As Amazon's profit expansion opportunities in the e-commerce space are brought about by supply chain normalization and pandemic catalysis, which have not yet been digested by the market. And as AWS continues to scale and reinvest in its business, coupled with the recent announcement of stock splits and buyback programs, and improved disclosures in business units, Amazon is worth looking forward to in 2022.
Editor from Daria Nipot/iStock from Getty Pictures
Amazon (NASDAQ: AMZN) has a market capitalization of $1.7 trillion, and as a household name e-commerce brand, it needs no introduction. I put Amazon as my top big cap stock for 2022 and provide my SOTP valuation of the company below.
Investment arguments
Amazon is my top big cap stock for 2022 for the following reasons:
1. We may see a meaningful expansion in profit margins in e-commerce businesses due to rising prime prices, as well as normalizing supply chains and fuel costs.
2. Amazon's international e-commerce business offers multiple options that could lead to a huge potential market and achieve long-term growth in the future.
3. AWS continues to have a strong industry tailwind due to the digital transformation of its business and continues to reinvest and scale its business by leveraging its industry leadership.
4. As the world's top advertisers see ads on Amazon providing value-added services to sellers, companies, and authors, ads are gaining traction and grabbing market share, especially in the area of e-commerce digital marketing wallets.
5. Amazon is becoming increasingly investor-friendly, with recent stock buybacks, stock splits, and disclosures from business units all increasing.
6. Amazon's short-term investments in fulfillment, logistics, and data centers continue to lay the foundation for long-term growth as investment spending enables companies to remain relevant in an ever-changing world.
Based on my SOTP valuation of Amazon, I came up with Amazon's target price of $4850, which means a 44% increase from current levels.
Amazon's revenue mix
To better understand Amazon's business model, I've added Amazon's revenue portfolio in the following quarterly report. Amazon's core business can be broken down into e-commerce, Amazon Web Services (AWS), and advertising services.
In the e-commerce space, the retail subscription services segment includes revenue generated by major members that provide Amazon with recurring revenue from e-commerce. AWS's revenue comes from the sale of its global computers, storage, databases, and other business services.
In the area of advertising services, this includes revenue from providing advertising services to sellers, suppliers, publishers, authors and others through sponsored advertising, display advertising and video advertising.
Amazon's Revenue Portfolio (Author Generated)
E-commerce
Amazon announced a price increase in amazon prime in the U.S., with monthly fees rising from $12.99 to $14.99 and annual membership fees rising from $119 to $139, up 15% and 17%, respectively.
On the negative side, however, Amazon is affected by rising fuel costs, as rising fuel costs affect the cost of shipping e-commerce goods to customers. In 2021, Amazon has $77 billion in shipping costs, which include sorting and logistics distribution and shipping costs. Based on an analysis of the potential growth in shipping costs and the impact on Amazon, it was found that every additional 500 basis points of shipping cost growth resulted in an additional $800 million to $1.5 billion in shipping expenses.
However, management did comment that the rise in shipping costs was a factor in the increase in amazon U.S. membership prices. I think we are currently seeing supply chain problems due to the pandemic, shipping and transportation costs, and fuel costs above normal levels. By this logic, as we move towards the post-pandemic era, this transportation cost will normalize when supply chain backlogs and problems are finally resolved.
So it makes me more optimistic that given the increase in Amazon Prime membership in the short term, fuel costs will normalize again when supply chain conditions improve. My point is that the profit expansion opportunities in Amazon's e-commerce division, normalized as a challenge to supply chains and epidemics, have not yet entered the market, which could bring up profits for Amazon.
In addition, the market has been worried about the deceleration of 1h22, due to the high base of e-commerce, the potential revenue of e-commerce has accelerated again, with easier growth plans and next-day/same-day delivery of elements
In fiscal 2021, international e-commerce accounted for 27% of Amazon's total sales and is growing at a rate of 22%, higher than the 18% growth rate of the North American market. As Amazon looks for growth opportunities, its workforce and logistics capabilities in Europe are doubling down.
Amazon also wants to grow in international markets such as Latin America and India, both of which will face fierce competition, especially in India. In India, Amazon's competitors include MercadoLibre and Walmart's e-commerce business Flipkart in India. With the acquisition Souq.com, Amazon also began to expand into the Middle East. The company has also expanded into Southeast Asian markets such as Singapore.
I believe that international e-commerce has long-term growth potential and will add to the list of opportunities to rise in the coming years.
