What Will Drive Growth In Amazon’s International Segment

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Amazon (NASDAQ:AMZN) has continued in its growth spree in 2017 thus far, with strong revenue growth in all three quarters. The company’s profitability has also improved this year, which has further impressed investors. Amazon has operated at low margins and reported low profits in recent years due to the high operating expenses required to expand its presence. The reward for shareholders has primarily been the surge in its stock price, with Amazon’s trailing P/E ratio fluctuating between 150 and 250 over the last eight quarters. Amazon’s P/E ratio was even higher at 500-700 in late 2015, while the company reported negative net income in the preceding quarters.

Despite being a seemingly high-priced stock, the company still has significant growth potential across industries. Amazon has invested massively in its international segments, which should generate significant revenues for the company in future years and gradually become more profitable. Within the international segment, it is imperative for e-commerce companies to gain a strong foothold in high-growth, untapped markets. Below we take a look Amazon’s performance in the international segment, and the factors that are expected to drive future growth for the company.

We have a $1,000 price estimate for Amazon’s stock, which is around 10% below the current market price. Amazon’s stock price surged from $750 at the beginning of the year to over $1,100 after the company reported its Q3 earnings.

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See our complete analysis for Amazon

Amazon International

Over the last few years, Amazon’s International segment has witnessed the slowest growth rate in revenues among its divisions. North America is its largest segment, accounting for almost 60% of net revenues in 2016, while Amazon Web Services (AWS) is the fastest-growing segment with a CAGR of almost 60% from 2013 through 2016. Meanwhile, Amazon International is the only segment to operate at a loss in the last three years, as shown in the table below. However, that doesn’t take into account the massive growth potential internationally, not to mention the fact that comparisons with Amazon’s biggest and fastest-growing segments are tough.

Examined in isolation, Amazon’s International revenues have increased at a CAGR of almost 14% from under $30 billion in 2013 to $44 billion in 2016. This is impressive considering the large base factor here. In order to achieve this, Amazon has had to spend considerably in international markets. A significant portion of these operating expenses are dedicated towards fulfillment expenses, marketing expenses and promotion costs, which are higher than expenses in markets where the company already has a strong presence.

The trend has continued this year, with the combined operating expenses for the international segment standing at over $38 billion on revenues of $36.3 billion, as shown below. Since the company’s AWS segment has consistently reported high margins and profitability, Amazon has effectively reinvested gains to expand further (read: How AWS Is Funding Amazon’s E-Commerce Expansion In International Markets).

Future Growth Drivers

Amazon acquired Middle East-based e-commerce company Souq for $580 million earlier this year. Last year, Amazon announced that it will increase its investment in India from a previously announced $2 billion to $5 billion to compete with local competition. With Amazon focusing on international markets, Amazon’s growth spree is likely to continue in the coming years. However, limited growth is expected in China and southeast Asia, with rival Alibaba (NYSE:BABA) posing a strong threat to Amazon in these regions. Consequently, we forecast Amazon’s international segment revenues to increase in the early teens through the end of the decade.

Despite high revenue growth, we expect adjusted EBITDA margins for this segment to remain low over the next few years. Subsequently, margins could expand as the company reduces additional operating expenses. You can modify the interactive charts in this note to gauge how a change in revenues and EBITDA margin of the international segment can have on our price estimate for Amazon.

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