Have you ever bought anything off Amazon.com?

Chances are you have made multiple purchases or at the very least, browsed the site.  In a mere 21 years, Amazon.com has grown from a humble online bookseller to become one of the largest retailers in the world.  Its current market capitalisation is US$285 billion – that’s about the same size as combining Walmart and Target in the United States as well as our very own Woolworths and Wesfarmers (owners of Coles and other retailing brands).

The following information does not take into account your personal objectives, financial situation or needs. You should consider if the relevant investment is appropriate having regard to your own objectives, financial situation and needs. 

 

How did Amazon.com change the retail landscape?

Apart from its sheer size (270 million active users accounting for one-third of the US$307 billion U.S. e-commerce market), Amazon.com has revolutionised the way we all shop.

Amazon.com knows a lot about its customers.  It was one of the first companies to recognize that having an online relationship with their customers was the best way to get them to buy more. When you browse Amazon.com’s site, you are leaving digital footprints. They know what you’ve browsed, what you shortlisted, when you did it, what device you used and more.  All this information is used to form a profile about you.

Once you make a purchase, the profile becomes even richer with contact and payment information. This allows Amazon.com to better target their marketing efforts to your profile to generate more sales. No wonder they are always getting better at recommending purchases and creating new customer incentives.

The Amazon Prime loyalty service is a great example. This paid service allows customers to receive free fast shipping and Amazon.com’s streaming media service.  With its estimated 60 to 80 million members, Prime has been a strong driver of sales with the average Prime member estimated to spend 3 times more than an average non-Prime member.

Over the last 21 years, you can imagine the customer and supplier database that Amazon.com has built.  With this data we are sure that Amazon.com will continue to optimise its customer experience including procuring and delivering your order within a matter of days, if not hours.  No other company in the past 2 decades has changed the retail landscape more than Amazon. Who knows, in the near future your delivery could actually come via one of the flying drones being developed by the company.

Is Amazon.com even a retailer anymore?

Short answer, yes plus more.

Part of Amazon.com’s success has been its rapid diversification beyond selling books online to selling all sorts of consumer products and services.  It has even moved into producing new and original content for books, TV and movies.

Perhaps the most notable business in Amazon.com’s expansion has been the establishment of Amazon Web Services (“AWS”).  The company has leveraged 2 decades worth of customer and supplier data to build a new business that offers cloud computing and data analytics to its corporate customers.  AWS is now one of the fastest growing parts of Amazon.com’s business with net sales almost doubling last quarter compared to the preceding quarter last year, and operating profit increasing 5 fold over the same period.

Not surprisingly, Amazon.com describes itself now as not just an e-commerce platform but a development platform.

But Amazon.com doesn’t make much money does it?

That’s not quite true.

In its latest results released last week, Amazon.com posted net sales of just over US$100 billion for the last twelve month period with operating income of US$3.8 billion.  It also generated free cash flow of US$5.4 billion.  Operating profit grew 131% over the preceding twelve months and free cash flow has been growing at about US$1 billion per quarter.

Yes, Amazon.com’s margins are relatively low but this ignores the fact that the company has invested heavily in new products, services and original content over many years.  We believe the two most recent quarterly results demonstrate that Amazon.com is well placed to reap the rewards of these investments over the next few years.

Where does Amazon.com’s share price go from here?

The latest quarterly results lifted the Amazon.com share price another 10% to a record high.  The company’s share price has almost doubled since the beginning of the year.  This does suggest that the share price may need a breather in the short term.

Longer term, it is certainly conceivable that Amazon.com grows its online market share further, in both North America and internationally. This will continue to come at the expense of traditional retailers such as Walmart.  AWS will also continue to drive profitability as demand for cloud computing and data analytics services increase.

Amazon.com has shown itself to be not only an innovative company under the strategic direction of enigmatic leader and founder, Jeff Bezos but also an aggressive leader, willing to invest capital to protect and grow its market share.  We see it continuing to benefit from the long term structural trends of e-commerce retailing, the convergence of content with devices and data analytics.  If you are looking for a truly innovative blue chip online company to invest in, then Amazon.com is well worth considering.

 

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About Kevin Hua

Kevin Hua is a Co-Founder of AtlasTrend, an online investment platform that makes it easy for anyone to learn and invest in trends transforming our world. Kevin has over 19 years experience in financial markets including as Senior Portfolio Manager at Atrium Investment Management and Stark Investments.

One thought on “Woolworths + Wesfarmers + Walmart + Target = Amazon

  1. Jeff Bezos is creatively destructive.
    Investments in AWS, FBA, Content and Amazon Prime are a good example of what Joseph Schumpeter referred to as creative disruption. AWS has the combined data capacity of the next 14 largest cloud providers. Fulfillment by Amazon has created a network of distribution hubs in the US that will likely rival Fedex in the next decade. Investment in original, Emmy award winning content and Fire TV are starting to challenge Netflix. Layer on top, Amazon Prime, a subscription service that will continue to change the way consumers shop for all products and the equation looks more like…
    FedEx + Walmart + Best Buy + Netflix+ next 14 largest cloud providers = Amazon

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