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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:
- Amazon's International EGM Market Share: We currently forecast the share of Amazon's international electronics and general merchandise revenues in international e-commerce market to increase from about 2.1% in 2014 to 2.8% by the end of our forecast period. However, given the intense competition in the space, there could be a 10% downside to our price estimate if this figure was to remain flat. On the other hand, there could be an upside of similar order if the figure jumps to over 3.6% instead.
- General Merchandise EBITDA Margin : We currently forecast Amazon's general merchandise EBITDA margin to remain flat at around 8.4% by the end of our forecast period. There could be 20% upside to our price estimate if these margins were to increase to more than 10% instead. On the other hand, there could be 10% downside if margins were to decrease to 7%.
Books, DVDs & Music
- Amazon International Online Books and Music Share: We currently forecast the share of Amazon's international books and music revenues in the international e-commerce market to decline marginally from 1.1% to 0.8%. However, there could be 10% upside to our price estimate if this figure was to increase to 2%, which may be a tough task given recent trends.
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 U.S., Canada, the United Kingdom, Germany, France, China, Japan and some other countries. The company also provides web services such as cloud computing and online storage to web sites and web developers.
General merchandise business is the most valuable segment for Amazon due to the company's high growth within this segment. During 2014, consolidated sales of electronics and general merchandise grew by 25% as compared to 4% growth for media sales. In addition, this segment accounted for roughly 68% of Amazon's total revenues during the the past year. Unlike books and music, Amazon's general merchandise business has been gaining share in the global e-commerce market.
Explosive growth in the global e-commerce market
The global e-commerce market is growing rapidly as consumers continue to shift to Internet for their purchases. Much of this is being driven by growing Internet penetration, increasing adoption of Internet enabled devices such as tablets, notebooks and smartphones, and the continuing improvement in online payment systems. The global online retail market was valued at roughly $1,316 billion in 2014, and is expected to grow at a CAGR of roughly 15% over our forecast period to over $2,700 billion in the long-run.
Growing high margin Web Services business
The growth in Amazon's Web Services has become a critical factor driving the company's expansion globally. Several companies continued to adopt these services in 2014. Besides helping big businesses, the company’s cost efficient web services are also useful for young start-ups that may have cash restrictions. The aggressive ongoing price war between Google, Microsoft and Amazon suggests that the company enjoys considerable margins on these services. We believe that the growing popularity of these services will mitigate the negative impact of the costs associated with fulfillment centers that Amazon is opening to speed up the delivery of physical goods to customers. As more online retailers spring up and traditional giants ramp up their online efforts, Amazon will have to make additional investments, and hence could face risk of profit decline as its margins are already very low. Expansion in this segment can help mitigate this risk to a certain extent.
Amazon Prime service gaining subscribers
Prime subscriptions grew by 53% year-over-year in 2014, with stronger growth across international markets than within the U.S.
We suspect that Prime members could be around 35-40 million globally at the end of 2014. The subscription offers free shipping along with access to video content. This implies that streaming content is just positioned as one of the key features of the service to attract subscribers.
While the revenues earned from the Prime service subscriptions account for a small chunk of the company’s total sales, the margins from Prime customers are much higher than other customers. Additionally, according to various reports, Prime customers tend to buy almost twice as much as the regular customers. We believe Prime subscribers will continue to grow rapidly as Amazon is investing heavily in streaming content to lure in more buyers.
Continuous decline in profitability could be worrying
During Q3 2014, Amazon posted an operating loss of $544 million which compared to an operating loss of $25 million in the same period a year ago. Heavy investments in diverse areas such as infrastructure development, content production, hardware development, and geographical expansion weighed on the company’s earnings during the quarter. For the fourth quarter of 2014, its operating margin improved to 2.0% and came in ahead of previous guidance and market expectations. While the results were encouraging and led to a rise in Amazon's stock price, we believe there is still a long runway ahead before Amazon could bring its margins to more sustainable levels.
The guidance for Q1 2015 was soft with operating income forecast to be in the range of -$450 million and +$50 million, as compared to +$146 million in Q1 2014. We think Amazon’s top-line growth could slow down in the coming future with tougher year-over-year comparisons and this could make margin improvement more difficult to achieve.
Weak growth being seen in the media segment
Sales growth in the media segment was recorded at -4% in Q4 2014 as compared to 10%, 8%, and 4% in Q1, Q2 and Q3 respectively. Tougher year-over-year comparisons and the trend towards book rental (as compared to outright purchase) contributed to this slowdown. On the other hand, the worldwide sales of electronics and other general merchandise (EGM) and ‘Other’ category rose at much higher rates. We expect this trend to continue in the near-future.
Heavy investments on international expansion could add further pressure on profitability
Amazon is making significant investments to expand its presence in regions such as China, India, Italy and Spain. While these investments will enhance revenue growth, however, this strategy could also raise margin pressure. Amazon will invest $2 billion on its Indian operations, but since the country’s e-commerce market is highly competitive, we believe it will be difficult for Amazon to attain profitability in the region for a couple of years atleast.
In addition, recently Amazon's growth rate in international region came down to 12% (in constant currency terms) in Q4, as compared to 14% in Q3 and 18% during the first two quarters. Weaker sales in Japan due to the imposition of consumption tax in April was cited as one of the reasons for this decline.
Trefis Forecast Rationale for Kindle Units Sold
This represents the total number of Kindle units sold in a given year, including Kindle e-reader and Kindle Fire.
We estimate that the number of Kindle units sold has increased from 2.4 million in 2009 to 14.3 million in 2014. However, if we just look at the last two years, Amazon's Kindle devices seem to be losing their appeal to consumers and Android based tablets are gaining share. As a result we are not too optimistic about Kindle's future growth.
Trefis considered the following factors for its forecast:
- Growing popularity of tablets
- Tablet sales have surged in recent years, with Apple and Android based tablets commanding majority share. However, this trend has helped spur the growth in Kindle Fire's sales as well. Consumers are increasingly shifting to tablets for their basic computing and entertainment needs, which has put pressure on the growth of PC industry.
- Growing selection of eBooks
- Amazon offers millions of e-books and the number of titles in Kindle Owners’ Lending Library in 2013 grew from 250,000 books to more than 475,000 books. These are the books that Kindle owners with a Prime membership can borrow for free with no due date.
- The company has also expanded its library in other countries such as Australia where it offers over 2 million e-books with 400,000 exclusive titles.
- Competitive pricing
- Amazon has a track record of offering most competitive prices, and could potentially do the same for its e-readers and tablets. Ultimately, the company wants to promote the sales of digital content through these devices and wouldn't mind taking a hit on hardware margins.
Back to Company Overview
- Competition from Android based tablets and Apple's iPad
- The total e-reader and tablet sales for Amazon saw a slight decline in 2013 according to our estimates as Android based tablets chipped away some share. There is a good chance that Samsung, Apple and other companies will make technically superior products with operating systems that boast of a huge app base. This will make it difficult for Amazon to grow Kindle fire's sales.
- Additionally, e-readers may lose popularity as consumers use tablets for reading e-books as well.
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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