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2021-06-14
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Amazon: The Virtuous Cycle At A Fair Price
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{"i18n":{"language":"zh_CN"},"detailType":1,"isChannel":false,"data":{"magic":2,"id":185629577,"tweetId":"185629577","gmtCreate":1623646887899,"gmtModify":1634030670624,"author":{"id":3576156131829756,"idStr":"3576156131829756","authorId":3576156131829756,"authorIdStr":"3576156131829756","name":"Thiogui","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"userType":1,"introduction":"","boolIsFan":false,"boolIsHead":false,"crmLevel":5,"crmLevelSwitch":0,"individualDisplayBadges":[],"fanSize":1,"starInvestorFlag":false},"themes":[],"images":[],"coverImages":[],"extraTitle":"","html":"<html><head></head><body><p>Good</p></body></html>","htmlText":"<html><head></head><body><p>Good</p></body></html>","text":"Good","highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":1,"repostSize":0,"favoriteSize":0,"link":"https://laohu8.com/post/185629577","repostId":1146011836,"repostType":2,"repost":{"id":"1146011836","pubTimestamp":1623639735,"share":"https://www.laohu8.com/m/news/1146011836?lang=&edition=full","pubTime":"2021-06-14 11:02","market":"us","language":"en","title":"Amazon: The Virtuous Cycle At A Fair Price","url":"https://stock-news.laohu8.com/highlight/detail?id=1146011836","media":"seekingalpha","summary":"Summary\n\nAmazon's business is firing on all cylinders, giving its investors many reasons to smile.\nT","content":"<p><b>Summary</b></p>\n<ul>\n <li>Amazon's business is firing on all cylinders, giving its investors many reasons to smile.</li>\n <li>The company is reinforcing its moat in e-commerce, cloud services and grabbing aggressively its share in ads from Google and Facebook duopoly.</li>\n <li>A growing share of high-margin activities improves cash flow at rapid pace.</li>\n <li>At the current level, the share price represents at least 6-8% return p.a.</li>\n</ul>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/dfbef43d925558552ced924df58f081f\" tg-width=\"768\" tg-height=\"512\"><span>Photo by coldsnowstorm/iStock Unreleased via Getty Images</span></p>\n<p>Amazon (AMZN) is a very diversified business with many sources of revenue. Its size, strong brand, and leadership position in e-commerce and cloud services give it an immense moat. The advertisement branch makes Google and Facebook's duopoly sweat. The growth in all sectors is simply remarkable for a company of its size. It all does not leave any doubt that Amazon's future is bright.</p>\n<p>Also, the price for this outstanding business is pretty attractive. Simple and conservative estimates show a safe 6-8% return per annum. In the world of a zero interest rate, Amazon shares are a bargain.</p>\n<p><b>The Virtuous Cycle, aka Scale Economies Shared</b></p>\n<p>Almost twenty-five years ago, Jeff Bezos laid a foundation for his company. At its core lies customer-centricity. The idea is pretty simple: exceptional customer experience brings more traffic and sellers with their products. A growing platform scale lowers the prices, which improves customer experience even further. By broadening product offerings, reducing prices, improving delivery time, and selling the highest-quality services, Amazon wins customer loyalty and expands its customer base.</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/33d2da72dce938108f652612d9f4b320\" tg-width=\"640\" tg-height=\"341\"><span>Source:Amazon - The Virtuous Cycle</span></p>\n<p>Putting customer experience at the center of every action combined with innovation spirit and readiness for failure has created a company that is redefining the way we shop, work, and spend our free time. Chapeau bas for management for sticking to those rules till these days, successful execution and constantly raising the bar to create more value for society.</p>\n<p><b>What do you get buying Amazon?</b></p>\n<p>All invested in Amazon know exactly why they own the shares. Leadership in life-changing trends, enormous growth, innovation, dominance, and of course huge profits. All checked. Let's put some numbers behind those buzzwords to prove it.</p>\n<p><b>E-commerce</b></p>\n<p>We start with e-commerce. This year the company is expected toincrease its US retail e-commerce market share to 40.4%. Walmart, second on the list, is going to enjoy only 7.1%. A clear sign of dominance. The sales growth is going to continue. After a Covid turbocharged 44.1% rise last year, analysts predict 15.3% in 2021. That means slowing down tothe average e-commerce growth in the US over the last decade.</p>\n<p>The international footprint is also growing nicely. In 2020, 27% of revenue came from abroad. And they are still expanding to new markets (in March 2021 they entered Poland startingamazon.pl).