AMZN
Amazon.com, Inc.
St Andrews Investment Society 14/11/16
Amazon.com, Inc.
AMZN We believe Amazon’s ability to adapt to the changing demands in services and its dominant scale and exposure to multiple business Price (14/11/16) segments make it a stock with exceedingly positive growth prospects. Market Cap (bn) EV (bn)
Company Overview Amazon was founded in 1994 by Jeff Bezos as an online book retailer. It has since expanded its product range to include everything from furniture to jewelry in addition to its own consumer electronics products - most notably the Kindle and Fire tablet. Furthermore, the company has recently established itself in the services sector, offering web services such as video streaming, online storage and cloud computing. Although Amazon’s retail sales make up the largest revenue share, its services segment is experiencing rapid growth. Amazon seeks to continue to be a low-cost, high-convenience online retailer to increase its market share, both by offering new products and by expanding internationally.
Investment Rationale Amazon is a very diversified company, operating in many business segments all over the globe. Although the largest part of its revenue still comes from its retail sales, in which it acts as a third party intermediary, it is largely involved in innovative and rapidly growing market segments. Amazon’s business model makes it flexible enough for it to take advantage of expanding market segments due its ability to rapidly adapt its allocation of human and financial capital, hence making it a supplier of innovative and creative solutions in competitive industries.
$721.63 $340.74 $351.79
TMT – Large Cap Price Target Investment Horizon
$900-$950 18-24m
24m performance: 1000 800 600 400 200 0
Market Data: 52- Week Range Shares Out. (m) EV/EBITDA EV/OpFCF P/E Div./Yield
$474-$847 474.1 32.1x 23.4x 164.7x $0/0%
Financial Data: Revenue (bn) Revenue growth EBITDA (bn) EBITDA growth EBITDA margin
128.0 27.2% 11.0 7.8% 8.6%
One of Amazon’s main selling points is related to its diversified activity range and the large scale in which it operates. In spite of its unique diversification and exposure to different markets, it is able to compete with industry leading organisations in all types of business segments, including retail Leverage: 9.0 services, cloud computing, and television and media services. The fact that Net Debt (bn) Net Debt/EBITDA 1.7x one company incorporates such a variety of services, usually bundled 28.7x together in its Amazon Prime program, provides it with a competitive EBITDA/Interest advantage against its rivals, whose market share is generally more restricted. Amazon’s ability to infiltrate new markets, its ability to predict areas of future growth, and its ability to integrate different services into one single corporation make it a unique investment. Amazon’s management structure and integrity seems to be able to handle the rapid expansion experienced in recent years. Under the control of the board members and the CEO, one can observe a continuous, consistent and rapid growth over the last 5-10 years, with very few disruptions. Its efficient functional and geographical division of groups and the company’s flexibility allows Amazon to efficiently allocate its human and financial resources. Amazon seems
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AMZN
Amazon.com, Inc.
to be able to cope with its consistent revenue and market share expansion, which we expect to continue in upcoming years, hence making the company able to outperform its industry rivals.
Market Position Amazon operates in a number of different segments which can be categorised both geographically and by the goods and services provided. Geographically, Amazon predominantly operates in North America (70.5%) followed by Germany (11.8%) and the UK (9%) by revenue share.
Amazon Geographic Revenue Share 2015 ($bn) 7.7
6.9
9.0
11.8 70.5
United States
Germany
United Kingdom
Japan
Rest of the World
Sales can also be divided into three main segments; North America, International, and Amazon Web Services (AWS). North America represents the largest segment with regards to net sales whereas AWS is the most relevant sector when accounting for EBIT values. ($m)
North America
International
Amazon Web
Total
Services Net Sales
53544 / 58.04%
30019 / 32.54%
8683 / 9.41%
92246
EBIT
1545 / 52.71%
(796) / -27.16%
2182 / 74.45%
2931
There are few corporations which offer the vast range of products and services that Amazon does, hence it can be difficult to find public comparable companies to this stock. Although eBay and Alibaba operate in a similar market structure as Amazon, eBay offers a more limited variety in products and services with its main focus being retail; meanwhile, Alibaba’s geographic exposure is inherently different from Amazon, and hence also making the comparison between both companies lack objectivity. Most importantly, due to its significantly larger scale, revenues and market share it is very hard to compare Amazon to any of its competitors, since it is clearly dominant in almost all industries, having larger market shares and revenues. An alternative way could be to divide Amazon into separate segments, e.g. TV and Series, and compare in this segment Amazon to industry leaders, e.g. Netflix. Similarly, its product, e.g. Fire Table could be compared to its competitors’ products, e.g, Apple’s iPad competitors in that industry. However, this analysis would not take into consideration that Amazon, instead of operating in several different segments without them being interrelated, instead offers products and services in several industries, thereby neglecting the convenience of being able to receive many services from one company. It would be also hard to analyse the advantages of disadvantages of cross-industrial services, such as Amazon Prime. Page 2 of 4
AMZN
Amazon.com, Inc.
