Here’s Why Amazon Could See Market Share Growth In The International Markets

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Amazon‘s (NASDAQ:AMZN) stock has run up by over 40% over the past six months, on positives factors such as improvement in profitability and high growth in the cloud services business. In addition, the company’s sales growth in the international region also saw significant acceleration during the most recent quarterly results. We think the company will continue to outperform the global e-commerce market in the coming years, owing to its various competitive advantages. These include the Prime program, along with access to a huge network of fulfillment and delivery centers. As a result, Amazon will continue to offer more innovative and faster delivery methods to its customers over our review period, in our view. However, investors must watch out for increased competition from Alibaba, eBay, traditional retailers (such as Walmart and  Target), and new entrants such as Jet.com, as these could potentially limit market share gains for Amazon over the next five to ten  years.

See our complete analysis for Amazon

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In our $503 price estimate for Amazon, we have forecast the company’s international sales in the electronics and general merchandise (EGM) category to rise at around 19% CAGR over our forecast horizon (till 2022). This is as we expect the market share of Amazon’s international EGM sales in the international e-commerce market to rise from 2.0% in 2014 to around 3.0% by the end of our review period. We have arrived at these estimates, based on the below given drivers:

  1. Customer Base Could Remain Sticky Due To Amazon Prime Program: The ‘Amazon Prime’ program, which offers free two-day shipping, along with access to a large collection of television, movie and music content, is the key differentiating factor and competitive advantage for Amazon, in our view. During 2014, Prime subscriptions grew by 53%, with stronger growth across the international markets as compared to the U.S. According to latest estimates by RBC Capital Markets, there could be around 60 to 80 million subscribers for Amazon Prime globally. [1] We expect Amazon Prime subscriptions to show healthy growth in the future as well. In addition, these subscribers are known to spend heavily on the platform. Hence, we forecast strong top-line growth for Amazon in the international markets to sustain over the coming years.
  2. Large Scale Infrastructure Brings Amazon Closer To The Customer: Amazon’s vast network of delivery, sortation and fulfillment centers allows the company to offer quality and timely delivery services to its customers. While Amazon was estimated to have 155 fulfillment centers across the world last year, we believe the company is expanding its fulfillment capacity at a rapid rate. [2] These heavy investments in infrastructure also help the online retail giant expand its assortment of products and third-party sellers. We believe these measures will continue to translate into strong demand on Amazon’s websites.
  3. Right Mix Of Products, Prices And Customer Service Will Help Amazon Gain Customers: Owing to its past experience and strong track-record in the e-commerce market, we believe Amazon will continue to win on factors such as product selection, pricing and customer service. We believe these factors represent the key purchasing criteria for customers in the online retail market, and as long as Amazon continues to lead in this area, it will continue to attract more buyers to its platforms.
  4. Innovations To Further Enhance The Popularity Of Amazon: Apart from the above given factors, we believe a continuous stream of innovations further adds to Amazon’s popularity. Recently, the company introduced a new dash button, that allows customers to order products with a click of a button. Additionally, Amazon’s initiatives to roll out one-hour delivery service and utilize drones for making deliveries, represent a promising trend, that could allow the company to remain on the top of new trends in the e-commerce market.

In a scenario, wherein the share of Amazon’s EGM sales in the international e-commerce market surges to 4% by 2022 (instead of our original 3% estimate), then it will take our price estimate 10% higher to $558.

In contrast to the drivers listed above, there are also several barriers that Amazon will have to battle in the coming years to enhance its share in the international e-commerce market. These barriers include:

  1. Increased Competition From E-Commerce Giants Such As Alibaba and eBay: We believe Alibaba could emerge as a key competitor for Amazon in the coming years. This is as the slowing economy within China will push Alibaba to expand quickly into international markets to sustain its historical high growth rates. At the same time, eBay (after the recent spin-off of PayPal) is also looking to gain a larger share of the overall e-commerce pie within international markets. Hence, we think increased competition from these two players, could limit market share gain for Amazon over our forecast period.
  2. Increased Competition From Traditional Retailers As Well As New Entrants: Besides the global giants, traditional brick-and-mortar retailers are also expected to enhance their competitive plays in the coming years. This is as the rapid surge in online retail sales is eating into their profits globally. Recently, Target started matching prices with more than 20 other websites aggressively. [3] Additionally, the entry of newcomers such as Jet.com — which was seen as the fourth largest player by GMV just a month after its launch — could also add to the challenges for Amazon over the next 5-10 years.
  3. Inability To Gain Market Share In Certain High-Growth Geographies Such As China: Over the previous 5-10 years, Amazon has made several unsuccessful attempts to enhance its market share in China. In the event, Amazon is unable to win in similar high-growth geographies such as India, then it will limit its market share gain in the international e-commerce market.

Under a scenario wherein Amazon’s market share in the international e-commerce market stays constant over our forecast period, it will lead to 10% decrease in our price estimate to $455.   

Our $503 price estimate for the company’s stock represents near 10% downside to the current market price, as we believe the market has already priced in most of the growth trends present in Amazon’s business.

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Notes:
  1. Prime will grow Amazon revenue longer than you think: Analyst, CNBC, September 11, 2015 []
  2. Amazon Takes a Big Step Toward Finally Making Its Own Deliveries, Wired, September 25, 2014 []
  3. Target Expands Online Price-Match Policy to Include Amazon, Wal-Mart, The Wall Street Journal, September 30, 2015 []