Shares of Amazon.com closed above $1,000 for the first time ever on Friday June 2, 2017. Amazon’s stock ended the week at $1,006.73. Google-parent Alphabet Inc. also came close. It ended the week at $996.12. Both Amazon and Google are held in Macrovue’s 'Disruptive Technology' thematic portfolio. Amazon is up 34% year to date and Google has gained 25.7% (USD).
Here is our latest take on Amazon. A similar article was published in The Australian on Tuesday, May 30. Macrovue's 'Disruptive Technology' Portfolio, holding Amazon shares, has gained 32.5% in 2017.
Amazon: No Ordinary Retailer
Giant online retailer Amazon has announced it is coming to Australia. This has significant implications for Australian retailers, both the bricks and mortar variety and online. It will also affect Australian investors who have traditionally invested in the publicly traded “go to” names in retail such as Woolworths, Harvey Norman, JB Hi-Fi, and Wesfarmers. Arch disruptor Amazon has decimated the traditional retail space in the U.S. It’s unlikely to be any different in Australia. The old adage “sell the disruptee, buy the disruptor” makes sense here.
Amazon is a multinational e-commerce company, and the world's largest retail provider. In 2016 AMZN generated US$136 billion in revenues.
It has three distinct businesses:
- E-commerce (online retail)
- Amazon Web Services (AWS)
- Digital devices (Alexa / Echo) and media (Kindle and eBooks)
Amazon’s eCommerce business has grown at a 27% CAGR 2010-2016. In the more mature markets of the developed world, Amazon is expected to maintain its leading position through a combination of faster fulfilment and better customer service as well as its popular Prime subscription services which offers free expedited delivery, streaming and special offerings. Prime costs $US99.00 yearly and now has over 80 million subscribers world- wide.
Australians do not see the full- blown Amazon online offering but they will shortly. Click on the local Australian website and it’s mostly books, e readers etc. In the U.S and many other international markets it offers everything from consumer electronics, music, videos, home and garden supplies, groceries, beauty products, toys, sporting goods, automotive gear, clothing, and jewellery. U.S. customers can access a staggering 370 million items provided by Amazon or third party sellers with a click of a mouse or via their mobile phone.
Amazon Web Services (AWS) is the jewel in the crown. AWS is Amazon’s “cloud’ platform and provides what is called in the industry IaaS or “Infrastructure as a service” whereby hardware and most computing resources are hosted by a service provider off site. AWS is growing in revenues at 40% plus and has an operating margin of 25%. AWS is the leader in the public cloud with a 45% market share. Its competitors Microsoft and Google are a distant second and third respectively. It is estimated only 10% of potential workloads are in the cloud today so it is likely that the pace of cloud adoption will continue to accelerate.
Above all, Amazon remains a growth story in spite of its size (market capitalization $US464 billion). In its recent earnings release for 1Q 2017, AMZN generated revenue of $US35.71 billion up 23% Y/Y and ahead of analyst’s estimates and earnings per share of $US1.48, way ahead of estimates of $US1.13 per share and up 38% Y/Y. Upside drivers were North American retail and AWS which reported $US3.66 billion in revenue and 43% growth Y/Y. Retail subscription services, which is mostly Amazon Prime but includes a few other things, like music, hit $US1.94 billion, up 49% Y/Y.
Is There Still More Growth Ahead?
Absolutely. In 2010, Amazon had less than 1% of retail sales in the U.S. It now has close to 5% and by year end 2018 it will have well over 7%. Consider too, that Amazon’s US e-commerce market share reached 43% in 2016, and is growing. Three years ago it was only 25%. Analysts believe that Amazon will to continue to take share, growing gross merchandise volume or GMV at nearly double the rate of US e-commerce and will be over 50% of US e-commerce by 2019. The key drivers of AMZN’s future e-commerce share gains? Certainly the Prime ecosystem, massive selection and third-party seller growth, as well as outsized opportunities in large, underpenetrated categories (i.e., apparel, consumer package goods (CPG), and office supplies).
Amazon’s international expansion is also a growth engine. International accounted for over 30% of AMZN revenues in 2016 and it has a similar growth rate as the US business 20% plus. Through first mover advantage, AMZN has the top market share in the U.S., Germany, and the U.K. It leads the number two and three ranked players such as eBay and Alibaba by a considerable amount. In Japan, it is rank two behind Rakuten but not by much. In its most recent earnings release AMZN flagged successes in India (the world’s most chaotic retail market), the introduction of Prime in Mexico, and its intention to acquire Souq.com, a major e-commerce player in the Middle East. Amazon’s sophisticated fulfillment expertise (FBA or Fulfillment by Amazon) is its competitive advantage particularly in countries with poor infrastructure.
Amazon stock has performed strongly. AMZN is up 34% YTD and 40% over the past 12 months. At 50 X 2018 EPS, Amazon is certainly not cheap using traditional metrics but on a P.E. to Growth measure (favoured by growth investors like myself) of 1.4X it’s not unreasonable and at the lower end of its historical range. True growth stocks can and do command multiples of 2-2.5X. Investors who believe that Amazon’s dominance will continue and the high level of investments will pay off in the future shouldn’t hesitate to buy the stock.
There are of course macroeconomic risks. Amazon is a retailer and it depends on consumer spending which in turn is a function of the health of the economy.
AWS is a key driver of growth and profitability. Any loss of market share could dent the bottom line.
Amazon’s on-going investment spend could impact profit margins over time.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances. Past performance is not a reliable indicator of future performance.