Abstract>>> According to EMarketer data, more than 40% of E-commerce sales in the United States are currently done on Amazon's platform, and the company still dominates the e-commerce field.
Amazon (AMZN), a global leader in e-commerce, cloud computing (AWS) and even entertainment, has launched products such as Prime Video and Kindle.
It's hard to believe that Amazon, founded in 1994, was an online book seller 28 years ago. Now, the company is one of the largest in the world, with a market capitalization of more than $1.5 trillion.
Fundamentally, Amazon's revenue and profits are growing. But it's worth noting that 10 to 20 years ago, Amazon wasn't the first choice for investors, and the company was heavily criticized for "not making money" and "waiting for profits to come." The beauty now is that as the company starts to go all out, those profits start rolling in. The pandemic has accelerated every aspect of Amazon's business, from promoting e-commerce and Prime membership to increasing the market's reliance on cloud computing.
Amazon still dominates the e-commerce space
According to a study by Emarketer, Amazon is the leading market leader in online shopping, accounting for more than 40 percent of online e-commerce sales in the United States. That advantage left Walmart (WMT) behind with a 7.1 percent share of U.S. e-commerce sales, while eBay lagged behind with a 4.3 percent share.
The difference between eBay and Amazon is surprising because the two companies were founded just a year apart and both drove e-commerce. But today, eBay's market capitalization is only $34.7 billion, while Amazon's market capitalization is more than $1.5 trillion.
Image source: EMarketer, Insider Intelligence
Due to factors such as the pandemic increasing the use of mobile devices, Amazon's U.S. e-commerce sales increased significantly in 2020 to 44.1%. And this trend continues into 2021, with its sales in North America growing strongly by 18%.
Although Amazon is a "universal store," the company is just getting started in areas where e-commerce penetration is low. As the chart below shows, Amazon has the lowest e-commerce penetration in areas such as food and beverage, at just 3.7 percent, but this provides a potential growth channel.
Image source: EMarketer
Amazon Fresh, Amazon's grocery division, which acquired Whole Foods in 2017, is now available in major U.S. cities and many major cities around the world, including London, Berlin, Milan, and more. They offer Amazon Prime members a surprising offer of free shipping for customers with orders over $40. So it's no surprise that Amazon Fresh is Amazon's fastest-growing segment in 2021 (revenue growth of 24.7 percent).
Compared with other categories, clothing is also a major area with low e-commerce penetration. But this is Amazon's second-fastest-growing sector in 2021, with a growth rate of 21.4 percent. The company even opened Amazon's first-ever clothing physical store called Amazon Style in Los Angeles. The store uses QR codes and machine learning algorithms to create tailored recommendations for customers. It's really convenient to do so, but that doesn't mean Amazon is a fashion company.
Prime is growing rapidly
Amazon Prime's membership ecosystem also continues to grow, with more than 200 million members worldwide, nearly 1 in the U.S. alone. 500 million Prime members, close to 50% of the total population.
Creating Amazon Prime was originally a risk, described by Bezos himself as a "buffet," and the risk was that "you're always going to meet someone who's going to eat a lot." However, now that Prime has reached such a large scale, there is no doubt that the benefits to consumers are enormous. In the U.S., Prime is priced at just $12.99 and can enjoy unlimited same-day delivery, Prime Video, Amazon music discounts, and even Kindle offers.
Amazon business model
Amazon operates under what former hedge fund manager Nick Sleep calls "Scale Economics Shared." Because of "economies of scale," many businesses save money while scaling up; however, few companies reinvest these savings back into helping customers.
As companies transfer their savings to customers, customers spend more and retention increases, which increases revenue, profits, and market share. Amazon has mastered this business model.
Economies of Scale Sharing Amazon (Author: Ben)
(Image: Nick Sleep Motivation 2 Invest)
Amazon leads the cloud market
Amazon Web Services (AWS) is the market leader in cloud computing, with a 33% global market share. It was followed by Microsoft Azure (MSFT) and Google Cloud (GOOG, GOOGL) with 21% and 7% share, respectively.
According to Statista, global cloud services revenue exceeded $50 billion for the first time in the fourth quarter of 2021, bringing the industry's full-year total revenue to $178 billion.
Image source: Statista
The cloud was the company's fastest-growing and most profitable segment, with revenue up 38 percent, from $13.5 billion in 2020 to $18.5 billion in 2021. That's about 74 percent of Amazon's profits, which is a surprisingly better business model overall due to its high margins (29 percent).
