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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 2.5% in 2013 to 4.0% 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 5.2% instead.
- General Merchandise EBITDA Margin : We currently forecast Amazon's general merchandise EBITDA margin to increase from 8.1% in 2013 to nearly 10% by the end of our forecast period. There could be 15% upside to the our price estimate if these margins were to increase to 11.5% instead. On the other hand, there could be 10-15% downside if margins were to remain flat.
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 1.6% to 1.3%. However, there could be 10% upside to our price estimate if this figure was to increase to 2.5%, 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 the nine months ended September 2014, consolidated sales of electronics and general merchandise grew by 27% as compared to 7% growth for media sales. In addition, this segment accounted for roughly 67% of Amazon's total revenues during the nine months ended September 2014. Unlike books and music, Amazon's general merchandise business has been gaining share in 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 $963 billion in 2013, and is expected to grow at a CAGR of roughly 13% over our forecast period to over $2,500 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 2013. 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
According to latest reports, Amazon's Prime service could have around 40 to 50 million subscribers globally. 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, a report suggests that 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 continued to weigh on the company’s earnings. A loss of around $170 million was incurred due to Fire phone inventory write-down and supplier commitment costs. For the fourth quarter, the company's management estimates operating income (loss) in the range of $(570) million and $430 million, compared to $510 million in Q4 2013.
We think that if the company continues to deliver higher-than-expected losses in the coming quarters, with investments in unprofitable areas such as hardware, then its stock could see significant decline. The recent downgrade in outlook of Amazon's credit rating from stable to negative by Moody's Investors Service in December 2014, highlights growing concerns related to Amazon on the Wall Street.
Weak growth being seen in the media segment
Sales growth in the media segment was recorded at 4% in Q3 2014 as compared to 8% and 10% in Q1 and Q2 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 by 26% and 37% respectively in Q3 2014. 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 14% in Q3 2014 as compared to 18% each in 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.
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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