As Amazon continues to reinvest in its business, I think in the coming years we will continue to see higher returns from past efforts to improve fulfillment and improve next-day or same-day deliveries, such as Amazon Prime Now, which will further solidify Amazon's leading position in the e-commerce industry.
As mentioned earlier, we can see margin expansion as Amazon expands globally, supply chain challenges and fuel costs fall, and international e-commerce revenue rises further.
AWS performance is superior
In the fourth quarter, we continued to see a strong performance from AWS, which grew 40% to $17.8 billion, compared to Wall Street's expectation of $17.3 billion. In my opinion, this is one of Amazon's strong market segments that will drive stock performance beyond in the future. This is not only because of the good industry dynamics in the cloud computing space, but also because Amazon has a unique competitive advantage in this space.
I'm confident that we will continue to see AWS excel as the need for digital transformation accelerates and the adoption of public clouds continues to increase. This, in turn, is driven by structural changes in business and consumer behavior after the 2019 pandemic, and the long-term prospects for cloud adoption remain strong.
As a result, I expect we will continue to see strong digital transformation-related spending. The cloud computing market could be worth $69 billion by 2025, which means it will continue to grow at a rate of 15% per year and will continue to raise its cost rate to reach a net worth of nearly $800 billion by 2025.
In addition, we continue to see a healthy backlog of AWS growing, with total commitments to future services up 48% year-over-year, compared to a 48% year-over-year increase in the second quarter of 2021. As we move into 2022, this backlog will flow to reported revenues, leading to higher revenue estimates.
The chart below shows the growth in AWS revenue and revenue, and really shows me the power of continuing to invest in a fast-growing business to scale up, which will have a compounding effect on future businesses. As a result, AWS's continued success comes from its ongoing efforts to improve its unique competitive advantage, scale it, and invest more deeply in the cloud computing business.
As it grew in size, AWS achieved exponential growth in both revenue and revenue
So I'm confident in Amazon's growth in cloud computing, and given its impressive customer list and strong demand, its execution remains reliable. I think we will continue to see the cloud computing industry lead in terms of revenue and profit margins.
ad
Amazon launched campaigns that provide greater transparency for Amazon's advertising business. This improved disclosure and communication with investors helps investors better understand the underlying business, helping to generate more accurate forecasts. Ad sales increased 32% year-over-year.
I've done several channel surveys with the digital advertising industry that show amazon's advertising business is growing. I've heard from the industry that Amazon continues to have market share in ecommerce digital advertising budgets.
While Amazon is seen in most cases as a funnel channel that responds directly to advertisers, my conversations with industry insiders have shown that many advertisers started focusing more on funnel ads last holiday season to attract new consumers and boost brand/product awareness before Black Friday.
A survey conducted by Citi found that the world's top advertiser reviews said Amazon Advertising was innovating rapidly, rolling out more than 40 new features and self-service features in the last quarter and making it easier for sellers, companies and authors to grow their businesses by helping customers discover their products.
I also think Amazon could benefit from the post-IDFA world. This is due to the fact that the company has access to massive 1p depth consumer data, such as detailed purchase histories of customers. This will translate into sustainable revenue growth for Amazon's advertising division.
Also, the last point is, I think we can see Amazon get its share from traditional TV advertisers as they redirect their ad spend to the top streaming platforms in 2022.
Increasingly friendly to shareholders
On March 9, 2022, Amazon announced that its board of directors had approved a 20-to-1 stock split and approved a repurchase program of up to $10 billion that had no expiration date. It was the first split since 1999 and the fourth since Amazon's 1997 initial public offering.
As a result of the stock split, at the end of May 27, 2022, each shareholder holding Amazon shares held every 19 shares of Amazon stock, which is expected to be reflected around June 3, 2022.
While a stock split doesn't technically change the company's fundamentals, a stock split has long been seen as a move in favor of shareholders to make it easier for more investors to take ownership of the stock, especially for Amazon. That's because Amazon is priced at more than $3,000 per share, which is one of the top 5 highest stocks in the United States.
As the chart below shows, returns are generally higher relative to the S&P 500 as other tech giants take shareholder-friendly stock splits.
Relative to the S&P 500, the impact of stock splits on the stock prices of large tech companies
As for share repurchase authorizations, Amazon previously received $5 billion in share repurchase authorizations in 2016, and based on previous plans, it has already repurchased $2.12 billion of Amazon shares. This means that Amazon has repurchased about $800 million of incremental shares, about $1.3 billion from the time of the buyback to February 2, 2022.