</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/ad6f72d60e6af0ab7802b63bb60e04c5\" tg-width=\"640\" tg-height=\"107\"><span>Source: Amazon Annual Report 2020</span></p>\n<p>There are two trends in retail sales that are going to benefit Amazon in the coming years. First, overall consumption and spending are growing together with the economy. But most importantly, a share of e-commerce retail vs. total retail sales is going to increase.In 2020, it was already 21.3% for the USA, up from 6.4% in 2010. Still less than e.g. in China, where the National Bureau of Statistics of China estimated online retail penetration to be at 24.9% in 2020.</p>\n<p>As Jeff Bezos predicted, the virtuous cycle is self-reinforcing and attracting more and more customers and merchants to the platform every year. Last Amazon's report shows that the number of sold products increases pretty fast, so do SMBs' profits. Amazon is fueling its success by intensive investments in logistics, analysis tools, and services, which lead to growing Amazon success and so on.</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/b70ae811d800c6e2fcaeb619b5a50964\" tg-width=\"640\" tg-height=\"608\"><span>Source:Amazon SMB Impact Report 2020</span></p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/dfe8106bb3f81d21e177ef59cefc5888\" tg-width=\"640\" tg-height=\"709\"><span>Source: Amazon SMB Impact Report 2020</span></p>\n<p><b>AWS</b></p>\n<p>Whether it’s technology giants, television networks, banks, food manufacturers, or governments, many organizations are using AWS to develop, deploy and host applications. The biggest customers are well-known brands such asNetflix, Adobe, Apple, LinkedIn, Twitter, BBC, and many more.</p>\n<p>It is another area that has sped upbecause of the COVID-19 pandemic. Implementation of stay-at-home policies for consumers, work-from-home policies for employees generated enormous demand and caused much higher than initially expected cloud usage.</p>\n<p>Amazon invests heavily in the data centers and expands its geographical footprint. The company offers a broad and rapidly growing portfolio of cloud services. All these efforts to satisfy customers' needs have given Amazon aworldwide leadership position.</p>\n<p>Strong double-digit demand for cloud services is going to continue in the next few years. Forecasts say that in 2021 the whole segment value will reach$330bn, up 23% from 2020. AWS as a dominant force with almosta third of market sharein IaaS and PaaS will surely enjoy growing revenues and profits.</p>\n<p><b>Advertising</b></p>\n<p>Google or Facebook make money by advertising different products and services. Their algorithms are very efficient in targeting selected audience groups. They are great at defining what may be of interest for me, for you, and every single web user. But they do not have the same insights as Amazon has. Amazon knows exactly what people buy, how they buy it, and how much of it they buy. The knowledge of what movies Amazon Prime customers are watching, what music and books they consume, gives Amazon an even more complete picture of the consumer journey.</p>\n<p>Here, the trend is once again Amazon's friend. Totalad spending continues to riseyear after year at a double-digit rate. Digital ads are already a dominant form of marketing and as people have more electronic devices connected to the Internet, they continue to be the most important channel to reach customers.</p>\n<p>Amazon has been very successful in this field. The company is alreadythe third power in advertising in the USAwith 10% of the market share. They are expanding especially at Google's cost as more people search for specific products directly on Amazon's website circumventing Google's search engine. Analysts predict that both Google and Facebook are going to lose their market share in the coming years,whereas Amazon continues to grab a bigger part of the growing pie.</p>\n<p>Looking at advertising revenue (classified as \"Other\" in the annual report), we can assume that it grew at a whopping rate of 50% last year. As cloud services, it is a very profitable, high-margin activity that will nicely continue to increase Amazon's bottom line in the future.</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/8a8ab12e5788fda9765fbd60bf394f23\" tg-width=\"640\" tg-height=\"261\"><span>Source: Amazon Annual Report 2020</span></p>\n<p><b>Amazon Prime</b></p>\n<p>Other powerful revenue engines are subscription services i.e. Amazon Prime membership fees, video-on-demand, etc. What Amazon offers its customers is pretty unique - by subscribing they get a combination of cheaper and faster orders' delivery and access to a rich library of movies, series, and songs. And it is very affordable! Thanks to that the retention rate is very high and the user base is constantly growing, exceeding already 200 million people. And almost130 million are using the Video Prime service at least once a month. That gives Amazon Prime Video servicesecond position worldwide just behind Netflix.