Thursday, August 25, 2022
And the buying spree continues for Amazon.com, Inc. (AMZN)!
Not even three weeks after announcing a $4 billion deal for healthcare provider, 1Life Healthcare (ONEM), the company bolstered its position in the automation industry by announcing a $1.7 billion deal for iRobot Corporation (IRBT).
Just like Amazon’s previous purchase, this one represents a major buy signal for us, too. But not for Amazon’s stock.
Let me explain…
Make no mistake, Amazon is no stranger to the connected device/smart home market.
Admittedly, the latest deal for iRobot and its ubiquitous Roomba vacuum represents Amazon’s biggest deal in the space to date.
As such, it underscores the company’s urgency to expand its dominance into more and more of our everyday lives and homes.
It’s a wise growth strategy, by the way.
Per the latest market research, the global smart home market is expected to expand nearly 30% per year to top $500 billion by 2030.
Here’s the thing: no matter how many acquisitions Amazon makes in the space, it’s never going to generate a needle-moving amount of profit for the $1.4 trillion market cap company.
Therefore, while Amazon’s latest purchase represents an undeniably bullish buy signal for us about this trend, Amazon itself represents a terrible investment to profit from the trend.
As I’ve told you before, Amazon is not a hardware company. And never will be.
Case in point: It doesn’t even separate out device sales in its financial reporting, a clear indication that it’s inconsequential.
To be fair, when the company first unveiled its Alexa-powered devices in 2014, enthusiasm abounded over the revenue potential.
In fact, analysts predicted that the new business segment would generate as much as $19 billion in annual revenue by this year.
The reality? It’s nearly a decade later, and the company is generating maybe $2 billion from devices per year, based on my research.
That might sound meaningful. But considering that Amazon reported total revenue of $486 billion in the last 12 months, it’s irrelevant.
What if we add in iRobot’s trailing 12-month revenue of almost $1.5 billion? Still irrelevant, as we’re talking about hardware sales accounting for less than 1% of Amazon’s business.
Add it up and hardware is never going to move the needle for Amazon. Even the most innovative hardware like robots. But it can move the needle for us!
All we have to do is buy companies that give us direct exposure to the booming $50 billion global robotics and automation trend and the broader $130 billion global smart home automation market.
This includes pure-play companies that generate the majority of their revenue from the sale of robots that perform specific tasks. Like Intuitive Surgical, Inc. (ISRG), ReWalk Robotics (RWLK), and AeroVironment (AVAV), for instance.
It also includes firms that make the technologies (i.e., chips) that enable robots and connected devices. Like Ambarella, Inc. (AMBA), Trimble Navigation (TRMB), and Microchip Technology (MCHP), to name just a few.
Of course, given the enormity of this trend, no single technology or company is going to dominate it. So the most prudent and reliable way to profit from it remains a diversified approach, like the one offered by our “Trade of the Week.”
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Ahead of the tape,