25% commodities, 25% cash).

"As you stated in the Digest, with bond yields at historic lows and with the zero yield on cash, these formulas go right out the window. I do like your ideas about gold holdings in your portfolio, as well as your recommendation to own bitcoin. It appears that investors are more willing to accept bitcoin as a cash alternative than ever before.

"Thanks for the ideas today. Keep up the good work." – Paid-up subscriber Andy W.

All the best,

Corey McLaughlin
Baltimore, Maryland
November 19, 2020