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Introduction
Amazon (NASDAQ: AMZN) is trying to dominate a new market: that of the smart home. The definition of a smart home is a home equipped with lighting, heating and electronic devices that can be controlled remotely by telephone or computer. Simply, it’s a home that future owners and generations will likely live in, and I think Amazon will be one of the dominant players in that market.
Amazon is known for its e-commerce and cloud services, however, few investors see Amazon as a player in the smart home market. After acquiring iRobot (IRBT), I strongly believe that Amazon will be a dominant player in this new and growing market. iRobot brings extensive home robotics to Amazon’s existing ecosystem of hardware products, all connected by an AI assistant, Alexa.
smart home market
The size and growth of the smart home market is expected to be huge. It is expected to reach a potential market size o$380 billion by 2028 at a CAGR of around 21%. Even with the magnitude of Amazon’s market size, profitability, and market capitalization, the potential that smart home services can bring is significant.
Amazon’s position
Amazon already offers a suite of products in the smart home market connecting everything from doorbells, surveillance products, speakers, TVs, light bulbs, thermometers and monitors, all controlled by Alexa.
Starting with doorbells and monitoring products, Amazon owns Ring. A company specialized in manufacturing smart doorbells and home monitoring products. It lets homeowners see when the doorbell rang, who rang the doorbell, and more, while providing an integrated service of security alarms and cameras throughout the home. All of these features can be controlled on an app or through Amazon Alexa’s AI assistant. Additionally, Alexa can control smart monitors, light bulbs, TVs, thermometers, and speakers. Even products that aren’t made by Amazon connect to Alexa, increasing the value proposition of owning an AI assistant.
To further strengthen Amazon’s market position, the company announced the acquisition of iRobot, leader in automatic household cleaning robots. iRobot offers a fully automatic cleaning experience. Its Roomba product doesn’t just vacuum the house, it vacuums dust and charges itself. Additionally, iRobot offers an automatic cleaning robot called Bravo. Integrating iRobot into Amazon’s existing smart home ecosystem will strengthen the company’s presence in the market.
With these broad services, Amazon will be able to sell multiple Alexa devices in a household with the ability to sell significant parts of the hardware it owns in full, including Ring. Therefore, Amazon’s presence in the smart home market is expected to be strengthened when acquiring iRobot. After all, a consumer is likely to stick with Amazon’s ecosystem of products once they purchase Alexa.
Future potential
Beyond the current market opportunity, I believe Amazon can monetize this enterprise-wide trend through the expansion of available smart home hardware while building more private labels in the market.
The potential for smart home appliances doesn’t stop at Ring, iRobot, thermometers, light bulbs, speakers, monitors and televisions. Other items such as curtains, smart gardens, refrigerators, washing machines, dryers, etc. can be a suite of products that can be interconnected in Amazon’s ecosystem. Most of these products exist in the market today, but lack the convenience and connectivity platform provided by Amazon, which can only be realized at scale. No consumer will want five different apps for five different products. A single device controlled by Alexa will provide more convenience and value. Thus, Amazon can leverage its scale and ecosystem to its advantage.
The expansion of the smart home market will not only bring strong revenue growth, but also margin expansion potential for Amazon. Amazon will be able to sell several Alexas in the same household because it is necessary in all rooms for maximum comfort. Additionally, Amazon can expand into the hardware market through its private label for cross-selling potential beyond the e-commerce platform. As such, I think Amazon’s potential in the market creates a strong underlying trend.
Risk for the thesis
Amazon is already one of the largest conglomerates in the world. As such, the company’s planned acquisition of iRobot has raised antitrust questions. regulatory concerns. The Federal Trade Commission said it would investigate the matter due to concerns that Amazon could accumulate even more private user data through the acquisition of iRobot. Amazon already operates several smart hardware services that collect personal data, including Alexa and Ring, which creates a barrier to a potential acquisition of iRobot.
Amazon beyond the smart home market
Slowing consumer spending today poses a risk to Amazon’s core business; so despite a bright opportunity in the smart home market, I think Amazon is on hold today. The smart home market is one factor that could play out in the coming years but won’t affect the company’s short-term share price.
In a context of record inflation, consumers feeling and expenses have come under pressure. According to the St. Louis Federal Reserve, consumer sentiment is at a recent low with an index of 51.5 in July 2022, which is even lower than the low point of the subprime mortgage crisis. of 2008. In addition, with the high inflation environment, consumer income growth slowed, which halted the growth of consumer spending in the United States. This data shows waning consumer confidence in the marketplace, which will likely lead to more cautious spending, which will significantly hurt Amazon’s e-commerce business.
Although cloud growth remains robust, risk in Amazon’s e-commerce business is offsetting positive catalyst from AWS. In 2022Q2, Amazon’s operating profit fell to $3.3 billion from $7.7 billion in the second quarter of 2021. The reason for this is Amazon’s e-commerce business, where the loss of North American market operating income was $627 million, compared to operating income of $3.1 billion a year ago. Additionally, the international market recorded an operating loss of around $1.7 billion compared to an operating profit of around $362 million a year ago. So a roughly $5.5 billion drop in operating profit from the e-commerce business weighed heavily on Amazon. With the likelihood of a continued challenging environment due to rising rates and inflation, the current issue is expected to last and more than offset the $1.6 billion year-over-year gain from the cloud activity.
Evaluation
It’s hard to form an opinion on Amazon’s valuation today using a traditional price/earnings ratio or a forward price/earnings ratio, as Amazon’s forward p/e is around 2750 with a market capitalization of approximately $1.3 trillion. This is the result of Amazon’s e-commerce business seeing a sharp slowdown from 2021 and a “pre-tax valuation loss.” [from Rivian (RIVN) investment] of $3.9 billion in Q2 2022.” Additionally, in Q1 2022, Amazon recorded a “pretax valuation loss of $7.6 billion.” So, looking at Amazon excluding Rivian’s losses, the company’s p/e forecast for 2023 is 55. Given AWS’s continued strength and with an expected near-term hurdle at Amazon. com, the e-commerce business, I think the forward p/e of 55 for 2023 is slightly pricey. Amazon has huge long-term opportunities, but it’s hard to ignore short-term macroeconomic hurdles.
Summary
Amazon is pushing to dominate the smart home market with the acquisition of iRobot, and the company will likely succeed in leveraging its scale and ecosystem. However, even considering the future potential of the smart home market, the short-term outlook for Amazon is not too bright. Due to high inflation and a hawkish Federal Reserve, consumers lost faith in the market, which ultimately led to lower spending, which led to a slowdown in e-commerce activity that more than offset AWS earnings. Additionally, Amazon’s rather expensive valuation during a time of strong negative short-term macro headwinds is hard to ignore. Therefore, for Amazon shareholders, Amazon is a grip.