In my opinion, we're starting to see some shifts in Amazon becoming more shareholder-friendly, as evidenced by the recent stock splits and buybacks. I think this is definitely positive, probably due to the new CEO Andy Lee. Jassy changed his position, having succeeded Jeff Thompson late last year. Bezos.
Recent investments
To compete with other online retailers, Amazon continues to invest in logistics and logistics capabilities. As the chart below shows, during the 2020 flu pandemic, Amazon increased capital expenditures as a percentage of sales to 9 percent, while other companies are scaling back their investments.
Amazon's capital expenditures account for % of sales (UBS)
In terms of investment amount, Amazon spends more than three times as much as Walmart, the second largest retailer in terms of capital expenditure in 2020.
Amazon's 2020 capital expenditures (in USD)
In addition, in order to compete with competitors in the logistics and logistics space, such as FedEx (FDX) and United Parcel (UPS), Amazon's results for the first quarter of 2021 show that Amazon has increased its capital expenditure by a crazy 80% over the past 12 months as it continues to invest heavily in logistics and logistics. That means Amazon is investing heavily in building more warehouses and increasing the number of planes, trucks and vans.
This increase in capital expenditure helps achieve Amazon's goal of managing its own fulfillment and improving the fulfillment process, thereby reducing reliance on third parties such as UPS. In addition, on the demand side, these capital expenditures are necessary to catch up with the huge demand for e-commerce from the pandemic.
Amazon announced that AWS will spend $2 billion to build and operate data centers in the UK. As mentioned earlier, AWS investments will go a long way in developing and maintaining AWS's global leadership in cloud computing.
In my opinion, these short-term investments in the business are necessary for the long-term growth of the business because these businesses require scale. While Amazon may come at a lower margin in the short term, I think this will give Amazon a competitive edge in the future over its peers who are slow to invest in the future in a changing world.
compete
Amazon is in an enviable position in the e-commerce space, especially in the United States. In 2021, it is the largest player in the market, with 41% of the market share, while the second largest player is negligible compared to its size.
Market share of U.S. e-commerce retailers
In the cloud computing space, Amazon still maintains its position as the number one in the world despite competition from large technology companies. As of the fourth quarter of 2011, Microsoft had a global market share of 33%, Microsoft Azure had a market share of nearly 22%, and Google Cloud had a 9% market share.
Global Cloud Infrastructure Vendor Market Share (Statista)
Valuation
Amazon's share price is 50.6 x/36.8 x 2022F/2023F p/e Free cash flow grew to $27 billion in 2022f and $45 billion in 2023f, which means free cash flow yields of 1.6% and 2.6%, respectively.
Amazon's SOTP Valuation (Author Generated)
risk
While I believe Amazon has a unique competitive advantage and the benefits of the flywheel effect, it's not a monopoly, and there's competition in both e-commerce and cloud computing, which could affect future revenue and profit growth, and may also affect which areas Amazon should transact in. As mentioned earlier, competitors in the e-commerce space include Walmart (WMT), eBay (eBay). In the cloud computing space, its competitors include Microsoft and Google.
Businesses with higher profit margins lack scale expansion
With Amazon's advertising, cloud computing, third-party sales, and subscription businesses dominating higher profit margins in the business, this will have a substantial impact on Amazon's bottom line if it can't successfully scale up.
Unexpected investment
While management has not yet announced any unexpected investments, if there are unexpected investments in many of the projects it focuses on, this will definitely affect my margin assumptions and create resistance to gross and operating margins.
Fluctuations in the macroeconomic environment
As we saw in early 2022, when investors' risk appetite declines, it could affect demand for growth stocks like Amazon. In addition, if consumer or business demand decreases, Amazon's e-commerce and cloud computing business will be affected by changes in the macroeconomic environment. For example, as a driver of online retail, and a business model that earns fees through online retail transactions, a slowdown in consumer spending could put pressure on its e-commerce business.
summary
I believe that Amazon is the top big-cap idea for 2022, and Amazon is at the heart of what investors have held for a long time. Amazon faces some long-term drivers, such as e-commerce, cloud computing, digital advertising, streaming, AI-driven computing.
Beyond that, we're likely to see continued industry leadership in e-commerce and cloud computing as it continues to invest heavily in both industries. I think when supply chains and fuel costs are normalized, we're going to see meaningful expansion in profit margins, growth in the international e-commerce market, and growth in advertising revenue.
In addition, in addition to future margin growth, we may also see Amazon maintain more than 15% free cash flow growth in the coming years.
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