</p>\n<p>Again, also from this trend, Amazon is trying to make use of. The expectations are that OTT and VoD services will growbetween 14%and18% for the next 4-5 years.The acquisition of MGMand gaining such IPs like James Bond, The Silence of the Lambs, Fargo, and a few thousand others, shows that the company takes it pretty seriously and will fight for its share of the pie.</p>\n<p>Looking once more into the annual report, we may see that subscription services brought ~$25bn in FY 2020. It seems not much compared to $386bn of total revenue, but $25bn was also the total revenue of Netflix last year! And it is growing faster than Netflix revenue.</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/9535c8b9791a767f3e8b52754d5db4c1\" tg-width=\"640\" tg-height=\"264\"><span>Source: Amazon Annual Report 2020</span></p>\n<p><b>Others</b></p>\n<p>If it was not enough, Amazon constantly tries to revolutionize some aspects of our lives and create new expansion opportunities. It isa leader in the smart speaker market(50% of the US market). Kindle dominates the e-reader market in the USA. FireTV streams videos to millions of homes. Etc., etc.</p>\n<p>Many experimental initiatives can easily become another mega-trend and contribute even more to customer satisfaction and the company's success, e.g.:</p>\n<ul>\n <li><p>Amazon Go - cashier-free stores</p></li>\n <li><p>AI-powered home robots</p></li>\n <li><p>game streaming services</p></li>\n <li><p>investing in self-driving technology</p></li>\n <li><p>building a fleet of delivery drones, etc.</p></li>\n</ul>\n<p><b>How did the business perform?</b></p>\n<p>Amazon does not provide as detailed information about its user base asAlibaba(BABA). Investors have only vague data announced from time to time during Earnings Calls or from Letters to Shareholders. For example,in the last letter, Jeff Bezos writes that Amazon Prime has already over 200 million members.Over 75% are Americans. However, the number of active users is much higher. Already inQ2 2016, there were over 300 million active customers globally.</p>\n<p>Let's move to the financial information to see the revenue generation power of Amazon's customers. The revenue is growing consistently at a high rate. The pre-pandemic slowdown was quickly corrected last year.</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/00ea9010cdf36960ced3316748d5b396\" tg-width=\"640\" tg-height=\"395\"><span>Source: Chart created by the author with data from annual reports</span></p>\n<p>The significance of the AWS, the golden goose of Amazon, and its contribution to the revenue was also growing from 7% in 2015 to almost 12% in 2020. Disappointing is the fact that the international sales represent currently only 27% of total revenue (a drop from 33% in 2015). It reduces the diversification of revenue streams and shows that the competition abroad is strong.</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/d8e5447ded18a889ea1ff7cdf37b342a\" tg-width=\"640\" tg-height=\"396\"><span>Source: Chart created by the author with data from annual reports</span></p>\n<p>On a plus side, we can see below that all segments are growing, but international revenue is simply growing slower than sales in North America or AWS. Another small positive is the fact that international sales saw last year almost 40% jump, slightly better than the other two segments.</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/d5550abe99358bb2a60e8552476cb096\" tg-width=\"640\" tg-height=\"396\"><span>Source: Chart created by the author with data from annual reports</span></p>\n<p>Similar to revenue, the operating income made a huge jump last year as COVID hit.</p>\n<p><img src=\"https://static.tigerbbs.com/7cf5a471f3cc5f3e15ad0436cc7f9a7b\" tg-width=\"640\" tg-height=\"396\" referrerpolicy=\"no-referrer\"></p>\n<p>The biggest contribution to the operating income is AWS. In 2020, cloud services generated over $13bn, which represented ~60% of total profits.</p>\n<p>Source: Chart created by the author with data from annual reports</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/366bd2ee01f2a7f0fa78c25001150c99\" tg-width=\"640\" tg-height=\"397\"><span>Source: Chart created by the author with data from annual reports</span></p>\n<p>North America brought around $9bn or 37% of the total operating income last year.</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/d49e53238ae749ae5f39ca6d421dca51\" tg-width=\"640\" tg-height=\"396\"><span>Source: Chart created by the author with data from annual reports</span></p>\n<p>Profits from AWS and North America used to subsidize international retail sales which only last year turned profitable. We may attribute this positive result to two factors - improving the efficiency of operation and favorable currency exchange rate last year.