AWS also recently announced a partnership with NASDAQ to migrate financial markets to it, which will create the first ever cloud-based exchange. In addition, AWS is now a strategic cloud partner of Meta (FB), which owns Facebook, Instagram, and more. These big deals with established platform companies should provide some stability for Amazon's cloud profits.
Strong financial position
Amazon has provided some solid financial data for the full year of 2021, and here's a brief overview. Compared to $386.1 billion in 2020, the company's sales grew an incredible 22 percent in 2021 to $470 billion.
Source: Seeking Alpha
From the chart above, you can see a clear upward trend in revenue. Analysts estimate that Amazon's revenue will exceed $500 billion by 2022 and more than $600 billion by 2023.
Thanks to the cloud business, Amazon's profits are also accelerating, with net income up 57 percent from $21.3 billion in 2020 to $33.4 billion in 2021. From the chart below, you can see a significant increase in earnings per share for the fourth quarter of 2021.
Operating cash flow did fall by 30 percent, from $66.1 billion in 2020 to $46.3 billion, due to an increase in property and equipment purchased. However, the company does have an incredible $96 billion in cash and a current ratio of 1.14, which is okay for a company of this size.
Is Amazon undervalued?
To value Amazon stock, I used the discounted cash flow method.
I estimate revenue growth of 15% over the next 5 years, down from the previous 22%. Due to the growth of the company's higher-margin cloud business, I expect the margin to grow by 2.5%.
Amazon Stock Valuation (Author: Ben)
I also inserted an effective tax rate of 12.5% for companies, and even capitalized the R&D expenses of businesses for greater accuracy.
From this model, I get a fair value of $3747/share, which is currently trading at around $3000/share, so it is undervalued by 20%. This discount provides a margin of safety.
risk
Bezos's exit
There is no doubt that Amazon's founder, Jeff Bezos, is a key driver of the company's success.
Bezos created a unique culture, such as banning PowerPoint presentations and encouraging the writing of one-page memos to explain ideas. A key part of the culture that led to Amazon's apparent success, however, was his "experimental" style, in which he made a series of "bets" but not bets on the company.
Not all of these experiments and bets paid off, for example, the Fire Phone was a disaster. However, this culture led to the creation of Amazon Web Services, which was created earlier than traditional computing companies such as Microsoft. As mentioned above, AWS now accounts for 74% of the company's profits.
Bezos leaves Amazon
(Source: Sky News)
Bezos stepped down in July 2021, and the new CEO is Andy Jassy, who previously led AWS. While Jassy is a very smart and experienced guy, the departure of the founder can still have a negative impact or cause the company to become complacent in the future.
manage
Big tech companies are the target of antitrust regulation. The European Commission launched an antitrust investigation into Amazon in 2019, investigating the company's use of sensitive data from independent retailers. Then, in 2021, the attorney general of the District of Columbia filed another similar lawsuit.
Amazon is often criticized for the way it handles independent seller data and has been accused of disrupting competition. Third-party sellers on Amazon accuse the company of manipulating the prices at which they sell products. For example, if a seller lists an item at a lower price on their own website, Amazon can choose to "not highlight" their product because the price is not competitive. Independent sellers say this forces them to raise prices and is therefore controlled by Amazon.
Worker conditions
Amazon now has more than 1.6 million employees worldwide and faces a series of scandals and bad news about working conditions. These include monitoring warehouse employees through sensors and not allowing delivery drivers to go to the toilet. Of course, these scandals have damaged the company's image and reduced the likelihood that others will work for Amazon in the future, which could mean labor restrictions.
compete
Amazon is now competing with other companies on multiple fronts.
On the commercial side, Amazon has competitors such as Walmart (WMT), Costo and every global commercial store. In the cloud computing space, AWS is competing with Microsoft and Google. Amazon Prime Video is then competing with Netflix (NFLX) and Disney Plus (DIS). Meanwhile, Amazon Music is competing with Spotify (SPOT).
But the problem with being a "one-size-fits-all store" is that its business may lack the focus, innovation and flexibility of its competitors, which can be a problem.
epilogue
Needless to say, Amazon is a giant, a market leader in areas ranging from e-commerce to cloud computing. The company's size and culture provide a strong competitive advantage, which allows the company to make strategic bets and is now reaping rewards through huge profitability such as AWS. The Prime membership ecosystem is expected to increase customer "stickiness," which further enhances competitive advantage.
The company faces a range of headwinds, from a worker condition scandal to antitrust lawsuits, but it appears to handle it much better than other FANG stocks like Meta. Amazon is currently inherently undervalued and offers reasonable price (GARP) growth for long-term investors.