Scale is a wonderful thing. Scale can make the difference between winning and losing. And, most important, scale doesn't depend on the Fed. In fact, it has nothing to do with the Fed even as it is instrumental in moving the averages higher.
What do I mean by scale? This one word might be the most important word in the business lexicon. It means that a company is big enough and powerful enough to control its own destiny. A company that scales, a company that has scale, is a company that can survive and thrive regardless of the environment.
This is a perfect day to talk about scale, because you are seeing the benefits play out in some of the biggest companies in their respective universes. It will help us immensely in explaining the term.
Today Amazon (AMZN) crossed the trillion dollar threshold. You can say the company is worth that much, because Jeff Bezos is brilliant. You can say it is worth a trillion dollars, because it created a national two-day special spending holiday, which happens next week, Amazon Prime Day, a spendathon for 100 million people.
I think that's wrong. I think it passed this magical, wonderful level because Amazon has scale, it is dominant because it is so big. It has leverage with every supplier, and it uses that leverage to help every customer creating an awesome moat. Scale is everything for Amazon, and it's more amazing than most pundits and cynics thought it could never scale. It would just lose money forever as it grew. Bezos knew otherwise. He knew Amazon could scale and that's why this company is worth a trillion dollars. Of course Bezos didn't just see how he could dominate retail. He figured out he could crush all of e-commerce by creating the wonder that is Amazon Web Services, which is responsible for so much of what you like about Amazon, whether it's the ability to get packages to my daughter in time for her birthday this weekend or whether it be the way that they prompt you to buy things that you want and get them to you seamlessly.
Amazon Web Services is growing at 40%, and it's is already one of the largest software companies in the world. When we had Andy Jassy, the chief executive of Amazon Web Services on recently, he talked endlessly about how his business has scaled to the point that it is dominant. That allows him to innovate and keep prices down to be the juggernaut that it is. I urge you to go back and look at that interview. It was mind-blowing.
Bezos knows the secret to maintaining scale is to keep his workforce happy, even as he works hard to make it so he can have a more efficient workforce, which can be interpreted as he wants to replace fragile people with indestructible robots. Maybe that's why he is committing $700 million to retraining workers on how to thrive in this new economy, whether they stay in Amazon or leave for other opportunities. It's a necessity to have good human capital in this new world, and Bezos gets that, too.
Who else has scale among the big cap companies we talk about all of the time? How about the silent trillionaire, Microsoft (MSTF) .
This morning Cowen put out a buy recommendation called "a framework for Microsoft's next $100 billion in revenues," something it expects can happen by fiscal year 2025. Most companies can never get to $1 billion in revenue. Here Cowen's talking about how Microsoft can almost double its current $122 billion in revenues in six years' time. I was astonished, until I read it. I think it's right. That's because Microsoft is going to rival Amazon with Azure, its own web services company. Microsoft's Chief Executive Officer Satya Nadella has quietly put together a powerhouse web services business that is rivaling and will soon surpass the Office -- as we think of Microsoft. In fact, Cowen says that Microsoft's commercial cloud business will be responsible for 90% of the incremental $100 billion.
Only Microsoft, currently, has the scale to compete with Amazon and as you can imagine there are many companies, including almost every large retailer, that are not anxious to support their mortal internet enemy. That, plus the need to have another company in the game to keep pricing down, allows Microsoft's Azure to keep scaling.
One of the most important things about scaling is that it keeps your suppliers in check. That's the chief reason why I have created a new acronym for the very few retailers that have scale.
You probably understand how dominant Amazon is. You probably do not understand how dominate Azure is because there 's no real business-to-consumer product and not Microsoft prime.
But you all know WATCH. How do these companies maintain scale at a time when brick-and-mortar stores seem to wilt by the day?
Simple? They innovate. They change their stripes they find ways to scale every day.
Let's go over them.
Walmart could have become Sears. The stores were dowdy and unpleasant. They didn't really have an online presence. They paid their people too little to keep them.
But Walmart changed all of that. It has a fantastic web business now and it will only get better now that Marc Lore is fully integrating Jet.com. It pays people more, holds on to them, and that's made their stores cleaner and brighter. It can negotiate prices with anyone it wants to because you can't afford to NOT sell into Walmart's channel. It is scale, personified.
We have covered the A, although it is hard to resist not talking about it more. I will show restraint.
The T is Target and I don't think people realize how much CEO Brian Cornell has done to re-invent this company. I visited an inner-city store the other day, one of many all over the country. I can tell you that with the combination of Shipt -- Target's brilliant delivery system -- and the fun, whimsical even, stores and great prices, the retailer is owning whole new metropolitan areas as well as the college crowd, with the small-form factor on-campus stores. Yes, they only have 30 million customers a week. Some may say that makes them too small to be in this group. I say it makes them the greatest opportunity, because they are growing like mad when others run in place. Do not underestimate Target's e-commerce business. It may be best in show, because it is scaling right now.
When you have 83 million people who pay to be a member of a buying club, you have an amazing business. Costco's my favorite club, even more than the Summit Elks and I am jealous that my wife's an executive member and I am only a plebe. I am a two-cart guy; the wife takes one, I take the other. I know that I am getting the lowest price on everything I buy. I have seen Zegna shirts there that cost less than what it costs actual merchants to buy. They are scaling magicians.
Finally there's Home Depot. Now, I didn't initially include them when I was noodling on my acronym and some wags say I just did it to make it WATCH instead of WACT, bit in reality the Despot had tremendous turns -- how quickly they sell merchandise and that's a dream come true for suppliers, so they give Home Depot great deals. Obviously if you are a tool or garden company and you don't sell into Home Depot you are dead. Nuff said.
If you want to be in the business of owning stocks, if you want to invest, you need to see which business can scale and which have the scale they need to get you, the customer, the lowest prices. That's what the two trillionaires, Amazon and Microsoft, do and it's what WATCH does. Now watch those exchange-traded fund demons take my acronym and create a security and profit from my hard work. They did it with FANG, trust me they will do it with WATCH.
Amazon and Home Depot are holdings in Jim Cramer's Action Alerts PLUS member club.