</p>\n<p>Let's have a look at Amazon's margins below. They are nicely trending higher almost every year. There are at least a few good reasons for that e.g. the scale of Amazon's operation, growing AWS, cash flow from Amazon Prime, and other subscription services. Margin expansion underlines the quality of the business and the good investment decisions of the management.</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/8e935c9bf800475aa0017d40f8fb1920\" tg-width=\"640\" tg-height=\"296\"><span>Source: Chart created by the author with data from annual reports</span></p>\n<p>In annual reports, Amazon presents also an alternative way of categorizing revenue streams. The chart \"Net sales by groups of similar products and services\" summarizes this method for the last few years. In 2020, slightly over 50% was attributed to online stores. We can see that AWS, advertising, subscriptions, and 3rd party seller services are growing faster than online stores. It shows the strength and diversity of Amazon's platform. It is nicely reflected in growing margins and recurring revenue streams.</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/c9394fd8d8fb6183d2e32bdb24c02b6f\" tg-width=\"640\" tg-height=\"396\"><span>Source: Chart created by the author with data from annual reports</span></p>\n<p>The growth for all segments is very strong. I would like to underscore here one component - advertising (\"Other\" in the chart below). It is still pretty small with \"only\" ~$21bn in revenue but is growing at a staggering pace, adding another very lucrative business area to Amazon's portfolio.</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/a5cf6ce184acc5b763aeb00f34b69b54\" tg-width=\"640\" tg-height=\"396\"><span>Source: Chart created by the author with data from annual reports</span></p>\n<p>Last but not least, the amount of free cash flow (\"FCF\") generated may show the quality of the business. It is one of the most important metrics for shareholders. FCF is used to pay dividends, repurchase shares, or for acquisitions. Amazon provides investors with three different metrics of FCF trying to adjust standard definition (FCF = Cash from Operations - Capex) to include heavy usage of finance leases used for faster expansion of AWS infrastructure and other equipment.</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/66290fc24e1df8192026a2305de99933\" tg-width=\"640\" tg-height=\"396\"><span>Source: Chart created by the author with data from annual reports</span></p>\n<p>The most important is the fact that all three metrics are rising. The Internet explains all of them for those interested in the nitty-gritty details of accounting.</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/aa13303f053af872d639e94fcfae68ca\" tg-width=\"640\" tg-height=\"396\"><span>Source: Chart created by the author with data from annual reports</span></p>\n<p><b>Valuation</b></p>\n<p>Note: I suggest subtracting 1,3% from CAGRs calculated below. 1,3% is an average shareholder dilution over the last 5 years. As long as there is no meaningful repurchase program, the dilution will continue.</p>\n<p><b>Simulation of P/EPS</b></p>\n<p>Analyst estimate is that Amazon's EPS will grow at 38% on average for the next five years. Assuming massive ratio reduction (from the current P/E=61 to P/E=18-26), we arrive at a potential return between 47% and 113% in 2026 (or 8% to 16% CAGR).</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/1a6f6320356bfd13c8cd1423f5c4997c\" tg-width=\"640\" tg-height=\"424\"><span>Source: Own calculation</span></p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/f7d373e66cfae1c02a39f11f735644db\" tg-width=\"640\" tg-height=\"396\"><span>Source: Own calculation</span></p>\n<p><b>DCF</b></p>\n<p>For DCF analysis I use Free Cash Flow less equipment finance leases and principal repayments of all other finance leases and financing obligations. With Amazon, this metric better presents the ability of the business to generate cash than standard FCF.</p>\n<p>I simulated much lower growth than presented in the last five years (and lower than analysts suggest). The reason is to be conservative and show likely outcomes of investing in Amazon at the current share price.</p>\n<p><b>DCF Worst-Case Scenario</b></p>\n<p>FCF growth drops gradually from 20% in 2021 to 11% in 2030. The first implication of this assumption is that the FCF in 2030 will be 4,5x higher than it is today. That would also imply that the current share price of ~$3200 will probably return around 6% annually.