Buying Amazon back in 1997 when the shares sold for pennies each could have been an investing masterstroke. Under £600 invested at the right point in 1997 would have bought me Amazon shares now worth over a million pounds.
Lately, some investors have been getting excited about the AI opportunities for digital start-up RC365 (LSE: RCGH). Just as online shopping was an exciting new technology with large untapped potential in the late 1990s, some investors feel the same way about AI today. So could buying RC365 shares now be like dipping a toe into Amazon back in the day?
Addressable market
One similarity is the potentially huge end market. Amazon’s addressable market was already huge when it focused on selling items online. Since then, it has moved into additional business lines such as cloud hosting, increasing its total potential market.
Last year, the online giant reported revenues of over half a trillion dollars. Its market focus has helped the company build a mammoth business.
With an AI focus and Asian exposure, I also think the ultimate size of the market RC355 is going after could be huge.
Competitive advantage
But having a large potential market is not enough for a business to succeed. Indeed, in some ways it can actually turn out to be a disadvantage, as the size of the prize attracts lots of competitors.
What ultimately matters is whether a business is able to capture a big enough slice of that market with a model that enables it to make money.
In 1997, Amazon had revenues of $148m and over a million customers. By contrast, RC365 reported revenues in the first half of its current financial year of under a million pounds.
That could yet grow dramatically. Amazon’s 1997 revenues grew over ninefold compared to the prior year. But I am yet to see the sort of huge growth drivers for RC365 that propelled Amazon.
Another factor to consider is what competitive advantage RC365 may (or may not) have to help it overtake rivals in an AI land grab. Amazon built a strong brand, backend infrastructure and compelling price proposition. RC365 could yet do the same – but I think it has a long way to go to achieve that.
Attractive valuation
While some growth shares perform incredibly, many end up fizzling out without trace. An early stage company can be expensive to build – and there is no guarantee the business will succeed.
That can make it difficult to value growth shares.
1997 saw sales revenues explode for Amazon. But losses ballooned too, to $28m.
Some investors still piled into Amazon back then, because although the company was lossmaking its competitive advantages and commercial momentum looked like an opportunity.
I am not attracted by the current valuation of RC365 shares. The market capitalisation of around £175m absolutely dwarves current revenues at the lossmaking business.
In theory, buying RC365 shares today could yet turn out to be like buying Amazon in 1997. But it could also turn out to be an awful investment.
For now, I have no plans to touch RC365 shares but will watch to see if the company can establish a firm competitive advantage and grow its revenues to much higher levels.
