Amazon Priming the Pump for Prime Day

  • Amazon Prime Day — one of Amazon’s greatest inventions — starts on Monday, June 16th at 12 PM PT.
  • Prime Day 2018 will last 36 hours (+6 hours y/y) and will be available in 17 countries (4 more than last year).
  • We expect Amazon to continue ~60% y/y growth in units sold, selling 140M units on Prime Day 2018.
  • The company is also training customers to use new and differentiated shopping methods to tighten its grip on Prime users.

Prime “Day” 2018. The fourth annual Prime Day will begin on Monday, June 16th at noon Pacific Time and will last for 36 hours. This is a six-hour increase from Prime Day 2017, which also saw a six-hour increase from Prime Day 2016. Not only did Amazon invent its own holiday, but the company has expanded its duration and geographic reach since inception.

Amazon’s strategic deals. The company rolled out select deals on July 3rd, with additional exclusives and discounts released each day up to the June 16th event. The marquee deals include a $100 discount off the Echo Show (was $229.99, now $129.99), 50% discount on Prime Video, four months of Amazon Music Unlimited for $.99, and more. In addition to the early start, Amazon announced that Prime Day 2018 will include deals on more than 1 million items worldwide compared to “hundreds of thousands” in 2017 and just over 100,000 deals in 2016. The company is also expanding Prime Day to four additional countries (Australia, Singapore, Netherlands & Luxembourg), bringing the total to 17 countries.

Expect another record Prime Day. The two previous Prime Days both broke Amazon’s single-day sales record, a trend we fully expect to continue. Prime Day 2016 and 2017 each saw 60% y/y growth. This year we expect that number to be between 55-65% given the longer duration, additional geographies, additional deals, and the ongoing Prime Day campaign at Whole Foods. Note, however, that a Prime subscription ($119/year) is now $20 more than it was on Prime Day last year, and eventually, the law of large numbers will catch up to Amazon’s Prime Day growth.

Amazon is training Prime members. Amazon’s Prime Day Guide outlines a few ways customers can access additional deals to push new Amazon offerings. The Amazon app, Alexa, and Whole Foods offer unique ways to shop Prime Day. Using the Amazon Assistant browser plugin, customers get notifications on deals, plus $5 off any Prime Day order of $25 or more. Amazon is also offering a $5 discount on select Prime Day deals when customers use Camera Search on the Amazon app. Prime members shopping at Whole Foods will also receive 10% back on up to $400 when they use an Amazon Prime Rewards Visa card.

With Prime Day, Amazon is doing what it does best — value and convenience — to tighten its grip on the 100 million Prime Members, and counting.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Returning to Our Amazon + Target Prediction

As we hit the halfway point of 2018, we wanted to check in on one of our boldest predictions for the year: Amazon will acquire Target in 2018. So far, we’ve been wrong. Getting the timing correct is difficult, and every business day that passes it becomes 0.38% less likely that our prediction comes to fruition. That said, we remain adamant that this combination makes sense.

We predicted that Amazon will buy Target for 3 reasons.

  1. Offline sales will always be a big part of retail. E-commerce is slowly killing brick and mortar business across almost every industry. Today, however, only about 10% of total US retail sales are online. We see this number going to 55%, but that still leaves a considerable market for physical retail. This is based on the concept of empathic retail – Human retailers are uniquely qualified to create personalized service based on empathy.
  2. They pursue a shared demographic. Amazon’s Whole Foods acquisition confirmed their focus on the high-income consumer. The median household income for an Amazon shopper is $90,100, similar to Whole Foods at $95,200. Target reports its average shopper earns $87,000. These far exceed the U.S. median household income of $55,322. In our experience observing tech companies, owning a demographic yields the best results.
  3. Brick and mortar retail must get more advanced. Retailers like Target must get more advanced to survive in the new world of commerce. Our data suggests that traditional retailers are struggling to transform, ostensibly because tech is not in their DNA. Additionally, the economics and the expectations of a traditional retailer are very different than those placed on their largest competitor: Amazon. Amazon has the flexibility to grow without generating a profit and does not carry the real estate burden of a brick and mortar footprint. An Amazon acquisition would change the rules of the game for Target, and further Amazon’s effort in brick and mortar.

