Amazon is no stranger to real estate… at least in virtual terms.
One of its biggest businesses, Amazon Web Services (or AWS), is essentially a landlord for websites and services.
It “rents out” storage space and computational power to startups, established businesses, and even the Pentagon.
AWS is a big and fast-growing business. It generated $21.4 billion in revenue in the fourth quarter of last year. And it grew by 20% year-over-year.
But growth is slowing as competitors such as Microsoft and Google develop their own “cloud rental” businesses.
So Amazon has started looking elsewhere for growth.
And unsurprisingly, it’s looking at real estate.
Amazon Aims to Become a Real Estate Landlord
Back in 2017, Amazon purchased Whole Foods for about $14 billion.
At the time, it was Amazon’s biggest acquisition ever.
And Amazon is looking to double down on physical retail this year.
Its CEO, Andy Jassy, said in a Financial Times interview:
We’re hopeful that in 2023, we have a format that we want to go big on, on the physical side. We have a history of doing a lot of experimentation and doing it quickly. And then, when we find something that we like, doubling down on it, which is what we intend to do.
Amazon has two reasons for doing this.
First, physical retail works. In the fourth quarter of 2022, the company’s brick-and-mortar sales grew by 5.7% year-on-year to about $5 billion.
Meanwhile, online sales declined by about 2.3% compared to the same quarter of 2022.
By going “big” on retail, Amazon is hedging its massive online businesses.
But there’s another reason the online retailer is looking at physical retail.
It’s Typical for This Stage of the 18.6-Year Cycle
It wants to become a landlord.
By building out a network of retail stores, Amazon will accumulate a real estate portfolio.
And my guess is this portfolio will be massive.
If anything, Amazon is good at scale.
Think about it…
It operates gigantic warehouses and sophisticated logistical networks… and it is developing the technology to run retail stores with almost no human involvement.
This network of physical retail locations will be scalable like no other.
And with Amazon’s $70 billion in cash and a solid AA credit rating, it can funnel tens of billions of dollars into real estate…
This is typical for this stage of the 18.6-year cycle. Massive players are coming in to profit from the ongoing bull market.
We’re nowhere near the end of this cycle. Amazon’s drive into real estate only confirms this.
Regards,
Phil Anderson
Editor, Cycles Trading with Phil Anderson