Why Would Amazon Be Interested In A Stake In Mapping Company HERE?

Reports suggest that Amazon  (NASDAQ:AMZN)   is in talks with a consortium of German automakers to buy stake in the high-definition digital mapping company HERE.  We don’t think Amazon is diversifying into autonomous cars – as yet, this prospective move appears to be part of a broader deal to lock the consortium into Amazon’s cloud computing services. Last year, BMW, AUDI and Mercedes bought Nokia’s mapping business ‘HERE’ for $ 2.8 billion as part of their plans to develop autonomous cars. This consortium of car makers has since been negotiating with potential new partners for HERE.  Apart from gaining a big client for its cloud computing business, we believe the mapping technology could be part of Amazon’s ambitious plans for faster, low cost delivery in specific metropolitan areas.

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Faster Delivery Via Autonomous Delivery Trucks

Recently, a new patent awarded to Google suggested that the company is looking to develop self-driving delivery trucks under an ‘autonomous delivery platform’.  In contrast,  Amazon plans to provide a 30 minute delivery via its drone delivery program in future and is looking into other areas as well. Should it gain a stake in HERE, the company can look at creating a fleet of autonomous delivery trucks, thus competing directly with Google. Amazon has always focused on faster delivery for its consumers and is investing heavily in a delivery network.  The three primary reasons for this focus are:  1) to reduce shipping cost in the long run, which forms a major part of Amazon’s expenses; 2) to sustain the growing base of its Prime Members, who expect and will pay for faster deliveries; and,  3) to have greater control over the e-commerce ecosystem as competition grows. (Read Why Is Amazon Setting Up Its Own Air Delivery Network?). Low cost faster deliveries can give Amazon the competitive edge and keep it ahead of competitors such as Google Express and other brick and mortar retailers such as Walmart which are increasing their focus on e-commerce. The stake in HERE will provide Amazon access to technology which can fulfill its ambitions of faster, controlled delivery at a lower cost.

Boost To AWS (Amazon Web Services) Revenues

AWS is the most profitable division for Amazon and, according to our estimates, it accounts for more than 30% of the company’s valuation.  Through its stake in HERE, Amazon will become a provider for cloud computing services to the company, thus boosting revenues for this segment.  There is a huge amount of data created by HERE and its users.  As the number of self-driving cars increases significantly in the next few years, this would be huge opportunity for Amazon cloud services business.  Autonomous cars are expected to grow at a CAGR of 134% between 2015-2020 and it is estimated that there would be 10 million cars with self-driving features on the road by 2020.

We expect Amazon’s web services revenues to increase substantially from around $ 11 billion in 2016 to more than $ 40 billion by the end of our forecast period.

There can be a nearly 7% increase in our price estimate, if the revenues of this division increase to $ 50 billion by the end of our forecast period.

We believe an association with HERE will benefit Amazon’s two most important divisions – e-commerce and web services.  As the company works towards retaining its competitive edge in both these segments, a stake in HERE is a positive development for Amazon’s shareholders.

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