Below are key drivers of Amazon's value that present opportunities for upside or downside to the current Trefis price estimate for Amazon:
For additional details, select a driver above or select a division from the interactive Trefis split for Amazon at the top of the page.
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.
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.
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.
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.
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.
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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