How Much Will Physical Stores Contribute To Amazon’s Top-Line Growth By The End Of The Decade?

by Trefis Team
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Amazon (NASDAQ:AMZN) has reported massive revenue growth in recent years, with revenues surging from just over $60 billion to almost $180 billion from 2012 through 2017. While much of the company’s top-line growth has been on an organic basis in this period, Amazon made headlines last year when it announced the $13.7 billion acquisition of Whole Foods in June. This resulted in a significant addition of physical stores to Amazon, which was most widely known for its online retail business.

Amazon has reported $8.6 billion in revenues from physical stores through the first six months of 2018 already. We expect the company to end the year at around $18 billion in revenues from physical stores. We further expect this figure to increase to over $28 billion by the end of the decade. We forecast the company’s net revenues to increase from $178 billion in 2017 to $235 billion this year. We further expect this figure to increase to over $340 billion by the end of the decade. Accordingly, the physical stores segment is expected to contribute around 14% of Amazon’s overall revenue growth in the same period. We have summarized our expectations for segment growth through 2019 and 2020 on an interactive dashboard for Amazon’s Physical Stores segment. Below we take a look at key revenue drivers for this segment.

Factors Driving Segment Growth

Amazon categorizes its total revenues into six key segments that include online store sales, physical stores, Amazon Web Services (AWS), subscription services, third-party seller services and other services. Physical store sales include revenues from sales on Amazon’s brick-and-mortal stores, mainly from the Whole Foods addition last year. The total area of leased or owned properties by Amazon for the purpose of its physical stores stood at 21.3 million square feet. Whole Foods has 7 properties in the U.K, 14 locations in Canada with the remaining 450+ in the U.S. From these locations, the company generated $5.8 billion in revenues through a part of the latter half of the year after the acquisition was completed. Based on these numbers, the company generated roughly $272 per square foot from physical stores.

In the current year thus far, it is not clear if Amazon has added more physical stores. However, the company’s expenditure on property, plants and equipment has increased to $6.3 billion through the first half of the year, up from $5.2 billion in the comparable prior year period. While this may not directly translate to an increase in physical store capacity, it can be used as a reasonable proxy. We expect the company to end the year at over 30 million square feet of physical store space. Over the next couple of years, we expect Amazon to open more physical locations both domestically as well as internationally, due to which total area for physical stores is expected to increase to over 45 million square feet by 2020. For the current year, we expect revenue per square foot to be nearly 2x the 2017 levels, since the implied figure for last year was only applicable for a period less than six months. As a result we expect revenue per square foot to stand at $530 this year, which we expect to gradually increase to over $600 by 2020.

As a result, Amazon’s physical stores sales are expected to increase from around $18 billion in 2018 to over $28 billion by the end of the decade. If you disagree with our forecasts, you can modify these figures on our interactive revenue contributor dashboard for Amazon and come up with your own estimates. You can further use these figures in our near-term valuation dashboard for Amazon to calculate a valuation estimate for the company’s stock based on your new estimates. The Trefis price estimate for Amazon’s stock stands at $1,650, implying a valuation of $830 billion, about 5% below the current market price. Amazon’s stock traded at $2,000 through September before crashing by over 10% this month.

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