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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 Kindle Units Sold
This represents the total number of Kindle units sold in a given year.
We estimate that Amazon sold about 34 million Kindles in 2012.The figures include sales from both the eReaders and Android based tablets and are based on IDC estimates. We have updated our 2013 forecasts accordingly and project higher Kindle sales over the forecast period.
We considered the following factors for our forecast:
- Users will get more comfortable with an electronic reader interface and generate positive reviews, starting a virtuous feedback loop.
- Amazon will likely continue reducing the Kindle's price in subsequent versions to drive volume.
- Growing selection of eBooks
- Available Kindle content includes over 775,000 books plus audiobooks, periodicals and blogs
- Over 1.8 million free, out-of-copyright, pre-1923 books.
Back to Company Overview
- Potential saturation of eReader and tablet PC market
- In addition to Amazon, companies like Apple (iPad), Sony (eReader), Barnes & Noble (NOOK), RIM (PlayBook) and HP have introduced tablet PCs or eReaders that have some overlapping functionality. Demand for tablet PCs can lead to cannibalization of demand for eReaders in the long-term
- International eBook Availability
- The availability of foreign language books on devices like the Kindle will be important to drive long-term international demand. Although the market for English-language books is sizable, it may prove to be a constraint on demand for eReaders outside English-speaking countries
- Lower Potential Upgrade Frequency Compared to PCs and Mobile Phones
- A key driver of mobile phone and PC unit sales is upgrades by existing customers. It is yet to be seen what the upgrade frequency will be amongst eReader owners. Given the relative computing simplicity of eReaders and sizable storage (Kindle holds 3,500+ books), the upgrade frequency is likely to be less than that of PCs and mobile phones which will dampen overall unit sales
- Though increasing, the selection of eBooks is limited compared to the number of physical books available for sale on Amazon. Creating better incentives for publishers to adopt eBooks will be an important part of growing the eBook inventory. Currently, publishers risk sacrificing higher priced physical book sales for eBooks that are priced lower but may sell more.
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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