Amazon: if you can't beat them, invest in them

Rather than bemoan the effect on incumbents, we are adopting the adage 'if you can't beat them, invest in them'. Despite its enormous reach, $352bn (£278bn) market capitalisation and extraordinary share price growth, Amazon still places little short-term emphasis on earnings per share (EPS), dividends or free cash flow. But we think the company's multi-sector dominance, enormous momentum and long-term exposure to structural trends should override concerns about traditional valuation metrics.

Indeed, Amazon's strategy has always eschewed short-term profits in favour of market share and entering new areas of business. Margins at publishers such as Bloomsbury (BMY) have long suffered due to Amazon's buying power and control over the ebooks market. In logistics, its huge investment in sorting hubs, freedom from delivery mandates and growing share of the profitable parcels market has left incumbents such as Deutsche Post (Ger:DPW) and Royal Mail (RMG) fighting an uphill battle. Such expertise in delivery has also presented an enormous challenge to grocers' attempts to build their own online delivery platforms, while outmanoeuvring the supply and distribution agreements struck by Ocado (OCDO).

Alongside this aggressive market growth sits innovation. A decade ago, Amazon executives realised the company could rent out spare capacity in its huge server farms to companies such as Netflix (US:NFLX) and Spotify. The division is now the dominant player in global cloud computing, and accounted for half of the company's $5.2bn operating profit in the first nine months of 2016.

Naturally, there are potential downsides to owning Amazon (aside from the price of one share, high even by US standards). Monopolisation - such as its estimated 90 per cent share of cloud hosting - has a habit of stoking the ire of market regulators. Continued expansion into global logistics - which Deutsche Bank has suggested could take the company into container shipping - might be checked by a world of higher tariffs and collapsing international trade deals. And, unarguably, Amazon's reliance on consumption means it would be impacted by an economic downturn, even if its performance in the last financial recession demonstrated shoppers' preference for low prices and convenience.

The company's momentum is also something few market commentators doubt. According to Bloomberg, 42 of the 46 analysts who cover the stock are buyers. And the average target price for the next 12 months of $940 is a 26 per cent premium to the current quote.