You should take a second look at Amazon (AMZN), here's why
As most people know Amazon.com operates online sites that sells a wide range of products and services. Products offered on its customer-facing websites include merchandise and content purchased for resale from vendors and products offered by third party sellers. On a services front, company offers Amazon Web Services, co-branded credit cards, fulfillment, and online advertising.
Financial Strength
Revenues - Amazon reported 2Q (2014) revenue of $19.3bn (+23.2% y/y vs. +22.8% in 1Q), in line with consensus
US business revenue growth stabilized in 2Q at 26% y/y, flat over the past two quarters
Media revenues slightly accelerated to 13% y/y growth vs. 12% last quarter o EGM (Electronics and General Merchandise) revenues also accelerated inthe quarter growing at 29% y/y compared to 28% last quarter
Other business lines (mostly AWS- Amazon web services) experienced a slowdown in the quarter, growing at 38% y/y vs. 61% last quarter
International revenue grew 18% y/y, same as last quarter, representing 38% of total revenue compared to 40% last quarter
Media category revenue growth stabilized at 4% y/y FX-neutral
EGM growth experienced deceleration, growing at 20% y/y FX neutral compared to 26% last quarter
International other revenue declining 1% y/y FX-neutral from 11% last quarter. The impact is small given the size of the business (less than 1% of international revenue)
Operating income - Adjusted operating income margin was 2.1%, slightly ahead of consensus
US business operating margin declined to 3.7% compared to 4.7% last quarter, mainly due to the price cut in AWS
International business operating margin remained negative due to continued investments
Capex - Incurred $1.3bn capex in 2Q14, up 51% y/y and representing 6.7% of total revenues which is the highest ever seen and itâs total capex is expected to reach close to $5bn in 2014
Balance sheet and liquidity - During 2Q14, Amazon recorded $0.9bn operating cash inflow and there was no share repurchase in the quarter. Account payables picked up $0.3bn and the net cash balance came down to $4.9bn from $5.5bn last quarter
Guidance - Amazon guided 3Q14 mid-point net revenue at $20.6bn, slightly shorter than $20.8bn of consensus owing to investment in fulfillment infrastructure and $100mn in incremental spending on original content for Prime Instant Video
Economic Moat
Prime is one of the most valuable and important growth trend for Amazon, representing around 50% of company GMV (Gross Merchandise Volume) today. At an estimated 32mn customers (13% of total, growing at around 45% Y/Y) and high GMV but low contribution margin, the mix shift to Prime is critical to the Amazonâs success. Primeâs value to Amazon holds key as-
It creates a competitive moat around AMZNâs e-commerce business
Drives up loyalty and
Increases wallet share and captures higher customer LTV (lifetime-value)
At current pace, Prime could reach 100m customers by 2020, and even at 70% of the LTV capture it would amount to $70bn in value (nearly half of AMZNâs market cap today)
Worldwide active customer accounts increased to over 250mn in 2Q from 244mn in 1Q and growth in ARPU (Average revenue per user) after excluding other revenues from NA region accelerated to 5% y/y vs. 3% last quarter
Few Risks
Taxation-related risks - Sellers on Amazonâs Marketplace may be subject to sales tax or required to submit tax-related reporting, which could negatively impact the business
Expansion-related risks - Amazon is rapidly expanding into the global market in terms of product sourcing and infrastructure capacity. This expansion increases the complexity of the business and may place a strain on the efficiency of its operations
Investment Rationale
Amazon it is in the process of diversifying its revenue base from mostly transactions (products) to subscriptions (services) that are more recurring and predictable. It is making necessary investments in content, device and ecosystem to ramp up, but this will take time and hence over the longer term, it will remain and become a stronger and prominent e-commerce player. Amazonâs strong investmentâs plans ($2bn) in the currently miniscule, severely under-penetrated and less competitive Indian e-commerce market holds immense potential over long-term.
Amazonâs stock ($335 closing price as on aug-20th) currently trades at an (enterprise value) EV-to- EBITDA multiple of approx. 23x-25x range based on 2014 analyst projections and with EBITDA growth projected at a CAGR of 21% (2013-2016) and historical EV/EBITDA in excess of 30 it holds strong promise to be an outperformer over the next 2-3 years within the e-commerce space.


















