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Investment Overview for Amazon (NASDAQ:AMZN)
Below are key drivers of Amazon's value that present opportunities for upside or downside to the current Trefis price estimate for Amazon:
Electronics & General Merchandise
- Amazon's Share of Int'l Online Electronics & Gen. Merchandise Sales: We currently forecast the Amazon's market share in this space to increase from about 4% in 2012 to 7% by the end of the Trefis forecast period. However, given the intense competition in the space, there could be a 10% downside to the Trefis price estimate if its market share increased to only 5%.
Conversely, if it makes the right moves and manages to increase its market share to 8%, there could be a 10% upside to its Trefis price estimate.
- Electronics & Gen. Merchandise EBITDA Margin : We currently forecast Amazon's EBITDA margin to decrease marginally from about 7.7% in 2012 to nearly 6.6% by the end of the Trefis forecast period. There could be a 10% upside to the Trefis price estimate if margins were to increase to 7%. On the other hand, there could be a 10% downside to the Trefis price estimate if margins continued falling, reaching 5.5% by the end of the Trefis forecast period.
Books, DVDs & Music
- Amazon Share of Int'l Online Books, DVDs & Music Sales: We currently forecast that Amazon's market share in the books, music and DVDs segment will increase from 25% in 2012 to around 28% by the end of the forecast period. There could be 3% upside to the Trefis price estimate if it instead increases to 36%, and a 3% downside if it declines to 20%. Amazon faces competition from the likes of Apple, Barnes & Noble etc. in this market.
For additional details, select a driver above or select a division from the interactive Trefis split for Amazon at the top of the page.
Amazon is an online retailer which sells books, DVDs, music, games, apparel, and other merchandise to consumers in the US, Canada, the United Kingdom, Germany, France, China, and Japan. The company also provides web services, such as cloud computing and online storage to web sites and web developers.
International Growth to Outpace Domestic
International sales for Amazon are expected to grow faster than US sales. Online penetration (online retail sales as a percentage of total retail sales) and Amazon's market share within both the "Books, DVDs & Music" category and EGM is currently lower internationally than in the US. Rising online penetration will drive much of the international growth over the forecast period.
Gross Margins improve in 2012 as Amazon pushes the web services and its marketplace gains popularity among third party sellers.
In 2012, Amazon's margins have improved due to its aggressive push for growth in the web services business which commands a high margin. Also, the growing popularity of its marketplace among the third party sellers helped improve the overall margins. Third party seller contribute about a third of all units sold and Amazon commands close to 100% margin on these sales as most of the shipment is handled by the sellers themselves. that saw its shipping and marketing costs increase. We believe that margins will remain under pressure in the mid-term as Amazon continues executing its growth plans, but will recover over the long-term. The launch of the new Kindle Fire range also contributed to margin pressure.
Within US, EGM to outpace Media growth by nearly 2x for Amazon
In the US, EGM sales for Amazon are expected to grow at nearly 2x the rate of Media Sales (20% vs. 10%). The primary reasons include:
- Online penetration of media--especially books--is much higher than that for EGM.
- Amazon has a higher share of online media sales currently.
International Growth Favors EGM
Although international EGM sales for Amazon are expected to grow faster than Books, DVDs & Music sales, the growth differential is expected to be narrower than that for the US. The primary reason is lower online penetration of media outside the US, as people out of the US are not yet used to buying books online.
Trefis Forecast Rationale for Amazon Share of US Online Books, DVDs & Music Sales
This represents Amazon's market share of the overall online spending on Books, DVDs & Music in the US.
Amazon remains the best consumer experience on the web, which should keep it in good position to gain additional market share. Given that books were the genesis of Amazon's business model, it holds a very high market share here. Amazon's share of online media sales (books, DVDs, and music) in the US stood at 35% in 2012--an increase from 5 percentage points from 2007 2006. However, we still see potential for continued--though moderate--share gains.
We considered the following factors for our forecast:
Back to Company Overview
- Addition of new product segments
- Online streaming service was introduced in 2011 and has been gaining popularity on account of it being bundled with the Amazon Prime service and the growing library.
- The company started developing online games in 2012.
- The company launched a service similar to iTunes on Apple iPhone in 2012.
Continued increases in selection
- An example of this was the addition of motion pictures from Paramount in 2012
- Attractive lower pricing made possible by scale advantage
- Best and most responsive
customer service in its class
Free shipping on more items than competitors like eBay offer
Standardized money-back policies
- This stands in stark contrast to competitors like eBay, which have policies that are largely driven by individual sellers. This remains true, even though eBay has provided sellers with the incentive to institute such policies
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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