Here’s Why Amazon’s Focus on “Echo” Is Justified

+13.47%
Upside
180
Market
205
Trefis
AMZN: Amazon logo
AMZN
Amazon

Since it was launched in late 2014, Amazon‘s (NASDAQ:AMZN) home speaker/virtual assistance device “Echo” has been ranking consistently in the best sellers list. The company has been constantly adding new features to the device and integrating it with other products and services to make the personal assistant increasingly useful. Recently, Amazon launched an updated version of Echo Dot (the cheaper variant of Echo) that costs $50 – nearly half the price of the original. While the speaker of this version does not output as much sound as the larger Echo, it gives the user access to all 3,000 capabilities of Amazon’s virtual assistant “Alexa”. A cheaper version is an indication that Amazon wants to rapidly increase the usage of Echo. One of the reasons for this focus could be the fact that Echo owners spend more on its e commerce site, thus driving overall revenues for Amazon. We believe that the focus on Echo is definitely working in Amazon’s favor. As the company integrates its virtual assistant with additional  products and services, it will increase Echo’s dominance in this market. It will also work as a catalyst to drive revenues on Amazon’s e-commerce website.

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Number Of Purchases, Overall Spend Higher By Echo Owners

According to a study by the NPD Group’s Checkout Tracking service (as reported by TechCrunch), Echo owners spent around 10% more on Amazon after they bought the smart speaker. There was also a 6% increase in overall number of purchases made by Echo owners on Amazon.com, compared to the number before they purchased Echo. The study also revealed that 50% of the online spending by Echo owners happens on Amazon’s e-commerce site (after they purchased Echo). We believe Amazon’s strategy to get users hooked to its devices (Kindle, Echo) by providing leading features and affordable price points works well in its favor. These devices can be instrumental in driving sales at Amazon.com and giving it a competitive edge.  According to our estimates, General Merchandise is the most valuable division for Amazon, accounting for more than 50% of its valuation. We expect Amazon’s U.S. Electronics and general merchandise (EGM) market share to increase from around 16% in 2016 to nearly 21% by the end of our forecast period.

If Amazon’s market share in the U.S. EGM market increases to nearly 26% by the end of our forecast period, there can be a 10% upside to our price estimate.

While some experts believe that Echo independently cannot be a growth driver for Amazon, we believe its ability to hook users to Amazon’s ecosystem (including e-commerce) can contribute to the company’s growth significantly. It is also likely that with the affordable Echo Dot , an increasing number of users will start relying on Amazon’s virtual assistant. The company can thus become a dominant player in this market and drive revenues in the longer term. In any case, Amazon’s focus on Echo is the right strategy, as it works a catalyst to drive e-commerce revenues for the company.

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