Investment idea: Amazon.com

Investment idea: Amazon.com

18 May 2017

Amazon.com is one of the biggest e-commerce companies in the world but is getting more and more profit out of their cloud division. For further growth the Americans are pointing their arrows towards Europe.

In the United Sates Amazon.com has acquired a strong dominant position. Currently the e-commerce company features 34% of the market for online commerce and analysts from Needham expect that this will increase to more than 50% in 2021.

One of the most important growth drivers for Amazon over the last few years has been the subscription service Prime. For USD 99 per year members will receive several benefits at Amazon. Research company Consumer Intelligence Research Partners estimates the total number of American Prime-members was 80 million in March this year. This is an increase of 38% compared to a year ago and a doubling of the number of members in March 2015.

Amazon benefits on multiple levels of the growth in Prime-members. First of all it provides a stable revenue stream. According to research from Statista, Prime-members also tend to spend more on Amazon. On average Prime-members spent more than USD 1,300 on an annual basis, while not-members annually spend USD 700 on Amazon. Nevertheless Amazon is still suffering a loss on Prime according to analysts, because the costs are higher than the revenue.

During the last quarter Amazon managed to maintain their double digit revenue growth of the last twenty year. The revenue during the first quarter rose with 23% to USD 35.7 billion on an annual basis, while the net profit reached USD 724 billion or USD 1.48 per stock.

 

Strong growth cloud division

Amazon Web Service (AWS) is taking an increasing part of the total revenue of Amazon. During the first quarter of this year the cloud division realized a revenue growth of 43% to USD 3.66 billion on an annual basis, which makes this the fastest growing division of Amazon. However the growth slowed down, because it was 47% during the fourth quarter of 2016.

The operational revenue of AWS came out at USD 890 million and the operational margin of the division improved on an annual basis from 23.5% to 24.3%. At the same time the competition for AWS increases. Both Alphabet (Parent company of Google) and Microsoft have indicated to focus more on the same market for the following years, which could pressurize the margins.

 

Expectations

For the second quarter Amazon expects that the revenue will grow with 24% annually and reach between USD 35.25-37.75 billion, excluded the one-time post of USD 720 million related to the adverse exchange rate effects. The operational incomes could reach between USD 425 million and USD 1.1 billion.

To boost the growth, Amazon continues to largely invest. For example the company wants to enrol the subscription service Prime and the grocery delivery service Amazon Fresh even further within Europe. According to estimations the European e-commerce market is worth around USD 545 billion, while Amazon only realized 44 billion of its total revenue in 2016 outside North-America. This represents 55% of the USD 80 billion revenue which the company realized in North-America over the last year.

After the presentation of the first quarter results the Amazon stock price rose with more than 4% and stands 40% higher to twelve months ago. Some analysts believe that the stock price of Amazon will eventually break through the USD 1,000 barrier, while others believe that the stock price already got to high. Investors who trust in Amazon can participate by taking an Amazon Turbo Long. However it remains to be seen how the future plays out.

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25/01/2020 06:40:54