Here Are The Key Triggers For Amazon’s Stock

Amazon (NASDAQ:AMZN) is the leading e-commerce player in North America, with significant presence across international markets. Though our $295 price estimate for Amazon’s stock represents near-20% downside to the market, we believe there are certain plausible scenarios that can influence the stock significantly over the next few years, assuming the market prices in these developments correctly. Specifically, we think the possibility of lower profitability over our forecast period and faster-than-expected increase in international revenues are plausible scenarios that could trigger stock price changes for better or worse.

See our complete analysis for Amazon

Operating Margin Stays Close To 1% Over Our Forecast Horizon (-10%)

Low profitability is a key area of concern for Amazon’s investors — though the company’s operating margin was seen at over-4% during 2008 and 2009, it decreased significantly over the past few years to 0.6% in 2014. We think profitability will be a key trigger for the Amazon going forward, as any improvement or decline in the same could cause a wide swing in the company’s stock price.

In our $295 price estimate for Amazon, we estimate its operating margin to improve moderately to over-2% by the end of our forecast period. This is as we think investor pressure will cause Amazon’s management to manage margins more seriously in the future. We think going forward, Amazon will raise prices where it can, rein in costs, and invest more cautiously in new business opportunities. A slight change in business mix driven by increasing proportion of higher-margin third-party sales and Amazon web services businesses will also positively impact margins over our review period.

However, under a scenario, wherein Amazon’s EBIT margin stays close to present levels, at about 1%, over our forecast period, then it would lead to a 10% decrease in our price estimate. A number of factors make this scenario plausible including — 1) intense price-based competition from traditional brick-and-mortar retail giants like Walmart and Target, which could make it difficult for Amazon to increase its prices, 2) high growth in fulfillment, marketing, and technology and content costs (at par with overall top-line growth) owing to investments in various growth strategies, and 3) slowdown in top-line growth over the coming years, making it difficult to attain operating leverage.

International Media And EGM Sales Surpass $110 Billion By 2021 (+10%)

Amazon’s international sales have underperformed over the past few years. During 2013 and 2014, international sales increased by 19% and 14% respectively (at constant currency rates); in comparison, total North American sales grew by 28% and 25% during the same period. Nonetheless, we expect international sales to be a key driver for Amazon’s stock, since the company is investing heavily on geographical expansion.

While Amazon has a presence across Europe, Asia, North America, South America — more than 80% of its international sales are derived from the key markets of Germany, Japan and the U.K.. In our current valuation model, we estimate Amazon’s international media and EGM (electronics & general merchandise) sales to rise at an annual rate of 17% to over $95 billion by 2021. We have derived this estimate based on projected growth in the global e-commerce retail market, which is pegged to expand from $1,316 billion in 2014 to $2,489 billion by 2018, according to eMarketer. ^[1] While retail e-commerce sales in Germany, Japan and the U.K. (combined) are expected to see 11% annual growth during 2014 to 2018, the global online retail market (excluding the U.S.) is poised to rise at a CAGR of 19% during the same period, according to eMarketer. ^[1] We believe Amazon’s international growth could broadly mirror the global e-commerce market, considering its large scale and tremendous economic moat.

Under a scenario where Amazon’s international media and EGM sales grow faster at about 20% annually to more than $110 billion by 2021, it would lead to a 10% increase in our price estimate to $325. We believe this scenario is plausible in the event Amazon is able to leverage the rapidly expanding e-commerce markets of China and India. China’s online retail market is huge and could surpass $1 trillion by 2018. ^[1] While Amazon is presently struggling in China with less than 1.5% market share, in the event its share improves even slightly to 3-4%, it could add more than $30 billion to Amazon’s top-line annually. ^[2] At the same time, the Indian market represents a bright spot for Amazon as the company is quickly gaining ground in the country. India’s online retail market is expected to grow at a rapid pace of 35% CAGR during 2014 and 2018 (as per eMarketer) and hence, this could propel Amazon’s international sales over our forecast horizon. ^[3]

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

1. Retail Sales Worldwide Will Top $22 Trillion This Year, eMarketer, December, 2014 [↩] [↩] [↩]
2. Strong Growth in China Online Shopping Market in Q3 2014,China Internet Watch, December 10, 2014 [↩]
3. In India, Ecommerce Takes Tiny Share of Retail Sales, eMarketer, January 2015 [↩]