Innovation and Risk-Taking Key to Amazon’s Success

Before the coronavirus pushed the market to its mid-March low, Amazon (AMZN) had a market cap of a “paltry” $834 billion. Since then, the e-commerce behemoth has blasted past the $1 trillion milestone, and now boasts a market cap of a truly staggering $1.3 trillion.

It’s clear Amazon has been one of the companies to benefit the most from COVID-19. Its core segments, online shopping and its cloud-based AWS business, perfectly attuned to the public’s needs during the crisis.

In an attempt to gleam some insights into Amazon’s recipe for all-conquering success, Baird analyst Colin Sebastian recently attended a public talk with Paul Misener, Amazon’s VP of Global Innovation Policy. The 5-star analyst walked away with a better understanding of how Amazon continually stays one step ahead of the game.

Misener highlighted companies’ hesitancy to innovate, which results in missed opportunities. As an example, COVID-19’s impact on Amazon’s retail business necessitated a swift reaction and resulted in the implementation of 150 “process improvements”, to ensure worker safety while also altering the supply chain “on a dime.”

The oft repeated mantra of “if you haven’t failed, you haven’t tried hard enough” got an airing by Misener, too. Sebastian tells clients that according to the VP, the need to experiment, and “to embrace trial and error”, are essential tools for anyone seeking to innovate. “Too many companies are risk averse and will only make changes if they think they know the outcome, which is neither experimenting nor innovating,” Sebastian wrote.

The same fearless state of mind is required to execute “big bets.” One big success can make up for many failures. A perfect example is Amazon Prime. It was first viewed as a risky “controversial new service,” with questions raised regarding the free shipping business model. Needless to say, the risk paid off.

On the other hand, taking a page out of Japanese auto manufacturers’ playbook, Amazon practices the method known as Kaizen, which focuses on small improvements which appear insignificant at first, but cumulatively add up to a “big impact on large scale business.”

It’s no surprise to learn Sebastian walked away from the discussion reiterating an Outperform (i.e. Buy) rating. (To watch Sebastian’s track record, click here)

The rest of the Street is just as enthusiastic. Amazon’s Strong Buy consensus rating is based on 38 Buy ratings, 2 Holds and 1 Sell. Yet, with a $2,747 average price target, the analysts expect a modest upside of nearly 5%. (See Amazon stock-price forecast on TipRanks)

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