</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/776195c42bbdbd69b1bfe5f22651ca12\" tg-width=\"640\" tg-height=\"245\"><span>Source: Own calculation</span></p>\n<p><b>DCF Best-Case Scenario</b></p>\n<p>FCF growth drops gradually from 26% in 2021 to 17% in 2030. The FCF in 2030 would be almost 8x higher. That would also mean that the current share price of ~$3200 will probably deliver a return of 8% per annum.</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/93471937eb050c18cabebb3ea4d3270c\" tg-width=\"640\" tg-height=\"245\"><span>Source: Own calculation</span></p>\n<p><b>Price to Sales</b></p>\n<p>In the last few years, it was a good deal to buy AMZN when the PS ratio was at 3,3 or lower (with average PS=3,6).</p>\n<p>PS TTM is currently at 3.9. That suggests a slight overvaluation between 10-15%. PS=3,3 would represent the price of $2750 per share. Buying at an average PS=3,6 would mean waiting for the price to fall to $3000.</p>\n<p>There is also a second option: the price will move sideways for the next 1-2 quarters and let the business catch up. Looking at forecasted sales growth, it will happen sooner rather than later.</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/02b247d1eaf407d6569dd5465ebf0a3b\" tg-width=\"640\" tg-height=\"581\"><span>Source:Seeking Alpha</span></p>\n<p><b>Conclusion</b></p>\n<p>2020 was for Amazon a great year. For Amazon shareholders too. Coronavirus caused a rapid acceleration in shifting the way we work, spend our free time, and buy things. It led to an explosion in revenues and profits. As a result, the share price doubled in a matter of a few months. But this is not over. Every single part of Amazon keeps growing at a high double-digit rate. And it will not stop soon.</p>\n<p>A lot of this growth is already in the share price. However, even quite conservative analysis shows that buying AMZN today may still generate at least 6-8% return p.a. in a long run. If the company continues improving efficiency, keeps innovating, and expands its portfolio of great products, the return may be even higher.</p>\n<p>To sum it up, I rate Amazon shares to be fairly valued and expect better-than-average performance.</p>","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Amazon: The Virtuous Cycle At A Fair Price</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nAmazon: The Virtuous Cycle At A Fair Price\n</h2>\n\n<h4 class=\"meta\">\n\n\n2021-06-14 11:02 GMT+8 <a href=https://seekingalpha.com/article/4434620-amazon-the-virtuous-cycle-at-a-fair-price><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Summary\n\nAmazon's business is firing on all cylinders, giving its investors many reasons to smile.\nThe company is reinforcing its moat in e-commerce, cloud services and grabbing aggressively its share...</p>\n\n<a href=\"https://seekingalpha.com/article/4434620-amazon-the-virtuous-cycle-at-a-fair-price\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{},"source_url":"https://seekingalpha.com/article/4434620-amazon-the-virtuous-cycle-at-a-fair-price","is_english":true,"share_image_url":"https://static.laohu8.com/e9f99090a1c2ed51c021029395664489","article_id":"1146011836","content_text":"Summary\n\nAmazon's business is firing on all cylinders, giving its investors many reasons to smile.\nThe company is reinforcing its moat in e-commerce, cloud services and grabbing aggressively its share in ads from Google and Facebook duopoly.\nA growing share of high-margin activities improves cash flow at rapid pace.\nAt the current level, the share price represents at least 6-8% return p.a.\n\nPhoto by coldsnowstorm/iStock Unreleased via Getty Images\nAmazon (AMZN) is a very diversified business with many sources of revenue. Its size, strong brand, and leadership position in e-commerce and cloud services give it an immense moat. The advertisement branch makes Google and Facebook's duopoly sweat. The growth in all sectors is simply remarkable for a company of its size. It all does not leave any doubt that Amazon's future is bright.\nAlso, the price for this outstanding business is pretty attractive. Simple and conservative estimates show a safe 6-8% return per annum. In the world of a zero interest rate, Amazon shares are a bargain.\nThe Virtuous Cycle, aka Scale Economies Shared\nAlmost twenty-five years ago, Jeff Bezos laid a foundation for his company. At its core lies customer-centricity. The idea is pretty simple: exceptional customer experience brings more traffic and sellers with their products. A growing platform scale lowers the prices, which improves customer experience even further. By broadening product offerings, reducing prices, improving delivery time, and selling the highest-quality services, Amazon wins customer loyalty and expands its customer base.