An update on Amazon’s brick and mortar strategy. Since we made the prediction in January, Amazon has shown that it is serious about integrating with Whole Foods and expanding its brick and mortar reach. The first Amazon Go store has opened to the public, and Amazon is reportedly planning 6 more Go stores to be launched later this year. The Whole Foods integration has progressed nicely with reduced pricing on some staples, rewards and discounts for Prime members, and free delivery for Prime members on orders over $35 in select cities. All of this points to Amazon’s concerted effort in brick and mortar as a critical channel for their business.

For these reasons we continue to believe that it makes sense for Amazon to acquire Target. In order to make their vision a reality, a broader reach in physical retail is important, and Target offers the reach that Whole Foods does not fulfill completely.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Apple as a Service Part 4: New Product Categories

  • Optionality around new product and service categories is the 4th and final pillar to our Apple as a Service thesis.
  • We expect a stable iPhone business (part 1), a growing Services segment (part 2), and capital returns (part 3) to move shares higher.
  • In part 4, we outline potential new product and service categories, including AR wearables, personal health, original video content, and autonomous vehicles, which represent additional growth drivers not yet reflected in investor thinking.
  • New hardware products generate new Services opportunities and the company will continue to develop both in tandem as it looks to expand its ecosystem.

AR wearables a great fit for Apple. Futurist Charlie Fink sums up AR best: “The world is going to be painted with data.” Tim Cook agrees, and in 2017 said, “AR is one of those huge things that we’ll look back at and marvel at.” Cook is doing everything in his power to advance the theme, as evidenced by three developments in 2017 including; releasing an AR development platform (ARKit), shipping dedicated AR optics in the iPhone X, and purchasing SensoMotoric (a wearable computer vision technology).

While the tech community believes in the long-term potential of AR as the future of experiences, most investors are understandably mixed about its potential, given the two most popular AR use cases today are Snapchat and Pokemon. Adding to investor skepticism is the failed consumer launch of Google Glass, released in 2014 and discontinued in 2015. As a society, we were not ready for people to wear cameras.

That said, we believe AR is real and Apple will be a beneficiary. We expect Apple’s AR theme to play out in three phases. First, this fall we expect 2 to 3 new iPhones to join iPhone X with advanced optics for AR (VCSEL arrays). Second, AR apps built using ARKit will slowly become the next gold rush for developers, led by games, ecommerce, and education. Last, we expect Apple will release Apple Glasses late in 2021.

This begs the question: are we ready for AR glasses? Not now, but eventually we will be. AR is better hands-free. We’re not made to experience the world holding up a tiny window. Our arms and eyes get tired. Glasses solve that problem, but they also create a problem by breaking a social dynamic around privacy. We expect minuscule wearable adoption until the utility of an AR wearable offsets the negative social dynamic. Simultaneously, the technology must advance to a point where the design of the glasses is not a negative factor (as we’ve seen with smart watches). Once that happens, wearables will likely go mainstream. We see the early flip phone as a helpful analogy. Around 2000, flip phones added cameras, and the privacy threat of a camera in everyone’s pocket created a negative social dynamic. Eventually, consumers got over it because the utility of the camera offset the negative social dynamic. In the future, we won’t be able to live without an AR wearable, and Apple will be there to sell us one.

We are pushing back our expected release of Apple Glasses from September of 2020 to December of 2021 based on recent meetings with several AR industry experts. While these people do not have direct knowledge of Apple’s plans, it is becoming clear that, as a category, AR glasses are a few years away. We’re looking for 10 million units in the first year, similar to Apple Watch’s first year. We’re using a $1,300 ASP, which yields a $13B business and should account for 3% of Apple’s revenue in CY22. See our updated model here.