($bn)
Amazon
Ebay
Netflix
Apple
Market Cap
340.74
31.91
52.45
601.3
EV
351.99
32.58
53.94
614.19
Revenue
127.99
8.91
8.18
215.64
EBITDA
10.96
3.03
0.344
70.53
Net Profit Margin
1.64%
20.29%
2%
21.29%
EV/EBITDA
32.09
10.75
156.80
8.71
Financial Position Amazon has currently a market cap of c.341bn with revenues expected to be … for FY 2016. Their Net Debt / EBITDA ratio of 1.73x is quite low and very sustainable for the business. It is not paying dividends to its shareholders. Amazon’s goal is to increase its revenues rather than its profits, in order to increase the companies’ Enterprise Value. The very low net profit margin (<2%) is due to the highly competitive industries it operates in, its belief in the continuous reinvestment of profits to increase market share, as well as its high operation costs.
Growth Prospects & Risks Researchers predict that 47% of the world will use the internet by the end of 2016, and that this will rise to 55% by 2020. This increased global internet penetration, along with consistent technological advancements prove to be a consistent source of income for Amazon and provide seemingly limitless growth opportunities. These growth opportunities mainly entail Amazon expanding the realms of their business and improving the efficiency of their current services. For example, offering increased options to Amazon Prime members, creating a music service to rival Apple Music, providing broadband service to European consumers, and creating personal home assistants like Amazon Echo. However, regardless of Amazon’s status as a well-established company, with its stock being generally perceived as a sound investment, it still faces a number of risks that might hinder stock performance. Firstly, Amazon’s business branches, including retail, digital content and electronic devices, web and infrastructure computing services, are all rapidly evolving and intensely competitive. Some of their current and perspective competitors in these areas are corporations with greater brand-recognition or resources, which might put at risk Amazon’s capacity to retain or expand its market share. Furthermore, Amazon follows a very aggressive expansion strategy, which might put a significant strain on its management, operational, financial and other resources. Hence, even though we believe Amazon will be capable of continuing to implement its growth strategies effectively, it does face the risk of it not being able to sustain or enforce its expansion as competently as possible. Linked to this is the volatility that can be expected from a stock such as Amazon: it has significant fluctuations in operating results and growth rate due to its rapidly evolving business model that can be reflected in its stock price. In the current macroeconomic environment, the recent results of the US election also threaten Amazon, as 70.5% of its net sales are in North America. Therefore, Amazon may be subject to fluctuations in sales and profits due to high levels of uncertainty in the US economy. Additionally, Donald Trump has directly threatened Amazon’s CEO, Jeff Bezos, accusing him of buying The Washington Post to acquire political influence in order to promote Amazon’s growth. Brexit is also a large area of risk for Amazon, it also creating further market uncertainty in an economy which accounts for 9% of the company’s revenue. The existing potential for a recession and lower consumer confidence, Page 3 of 4
AMZN
Amazon.com, Inc.
which decreases aggregate consumption, Amazon’s revenue may be adversely affected. Moreover, it could also affect Amazon’s suppliers since it may result in more restrictive policies on the passing of goods and services across Europe. However, whilst Brexit and the presidency of Donald Trump are major considerations for Amazon, they are also crucial matters for many firms all over the globe. Most of these firms are smaller and less diversified in relation to Amazon, thus comparatively, making Amazon seem more able to cope with the uncertain economic climate.
Management Structure & Integrity Amazon’s business structure and approach to organisational management are key elements in ensuring the firm’s resource management and continued growth. Its structure focuses on business functions as a basis for determining the interactions among components of the organisation. Function-based groups are the strongest characteristic of Amazon’s organisational structure. Each major business function has a dedicated group or team, along with a senior manager. The strategic objective in having this structural characteristic is to enable Amazon to facilitate successful e-commerce operations management throughout the entire organisation. Considering its ongoing global expansion, this is beneficial in terms of procuring ease at establishing operations in new markets. Senior managers’ directives are applied throughout the organisation, affecting all relevant offices of the company worldwide. The strategic objective of this feature of the corporate structure is to facilitate managerial control of Amazon’s entire organisation. Amazon’s organisational structure also involves geographic divisions, where groups are based on regional distribution and related business goals. Amazon uses geographic divisions to make it easier to manage e-commerce business based on economic conditions of certain regions. The strategic objective in having this characteristic of the organisational structure is to enable the company to address issues or concerns relevant to each geographic region, considering differences among regional markets. Most members of Amazons’ senior management team have been with the firm for around 5-10 years, with experience in their sectors prior to their current senior roles. Managers are highly compensated for their work, however, compensation seems to follow a biannual pattern of high the first year, low the second, and then this repeats. With regards to Amazon’s corporate social responsibility (CSR), while in the past Amazon has been critiqued for worker treatment and recycling amongst other issues, the employment of new members to add to the sustainability team, including Dara O’Rourke, a leading expert of global supply chains, suggests Amazon is making more effort to improve its practices with regards to CSR.
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