NASDAQ: AMZN
COMPANY DESCRIPTION
Founded
in –1994 | Current Market Cap – 794.09 Billion USD
Amazon.com,
Inc. engages in the provision of online retail shopping services. It operates
through the following segments: North America, International, and Amazon Web
Services (AWS). The North America segment includes retail sales of consumer
products and subscriptions through North America-focused websites such as
www.amazon.com and www.amazon.ca. The International segment offers retail sales
of consumer products and subscriptions through internationally-focused
websites. The Amazon Web Services segment involves in the global sales of
compute, storage, database, and AWS service offerings for start-ups,
enterprises, government agencies, and academic institutions. The company was
founded by Jeffrey P. Bezos in July 1994 and is
headquartered in Seattle, WA. Number of employees are 566 000 people.
RECOMMENDATION
We rate Amazon.com, Inc a Buy at USD 1590
for a target of USD 1800 in one month.
Below are the basic reasons to
recommend this stock as a Buy.
·
Amazon.com is one of the largest e-commerce
companies in the world. Although the primary product line was books at first,
the company rapidly diversified into a host of other product categories. The
current focus is on building video content, primarily for Prime subscribers
because the growth prospects in that market are considerable. Product
selection, a superior user experience, bargains and customer feedback have
helped the company build a strong position for itself in the fast-growing
ecommerce market. The growth of the e-commerce industry with consumers
increasingly buying things online has proved to be favorable for the company.
While the big brands may build their own online stores over time, a platform
like Amazon allows discovery by new buyers. Smaller players are far more
dependent on Amazon as they don’t have the resources that Amazon has to invest
in technology and fulfilment to generate the kind of reach that Amazon can
deliver. Moreover, considering opportunities in international markets, the
company’s high growth rates are likely to be sustained over the next few years.
·
Amazon keeps its retail business very hard to
beat on price, choice, and convenience with the help of a solid loyalty system
in Prime and its FBA strategy. The company continues to push advantages
exclusively to Prime members, thus encouraging them to spend more on Amazon.
The current focus is on building video content, primarily for Prime subscribers
because the growth prospects in the market are considerable. Prime members are
much more loyal and spend double the amount spent by non-Prime members.
·
Amazon’s strategy of gradually merging online
and offline retail looks promising. It will not only reshape the retail landscape
but also help it fend off competition, if it could manage a first mover
advantage. It has added online and offline features to its bookstores and is
going the same way with innovations such as drive-in-grocery delivery service
(AmazonFresh Pickup - order groceries online and collect them from a store
nearby) and “cashier-less” stores (Amazon Go – the company’s first brick-and
mortar grocery store). We expect online retail sales to decelerate while the
overall retail market still holds a lot of potential. So, moves like these will
help Amazon tap many customers who prefer to shop offline, while not doing away
with the online business.
·
Amazon is the leading provider of cloud
infrastructure as a service to enterprise customers. The expanding customer
base of Amazon Web Services (AWS) driven by its strengthening cloud offerings
will continue to aid Amazon's dominance in the global cloud space. Even more
encouraging is the fact that AWS generates much stronger margins than the
traditional retail business, which should remain a positive for the company’s
profitability as it continues to grow in the mix. AWS is gaining momentum with
customers including Adobe, GE Oil & Gas, Kellogg’s, Airbnb, Hilips,
Pinterest, Spotify, Tata Motors, Unilever, McDonalds, BMW, British Gas, Capital
One, US Department of State and USDA Food and Nutrition Service.
·
Amazon is pushing well with its device’s
strategy. Alexa powered Echo devices are going great guns and help the company
sell products and services. Artificial intelligence (AI) driven Alexa has
already been integrated into a host of everyday devices for the digital home,
which has converted the nascent smart home market into a potential area of
growth in a very short time. Currently, Alexa is equipped with more than 25,000
of skills and can connect to any stream of business. It’s an important method
of collecting householder information, since Alexa is used to listen to
commands and store everything that it hears in the cloud the company is racing
to build an ecosystem around Alexa and it’s safe to say that it has taken an
early lead over Google's smart assistant and Microsoft's Cortana.
