How Much Will Amazon’s Other Services Contribute To Top Line Growth By 2020?

by Trefis Team
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Amazon (NASDAQ:AMZN) has reported a steady revenue growth in recent years across revenue streams. Amazon’s core commerce operations include products sold on its websites and platforms, which make up over 60% of the company’s net revenues. In addition, one of its ancillary revenue streams include Amazon’s third-party seller services, which have also correspondingly increased in recent years. Core online sales have increased from $77 billion in 2015 to $108 billion in 2017. In the same period, third-party seller and other services combined have increased from $18 billion to over $36 billion, outpacing the growth in core business proportionally (though the absolute growth of the core sales was larger due to the sheer size).

Going forward, we expect these revenues to continue to outpace growth in online sales over the next few years due to easier year-over-year comparisons and increasing demand for offered services by the company. We expect the company to end the current year at over $50 billion in revenues from these services. We further expect this figure to increase to nearly $70 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. This figure is likely to increase to over $340 billion by the end of the decade. Accordingly, we forecast third-party seller and other services revenues to contribute around 20% of Amazon’s overall revenue growth in the same period. We have summarized our expectations for segment growth through 2019 and 2020 in an interactive dashboard on Amazon’s Third-Party Seller & Other Services revenue. 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, subscription services, third-party seller services and other services. Third-party seller services revenues mainly include commissions on transactions and fulfillment fees, shipping fees and fees charged on other third-party seller services offered. The company provides Fulfillment by Amazon services in combination with some sellers’ programs. In this setup, third-party sellers maintain ownership of their inventory, irrespective of fulfillment being provided by Amazon or the third-party sellers themselves. As a result, these products are not included in our inventories. In this segment we also include Advertising and other services revenues, which are generated from sales of advertising services and sales related to other service offerings such as co-branded credit card agreements.

In recent years, both revenue streams have grown steadily, with the contribution of these revenues combined to Amazon’s net revenues increasing from 17% in 2015 to 21% in 2017. Third-party seller services revenues doubled from $16 billion in 2015 to $32 in 2017. Similarly, advertising and other services revenues surged from $1.7 billion in 2015 to $4.6 billion in 2017 – an annual growth rate of 65%. In the current year thus far, third-party seller services revenue has increased 40% y-o-y to $19 billion through the first half of the year. Additionally, other services revenues are up by over 100% y-o-y to $4.2 billion. We expect the company’s combined third-party and advertising services revenues to be around $52 billion for 2018.

Over the next couple of years, these revenue streams should continue to grow steadily. With customers warming up to advertising services, cooperative marketing efforts and promotion services offered by the company, we expect these revenues to continue to grow to over $10 billion by 2020. In addition we third-party seller services revenues to increase at around 15% annually through the end of the decade to $60 billion. As a result, combined other services revenues are expected to increase to $70 billion by 2020. 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 your fair price estimate for the company’s stock based on new estimates. The Trefis price estimate for Amazon’s stock stands at $1,650, which implies a valuation of $830 billion. Our estimate is slightly lower than the current market price, which has fallen by over 12-13% this month. Amazon’s stock price surged from $1,200 in January to an all-time high of $2,000 through September.

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