What Will Amazon.com Gain From A Stake In HERE Maps?

  • Amazon could be looking to take a position in a company called HERE.
  • Amazon's investment into the company would position the company to compete in autonomous deliveries.
  • While the deal could prove expensive, the incremental capabilities from the deal would be accretive in nature.

Amazon.com, Inc. (NASDAQ:AMZN) and Microsoft Corporation (NASDAQ:MSFT) are looking to take a position in HERE, which is a mapping company based out of Europe. The strategic shift to acquire additional properties is a little counter intuitive for the company, but given the weak M&A environment, the opportunity to snatch up additional opportunities via acquisitions or acquired stakes in smaller companies is most elevated at the present moment in time. Furthermore, Amazon’s current cash position of $15.89 billion puts them in a similar position to other tech titans to make larger acquisitions or investments.

But, does the rumored investment into HERE put them in an enviable position in mapping technologies? I’m not so sure, Google has an end-to-end suite for autonomous driving on the way, and Apple is working round the clock to develop both the software and mechanical capabilities to market an autonomous electric vehicle. With the unveiling of the Tesla Model 3 this week, which was future proofed for further autonomous integration, I’m not certain if Amazon has enough time to catch up. Therefore, I'm going to rule out the possibility of an Amazon Autonomous Car.

The Reuters report points out that the stake in HERE implies both an investment by Amazon and the exclusive right to host the workloads for the mapping technology:

"Amazon would take a stake as part of a broader deal to lock them in as a provider of cloud computing services," one source familiar with the talks said. The consortium needs cloud computing providers to manage the mountains of data collected from sensors on thousands of Mercedes, BMW and Audi cars. These digital maps allow cars to avoid traffic jams or hazards such as ice. "The new owners Audi, Daimler and BMW have said from the start that they are open for new partners to join," BMW said in a statement. "We have noticed that there is lots of interest not only from potential partners from within the automotive industry, but also from other sectors."

The mapping division of Nokia referred to as HERE was bought as a part of an automotive consortium between BMW, Mercedes and Audi. Yes, the three luxury auto makers paid a collective $2.85 billion to acquire the unit. If Amazon is indeed serious, the company will need to pay an even higher premium to be a part of a second round of investors. Hence, I mentioned the near $16 billion cash position that Amazon currently has.

Furthermore, I’m fairly certain the strategic value of Amazon’s data center business comes in handy here. Because, we know that Google’s cloud capabilities belong in the same sentence of other hyper scale cloud vendors. i.e. Microsoft and Amazon. However, Amazon’s end-to-end capabilities are considered several years ahead of the pack, as they’ve been plowing capital into AWS since 2006 (9 years of continuous investment). In fact, Amazon built the IaaS and PaaS business from the ground-up via Amazon Elastic Compute Cloud and Elastic Beanstalk. Now I know many of you are familiar with companies that have been in business for far longer, but 9 years is a lifetime in the tech sector. By the end of 2016, AWS is projected to reach $10 billion in revenue. Therefore, if Amazon has been able to organically grow a business to $10 billion in sales at high profit margins, it’s worth paying closer attention to Amazon’s next growth area, which could be in autonomous software, computing and services.

In a recent analyst note release by Morgan Stanley, the firm believes that Amazon has three different motives here, first they’re looking to lock-in HERE as an AWS customer, second the mapping data becomes useful for its fleet of delivery trucks, third the firm may be looking to build autonomous delivery trucks and drones.

Of those three reasons, I think the third one makes the most sense. Amazon could have acquired HERE as a customer without needing to pay a large investment stake. Finally, depending on how the agreement shapes up, Amazon’s investment into HERE could be conditional on gaining certain technology licensing rights for its own products and services developed in house. When talking to other industry experts, I’ve heard of arms-length agreements similar to this so it’s certainly within the realm of possibility. Furthermore, Amazon isn’t in the automotive business, so there’s a decent runway for Amazon to create strategic value from this deal without worrying the remaining stakeholders over an Amazon Car that will compete in the mass automotive market.

However, Morgan Stanley added commentary that ties Amazon to the ride sharing economy and heightened resource allocation:

Cars are used on average for 1 hour a day or 4.2% capacity utilization on a 24-hour day basis which is appropriate from a logistics business model perspective. The average car on the road has more than 5 seats and a passenger occupancy rate in the US of 1.55. Seen from an available seat-mile basis, the capacity utilization of the car population is no more than 1.3%. Then consider the available trunk capacity in the average car. A 2016 Toyota Camry has 15.4 cubic feet of truck capacity. How much of that capacity is actually utilized? In our view, it is not a stretch of the imagination to see at a portion of the passenger car fleet as an available fulfillment capacity for goods to be delivered to a customer’s home or place of work. All it takes is a mobile phone and software to make this unused capacity a potential part of the delivery equation.

It’s not a stretch to imagine this possibility materializing. It’s sort of like the Uber-model for car transportation except for parcel delivery. However, with the exception that no one needs to actively deliver goods or services via their cars. The car can make the deliveries autonomously. Of course, you’d need a device that would drop the packages off without a passenger. But, in a world where we’re transitioning to drone technology and more advanced artificial intelligence, it seems the sharing economy in conjunction with advanced AI rhymes with Amazon's forthcoming strategy with HERE.

Therefore, investors should eagerly watch for developments on this front. I continue to reiterate my buy recommendation on Amazon stock.

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