·
Amazon is gradually choosing the buy option over
build, which, along with the other positives, ensures that the company
generates revenues right way without wasting any time in building its own
infrastructure. In Jul 2017, the company completed the acquisition of a
Dubai-based e-commerce giant, Souq.com. The deal will help Amazon to establish
a presence in countries like Egypt, Saudi Arabia, and the UAE markets like
Egypt, Saudi Arabia, and the UAE. Amazon’s retail market share is still
relatively small in these markets, but there is a good possibility of an
increase in the next few years. If this happens, the company will see
additional several billion dollars a year in revenues. In August, the company
closed acquisition of natural and organic foods supermarket, Whole Foods Market
for $13.7 billion. Through this acquisition, the company is targeting the
considerably large customer base that still prefers to shop at physical stores.
This is Amazon’s way of tackling mounting competition and slow growth in the
e-commerce space. This year, Amazon has also acquired Body Labs, a startup that
develops AI, computer vision and body-modelling based 3D body shapes and motion
for various industries. It also acquired GameSparks to spruce up its gaming
capabilities.
·
The International segment balances out the
domestic business. It has been generating double-digit year-over-year growth
right through the recession and thereafter. Amazon has been introducing several
new products for international markets that are expected to drive demand. It is
also building fulfillment centers to cater to the increase in demand. The
company has been expanding Prime internationally to strengthen its foothold in
international markets and create a launch pad for its other business. We expect
the growing international market to continue to drive sales over the long term,
as opportunities abound.
·
Amazon has accelerated its push in the logistics
business. The company is reportedly working on a new delivery service called
“Seller Flex”, where it itself will pick up packages from third-party merchant
warehouses and deliver them to customers, a function currently handled by its
long-time partners United Parcel Service and FedEx. The company is increasing
its own control and reducing reliance on courier partners and third-party
merchants in the process of delivering products. Earlier the company announced
that it will build its first air cargo hub at Cincinnati/Northern Kentucky
International Airport. Moves like these underscore Amazon’s accelerated push
toward building its own in-house shipping and logistics service to support the
complex network of fulfillment, logistics and delivery systems that it has been
building. Amazon has been investing heavily in fulfillment centers, trucks and
containers and its Fulfillment by Amazon (FBA) service has been doing well. It
has bought some planes and has self-designed drones in the works.
·
Amazon.com generates strong cash flows. The
nature of the retail business does not leave too much room for differentiation,
so price competition is intense. However, despite the seasonality in its
business and the resultant fluctuation in gross margins, operating margins do
not move around that much. This is because of a relatively flexible operating
cost structure, which allows the company to curtail technology and content
expenses when margins are impacted by discounts and promotions to boost sales
during the holiday season. Given these factors, revenue growth and the
expansion of business are the primary drivers of cash flows. However,
management has been investing in the business aggressively mostly transferring
gross profit gains into fulfillment, technology, content and acquisitions. We
consider these investments essential in driving the next growth phase.
Moreover, these investments have increased automation in the fulfillment
centers and led to huge volumes of quality content, which along with strong
growth in third party units are positives for gross margins. The increased
investment on the AWS side, despite being a drag on profits initially, has paid
off big time.
EARNINGS
Amazon reported third-quarter 2018
earnings of $5.75 per share, crushing the Consensus Estimate by $2.46 (74.8%).
The company had reported earnings of 52 cents in the year-ago quarter.
Further, net sales of $56.58
billion missed the Consensus Estimate of $57.07 billion. However, the figure
surged 29.3% year over year and was within management’s guided range of
$54-$57.5 billion.
North America revenues (60.7% of
sales) jumped 34.9% from the year-ago quarter to $34.35 billion. International
revenues (27.5% of sales) increased 13.4% to $15.55 billion.
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