Amazon.com (AMZN)

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POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of Amazon's value that present opportunities for upside or downside to the current Trefis price estimate for Amazon:

Amazon Web Services

  • AWS Revenues: We currently forecast Amazon Web Services revenues to continue to increase rapidly from about $17.5 billion in 2017 to over $100 billion by the end of our forecast period. This represents a CAGR of 28-30%, which is lower than its historic growth rate. However, given the potential competition in the space such as Alibaba and Microsoft, coupled with the huge base factor, Amazon can witness a lower than anticipated growth rate. There could be a 10% downside to our price estimate if AWS revenues increased at a CAGR of 25% to around $90 billion by the end of our forecast period.
  • AWS EBITDA Margin : We currently forecast Amazon's AWS EBITDA margin consistently rise to over 48% by the end of our forecast period due to relatively fixed operating expenses and high operating leverage due to economies of scale. There could be 10-15% downside to our price estimate if these margins were to increase only around 40-42% instead.

Amazon North America

  • Amazon North America EBITDA Margin: We currently forecast Amazon to consistently add customers for sale and subscriptions in North America leading to improved revenue per customer and resulting high margins due to economies of scale. We forecast North America EBITDA Margin to improve from just over 10% in 2017 to almost 12% by the end of our forecast period. However, there could be 10% upside to our price estimate if this figure increase by 3 percentage points over our forecast horizon.

For additional details, select a driver above or select a division from the interactive Trefis split for Amazon at the top of the page.

BUSINESS SUMMARY

Amazon is an online retailer which sells electronics, books, retail consumer goods, music, games, apparel and other merchandise to consumers in the U.S., Canada, the United Kingdom, Germany, Brazil, France, China, Japan, India Mexico, Netherlands, Italy and other countries. The company also provides web services such as cloud computing and online storage to web sites and web developers.

SOURCES OF VALUE

Amazon Web Services business is the most valuable segment for Amazon due to the company's high growth within this segment. In recent years, consolidated AWS revenues have grown at high double digits. Despite the lowest revenue contribution, AWS is the most valuable segment due to high margins of cloud computing as compared to e-commerce retail business which operates on razor thin margins.

KEY TRENDS

Growing high-margin cloud services business

The growth in Amazon's Web Services has become a critical factor driving the company's expansion globally. Several companies continued to adopt these services in recent years. Besides helping big businesses, the company’s cost efficient web services are also useful for young start-ups that may have cash restrictions.

The growth in the AWS segment has been massive - the annual growth in AWS revenues came in at 70% in 2015, 55% in 2016 and 43% in 2017. Apart from this, the company also showed strong profitability in the cloud-services business as margins have improved in this segment in successive years.

Amazon Prime service gaining subscribers

Prime subscriptions grew by 53% and 51% year-over-year in 2014 and 2015, respectively, with stronger growth across international markets than within the U.S. Amazon's total Prime members (not reported by the company) was estimated to be 50 million in 2015, which increased to 65-70 million in 2016 and subsequently to over 85 million by the end of 2017. The subscription offers free shipping along with access to video content. This implies that streaming content is just positioned as one of the key features of the service to attract subscribers. Amazon offers other integrated product and services offerings through Prime membership such as Echo, Amazon’s Fire TV Stick, and Amazon Basic Cables.

While the revenues earned from the Prime service subscriptions account for a small chunk of the company’s total sales, the margins from Prime customers are much higher than other customers. Additionally, according to various reports, Prime customers tend to buy almost twice as much as the regular customers. We believe Prime subscribers will continue to grow rapidly as Amazon is investing heavily in streaming content to lure in more buyers.

Explosive growth in the global e-commerce market

The global e-commerce market is growing rapidly as consumers continue to shift to Internet for their purchases. Much of this is being driven by growing Internet penetration, increasing adoption of Internet enabled devices such as tablets, notebooks and smartphones, and the continuing improvement in online payment systems. The global online retail market was valued at roughly $1.9 trillion in 2015 and $2.3 trillion in 2016, and is expected to grow to over $4 trillion by the end of the decade.

Heavy investments on international expansion could add pressure on profitability

Amazon is making significant investments to expand its presence in regions such as China, India, Italy and Spain. While these investments will enhance revenue growth, however, this strategy could also raise margin pressure. Amazon will invest a couple of billion dollars on its Indian operations, but since the country’s e-commerce market is highly competitive, we believe it will be difficult for Amazon to attain profitability in the region for at least a couple of years.

However, the recent acceleration of currency-neutral revenue growth in the international segment outperformed average market expectations during 2015. While the bottom-line could continue to remain challenging through 2018-19 in the international region, we forecast profitability to improve by the end of the decade. Moreover, the top-line outlook in this market remains strong.

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