Amazon.com Inc stock will greatly benefit from the rise of Voice-Activated Internet.
Shares of eCommerce giant Amazon.com, Inc (NASDAQ:AMZN) have gained more than 50% in the last one year, driven by the twin growth engines of eCommerce and cloud computing. As we have said earlier, these engines of growth are likely to continue their performance going forward making AMZN stock a good buy. Both the eCommere market and the cloud computing market will continue to grow. And now, Amazon.com Inc has another potential growth driver in its Echo devices and Alexa digital assistant.
Rising popularity of Amazon Echo.
In the last one year, there has been a lot of buzz around Amazon's Echo devices and its digital assistant Alexa. Alexa was everywhere during the CES 2017. According to a CIRP report, Echo's brand awareness increased to 82% in the United States last year compared to 47% awareness level at the end of 2015. The rise in the product awareness was driven by strong promotion by the eCommerce giant on both conventional media and its eCommerce platform.
Echo was one of the most sold devices on Amazon.com during the holiday season last year. In a press release, Amazon had said that "Echo and Echo Dot were the best-selling products across Amazon this year, and we're thrilled that millions of new customers will be introduced to Alexa as a result. Despite our best efforts and ramped-up production, we still had trouble keeping them in stock. From turning on Christmas lights and playing holiday music to shopping for gifts and asking for help with cookie recipes, Alexa continues to get smarter every day".
Amazon.com Inc is expected to have sold more than 3 million devices in the last quarter of 2016. According to estimates, more than 8.4 million consumers own an Echo or Echo dot device. The huge popularity of Echo has put Amazon in the driver's seat in the smart home devices segment, a category which didn't exist just a few years back but is rapidly gaining popularity among customers.
Customers use Amazon Echo for many purposes, including playing music, controlling home systems, such as television and lighting, cooking tips, playing voice-based games such as Jeopardy and answering questions. Two-thirds of Amazon customers report using it as an information provider, and over 40% as a speaker for listening to streaming audio. Alexa Now Has Over 10,000 Skills Available. These skills have allowed Echo devices to become the hub or the operating system of the "smart homes". Amazon is seeking to leverage this position of Echo as the"hub" of the house to drive customers to its eCommerce portal.
Amazon.com Inc is building an ecosystem based on Alexa.
Amazon had an unexpected hit in its Echo line of devices. But more than the device itself, it is the digital assistant, Alexa, running these devices, which is more valuable to Amazon. The sales of Echo devices per se is not likely to make much difference to Amazon Inc's top line for the next few quarters. And the eCommerce giant might be losing money on every device sold. However, that might not be a cause of worry for Amazon right now.
Amazon is not looking to make money by selling these devices. Rather, the company is using these devices and it's Alexa digital assistant to drive customers to its eCommerce portal. Every Echo is a customer who is more likely to spend more on books, groceries, music, and movies. Every Alexa user is a potential customer for Amazon.com with much higher consumer lifetime value than the existing customer base. Alexa users are likely to be much more frequent buyers on Amazon.com than even the regular prime subscribers. It is for this reason that Amazon is partnering with the likes of Ford and LG to create an ecosystem based on Alexa.
$10 billion revenue opportunity for Amazon Inc
In a recent report on Voice-Activated Internet (VAI) players, RBC Capital Markets’ analysts Mark Mahaney and Jim Shaughnessy argued that VAI represents a significant opportunity for Amazon.com Inc over the long term. In their survey on Alexa devices, they found brand awareness more than doubling in last six months, with device ownership, up from 5% to 13%. According to them, more than 50% Alexa owners use their Alexa device on a daily basis. More importantly, 17% use Echo line of devices to place Amazon orders. RBC expects Alexa based devices to contribute over $10 billion to Amazon.com Inc's revenue by 2020.
Rising competition, but Alexa still has a strong lead.
While Amazon.com Inc has a strong lead in the smart speaker segment, Google's Home is catching up. In their report, RBC analysts said that Google Home is enjoying much more traction with customers than previously expected. To quote them, "While we previously stated our belief that Amazon Alexa devices were outselling Google Home devices 10-to-1, our survey results indicate Google Home’s awareness and installed base could be much closer to Alexa – with a brand awareness in the U.S. 80% that of Alexa and an installed base that may be close to a third that of Alexa". However, they still believe that Google has a lot of catching up to do. Alexa powered devices like Echo will be dominant players in this industry, for now, giving Amazon.com, Inc an edge.
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