Personal health and fitness Apple’s new hobby. Steve Jobs routinely referred to Apple TV as a “hobby” for the company. In 2018, the Apple TV business will generate an estimated $3-$4B in revenue. Apple Watch has well surpassed Apple TV; we estimate it will generate nearly $11B in revenue in 2018. Apple Watch is now the most popular watch in the world. And fitness is literally a hobby of Tim Cook’s. Lastly, we view Cook’s personal motivation to improve global health and wellbeing as an important factor here. The rubber meets the road with products like Apple Watch and AirPods along with software development tools including HealthKit and ResearchKit, but new wearables (and “hearables”) and new capabilities for existing products represent a significant potential growth driver for Apple in the personal health space. We estimate that Apple Watch, AirPods, and a new AR wearable (“Apple Glasses”) will generate over $71B in FY23, up from an estimated $12B in FY18.

The opportunity in original content. We continue to expect Apple to launch a rebranded, all-in-one Apple video and music offering in 2-3 years. As the company ramps its spending on original content at a clip of about 50% per year to more than $4b in 2022, it will need a new home for its video content (currently available through Apple Music and iTunes). While Apple’s original content spend of about $500M in 2017 is just a fraction of the $8B Netflix plans to spend on original content this year, we think they are committed to competing in the content space. That said, they already take a cut of subscriptions generated for HBO, Hulu, Netflix and others via Apple devices. This one-two punch in content will continue to drive consumers away from cable and satellite TV providers to a combination of over-the-top service providers, and Apple is well positioned to benefit both directly and indirectly from this shift. See more here for our thoughts on Apple’s original content strategy.

Apple’s plans in autonomy. Tim Cook has said, “We’re focusing on autonomous systems…It’s a core technology that we view as very important…We sort of see it as the mother of all AI projects.” While he notes that transportation is just one segment of autonomy, it is clear that Apple is working on autonomous vehicles, as they have recently expanded their fleet of test vehicles registered with the California DMV to 55, up from 27 earlier this year, and just 3 last year. While the company’s ultimate ambitions in autonomy are unknown, their public confirmation is noteworthy, and it is clear they are taking the opportunity seriously.

There are two ways we see Apple potentially bringing its autonomous systems to market. The first option would be to partner with a manufacturer to build an Apple-branded car, just as they do with the iPhone and iPad. By partnering with a manufacturer, Apple would have design control over the product and would be able to customize the user experience as much as possible. On the other hand, manufacturing a car is very different than manufacturing a smartphone. The second option would be to focus on developing software and license its technology to current auto manufacturers for use in their vehicles. Apple could be the OS of the future for cars. This may be the more likely option as it plays to a number of Apple’s strengths including voice, navigation, entertainment, security, and a developer ecosystem.

At the moment, Apple is likely pursuing both options under the R&D umbrella of Project Titan. The most near-term application of their efforts is an autonomous shuttle called PAIL (Palo Alto to Infinite Loop) that will transport employees around campus, likely to collect data in a semi-controlled environment. True to form, they’ll watch this market emerge and enter when the time is right – from both a product and a market standpoint.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make. 

Amazon’s Next Massive Market: Healthcare

  • CNBC reported on Friday that Amazon is building a health and wellness team inside its Alexa division to work on making Alexa a better tool for healthcare.
  • Amazon, Berkshire Hathaway, and JP Morgan recently announced plans for a joint healthcare company focused on reducing costs and improving care for their combined 1.2m employees.
  • The $3.3T U.S. healthcare industry is notoriously slow to innovate.
  • We think Amazon will change healthcare on three fronts: 1) Logistics: Help reshape the $453B Pharmacy Benefit Management industry; 2) AI: Alexa will help both patients and providers with everything from in-home care to allowing providers more time with patients instead of paperwork; 3) Cloud: AWS will continue to allow Amazon to partner with the world’s leading patient data networks.

Source: CNN Money

Dr. Alexa. Today’s news around Amazon’s new Alexa healthcare team got us thinking about Amazon’s prospects for breaking into healthcare.  Companies across the entire healthcare industry are quickly discovering that AI will be used in everything from operations to enhancing quality of life for patients. Imagine the safety, information, connectivity, and entertainment that an Alexa near every hospital bed could offer patients.

Amazon’s Medical History. Amazon’s first foray into healthcare came with a 2014 deal with Cardinal Health leveraging Amazon’s e-commerce capabilities to sell medical supplies to hospitals and clinics. Amazon announced another major move into healthcare when they, JPMorgan Chase, and Berkshire Hathaway outlined plans to start a company that would provide and manage healthcare for the three companies’ combined 1.2m employees, focusing particularly on reducing costs. Separately, Amazon announced that they have put their plans to become a pharmaceutical wholesaler on hold (for now). The company found it difficult to bring major hospitals on board due to their reluctance to deviate from the purchasing process they’ve grown used to. 

