In the months since Apple Inc. (NASDAQ: AAPL) stock price began falling two new companies have emerged as the tech industry’s leaders: Google Inc (NASDAQ:GOOG) and Amazon.com, Inc. (NASDAQ:AMZN).
The fact that Google Inc (NASDAQ:GOOG) is apparently readying a shipping service that will undercut Amazon’s Prime is a tell that these two companies know which car is beside them, and they’re acting accordingly.
Google Inc (NASDAQ:GOOG) practically invented the cloud – most of the innovations we know of as the cloud emerged from work Google Inc (NASDAQ:GOOG) was doing in the early part of the last decade to solve its own business problems. Later, Amazon.com commercialized the cloud as Amazon Web Services, and now has a dominant market share in the public cloud arena.
But seeing dominance through a single prism is a mug’s game. It’s subject to fashion, as Apple discovered. Once the fashions change, so does confidence. The fall comes hard and fast.
So which of these two companies is likely to crack first?
Amazon And The Top Line
Amazon’s story is all about top-line growth. The company deliberately avoids profit, believing that any money it does not reinvest in the business is an opportunity lost. Investors have rewarded it handsomely for this.
Back in 2009 Amazon had sales of about $24 million. In 2012 its sales were nearly 2 ½ times that, or $61 billion. The expectation is that this growth will continue. But as numbers get bigger they get harder to grow. Wal-Mart has grown its sales $60 billion since 2009, while Amazon is up “only” $36 million during that same time. But Wal-Mart’s sales gains mean it has grown only 11% on the top-line in four years. That’s the way of large numbers. This means that at some point Amazon.com is going to have to show a bottom line. Amazon grew its top line just as much in 2012 as 2011, but its growth rate went down, from 37% to 27%.
Amazon is also running a game with its cloud numbers. It doesn’t break them out. It just calls them “other,” and throws some more stuff in there too. Thus, people have to guess. And they tend to guess high, as Macquarie Capital does. Since cloud is technology, not retail, analysts assign a big multiple to it when calculating the company’s value. But they’re basing this calculation on a fiction, the idea that they know AWS’ numbers. They don’t.
So it’s easy to see Amazon.com falling for competitive reasons. There are more companies selling cloud services than ever before, and the numbers are getting too high to grow quickly. The stock is going to fall. How far it falls will depend on what Amazon does at that point, whether it’s willing to accept a profit or pay out a dividend.
Google And the Vultures
Google’s secret sauce is its cost structure. Google bought dark fiber when it was cheap, it uses less energy than other cloud players, it has data centers across the planet, and it caches copies of itself in many, many different places – at phone offices, at customer premises – so requests don’t always have to come back to the center.
This is why Google Inc (NASDAQ:GOOG) gives away so many services, and does all it can to encourage people to use all of the Internet’s free stuff. This maximizes its advantages.
But in becoming a verb, Google Inc (NASDAQ:GOOG) has put a target on its back. Governments around the world see Google as a pressure point, as an outsider they can tax, or one they can blame for their own failings. Google’s unofficial motto – “don’t be evil” – is something no company could completely live up to. Those Google has passed along its way, from Microsoft to the Bell companies, also have it in for the search engine giant, and are not averse to using the tools of government against it. Google, being young, also has a smaller patent portfolio than older companies.
