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Alexa: how big could Amazon get?

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Written by: Danielle Levy
26/04/2019
As Amazon reports record first-quarter profit, one investor in the business – Scottish Mortgage investment trust – provides insights into the tech giant after meeting with chief executive Jeff Bezos.

It’s tough for many of us to ignore the impact that Amazon has on our lives: from using the ‘Alexa’ smart speakers to ordering a last minute present on your phone via Amazon marketplace.

Therefore it may come as no surprise that Amazon has just posted its fourth successive quarter of record profit. During the first quarter of 2019, the tech giant doubled profits to $3.6bn (£2.8bn) when compared to the same period last year. Sales increased 17% to $59.7bn and the company expects it can continue to grow its revenue between 13% and 20% during the second quarter.

Looking ahead, one investor in Amazon – Scottish Mortgage Investment Trust – highlights a number of growth areas for the business. Scottish Mortgage is a listed fund that invests in growth companies across the globe and has long had exposure to the tech company.

Tom Slater, who co-manages the investment trust alongside James Anderson, was keen to share some insights after a recent meeting with Amazon’s chief executive Jeff Bezos in Seattle.

Alexa’s potential

Although analysis suggests that the smart speaker market is maturing and strong revenue growth may now have passed for Amazon’s Alexa product, Slater disagrees.

“It is exactly this narrow kind of thinking that has led Wall Street to underestimate Amazon for the past two decades. We would not disagree that the smart speaker market is no longer of much interest. But far more importantly, Amazon has laid the foundations of a new era of computing,” he said.

In particular, he notes that Alexa’s success has created an expectation that we should be able to speak to our devices – and the impact of this cannot be underestimated.

As the Alexa product becomes more widespread, he suspects that advertisers will shift their attention to voice over text search.

“Growth in ad revenues from Amazon’s e-commerce business show this area becoming a lucrative income stream for the company. Product advertisers already realise the importance of being one of Alexa’s coveted answers,” he added.

Looking ahead, he says Amazon needs to improve its natural language processing and ability to give results based on user preferences and circumstances; connect Alexa to more devices; and strike further partnership deals.

“Think of the potential: if this technology becomes our default household assistant and the means by which we organise our households, then Amazon has just taken an important step closer to influencing the way we decide to spend our money,” Slater explained.

He adds that it is therefore no surprise that Bezos is so excited about Alexa’s potential growth in the future.

The rise and rise of ‘the Cloud’

Amazon Web Services, Amazon’s market-leading cloud computing business, represents another area that Slater is excited about.

“In the eyes of Jeff Bezos, the likely impact of ‘the Cloud’ is still not fully understood. He sees it as a fundamental change in computing that will play out over decades,” the fund manager said.

Bezos is particularly excited because the transition to the Cloud amongst businesses across the globe is still in its infancy.

What’s more, streaming companies such as Netflix and Spotify host their platforms in the Cloud and use artificial intelligence (AI) tools to recommend films and songs to customers. Likewise, recommendations on Amazon’s website are generated using machine learning algorithms.

“There is potential that as these gradually improve, it may become more economical and profitable for Amazon to send products before the user has requested them,” explained Slater – adding that this is only possible because of the Cloud.

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