Amazon’s Next Moves. We believe Amazon will have a major impact on the $3.3T U.S. healthcare industry by leveraging three core competencies: Logistics, AI, and cloud infrastructure to transform delivery of care, population health management, and healthcare software services.

  1. Logistics: Logistical expertise will most directly impact the highly concentrated Pharmacy Benefit Management (PBM) sector. Rising drug prices and rising drug demand has driven considerable backlash recently among American consumers. We feel this could be a golden ticket for disruption to a cost-conscious, logistics expert like Amazon.
  2. AI: Alexa’s artificial intelligence could significantly reduce the amount of busywork for doctors and accelerate the adoption of in-home telehealth. From checklists to note taking to logging patient symptoms, Alexa could streamline many healthcare operational functions by eliminating menial tasks and allowing providers to spend more time with patients. In the home, patient rooms, and at senior living facilities, Alexa could do everything from reminding patients to take their medicine, to helping manage care for diabetics, to helping patients notify staff if they’ve fallen.
  3. Cloud: Amazon’s $5.4B AWS business is poised to provide incumbent electronic health record systems with the storage, analytics, and population health management tools needed to provide a full stack of services around patient data. Evidence of this came as Cerner, one of the world’s largest health technology companies, partnered with AWS to utilize the platform’s data analytics strengths to provide more real-time care coordination amongst providers. Cerner also looks forward to leveraging Amazon’s AI to take a more proactive approach to cross-sector population health and wellness, and we anticipate they will be one of many healthcare firms in the future using AWS in similar capacities.

Whole Foods + Healthcare. The acquisition of Whole Foods gives Amazon another unique product and product delivery method, although we can’t call it a core competency yet. Food as medicine will be an important part of healthcare’s future and, as a leading grocer, Amazon is well-positioned here. Whole Foods locations also provide Amazon with the physical presence, and the brand recognition in health and wellness, to potentially address the need for more convenient healthcare clinics.

Bottom line. Amazon’s aspiration to be “Earth’s most customer-centric company” provides it with seemingly unlimited growth potential (and uncanny ability to find success in new markets). While they may be king when it comes to e-commerce, their entry into the healthcare market will likely prove to be one of their toughest tests to date. They face an extremely complex and concentrated industry and the regulatory quagmire that comes with it. Amazon has its work cut out in convincing the healthcare system that it belongs at the table, but it’s made sensible first steps and we’ve learned not to bet against them.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Lights Out: Amazon Flexes Its Profit Muscle

  • Amazon reported Mar-18 results highlighted by profitability that was 2x analyst expectations.
  • Recall that from time to time Amazon will flex its gross margins to remind investors of the model’s leverage potential. Going forward we expect margins to dip lower as the company continues its aggressive investment pace into fulfillment, lower AWS pricing, and content.
  • Retail growth of 22% y/y was consistent with growth over the past two years. More room to go given the company added ~15m Prime members in 2017, which will drive spending in 2018. Prime members spend 3-4x more on Amazon than non-Prime users.
  • AWS growth accelerated for the second straight quarter to 49% y/y, compared to 45% y/y in Dec-17 and 43% y/y in Sep-17. Cloud is still a nascent market and AWS is a killer platform that should yield favorable growth going forward.
  • The company also announced a 20% increase in the price of a Prime membership. This should yield about $2B per year in incremental revenue that will most likely be reinvested in the business, and occasionally allow the company to flex its profit margin muscle once again.

The $50B automated retail opportunity. In 2016 there were 3.5 million cashiers in the U.S., according to the Department of Labor, with an average salary of $13,574, according to Data USA. That makes for a nearly $50 billion opportunity in cashierless retail that Amazon is well positioned to attack. Of those 3.5 million cashiers, 323,000 are convenience store or gas station employees, or 9% of the cashier workforce. The automated retail space is getting more and more crowded, but the Go store suggests that Amazon has the pole position.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.