\nSource:Amazon - The Virtuous Cycle\nPutting customer experience at the center of every action combined with innovation spirit and readiness for failure has created a company that is redefining the way we shop, work, and spend our free time. Chapeau bas for management for sticking to those rules till these days, successful execution and constantly raising the bar to create more value for society.\nWhat do you get buying Amazon?\nAll invested in Amazon know exactly why they own the shares. Leadership in life-changing trends, enormous growth, innovation, dominance, and of course huge profits. All checked. Let's put some numbers behind those buzzwords to prove it.\nE-commerce\nWe start with e-commerce. This year the company is expected toincrease its US retail e-commerce market share to 40.4%. Walmart, second on the list, is going to enjoy only 7.1%. A clear sign of dominance. The sales growth is going to continue. After a Covid turbocharged 44.1% rise last year, analysts predict 15.3% in 2021. That means slowing down tothe average e-commerce growth in the US over the last decade.\nThe international footprint is also growing nicely. In 2020, 27% of revenue came from abroad. And they are still expanding to new markets (in March 2021 they entered Poland startingamazon.pl).\nSource: Amazon Annual Report 2020\nThere are two trends in retail sales that are going to benefit Amazon in the coming years. First, overall consumption and spending are growing together with the economy. But most importantly, a share of e-commerce retail vs. total retail sales is going to increase.In 2020, it was already 21.3% for the USA, up from 6.4% in 2010. Still less than e.g. in China, where the National Bureau of Statistics of China estimated online retail penetration to be at 24.9% in 2020.\nAs Jeff Bezos predicted, the virtuous cycle is self-reinforcing and attracting more and more customers and merchants to the platform every year. Last Amazon's report shows that the number of sold products increases pretty fast, so do SMBs' profits. Amazon is fueling its success by intensive investments in logistics, analysis tools, and services, which lead to growing Amazon success and so on.\nSource:Amazon SMB Impact Report 2020\nSource: Amazon SMB Impact Report 2020\nAWS\nWhether it’s technology giants, television networks, banks, food manufacturers, or governments, many organizations are using AWS to develop, deploy and host applications. The biggest customers are well-known brands such asNetflix, Adobe, Apple, LinkedIn, Twitter, BBC, and many more.\nIt is another area that has sped upbecause of the COVID-19 pandemic. Implementation of stay-at-home policies for consumers, work-from-home policies for employees generated enormous demand and caused much higher than initially expected cloud usage.\nAmazon invests heavily in the data centers and expands its geographical footprint. The company offers a broad and rapidly growing portfolio of cloud services. All these efforts to satisfy customers' needs have given Amazon aworldwide leadership position.\nStrong double-digit demand for cloud services is going to continue in the next few years. Forecasts say that in 2021 the whole segment value will reach$330bn, up 23% from 2020. AWS as a dominant force with almosta third of market sharein IaaS and PaaS will surely enjoy growing revenues and profits.\nAdvertising\nGoogle or Facebook make money by advertising different products and services. Their algorithms are very efficient in targeting selected audience groups. They are great at defining what may be of interest for me, for you, and every single web user. But they do not have the same insights as Amazon has. Amazon knows exactly what people buy, how they buy it, and how much of it they buy. The knowledge of what movies Amazon Prime customers are watching, what music and books they consume, gives Amazon an even more complete picture of the consumer journey.\nHere, the trend is once again Amazon's friend. Totalad spending continues to riseyear after year at a double-digit rate. Digital ads are already a dominant form of marketing and as people have more electronic devices connected to the Internet, they continue to be the most important channel to reach customers.\nAmazon has been very successful in this field. The company is alreadythe third power in advertising in the USAwith 10% of the market share. They are expanding especially at Google's cost as more people search for specific products directly on Amazon's website circumventing Google's search engine. Analysts predict that both Google and Facebook are going to lose their market share in the coming years,whereas Amazon continues to grab a bigger part of the growing pie.\nLooking at advertising revenue (classified as \"Other\" in the annual report), we can assume that it grew at a whopping rate of 50% last year. As cloud services, it is a very profitable, high-margin activity that will nicely continue to increase Amazon's bottom line in the future.\nSource: Amazon Annual Report 2020\nAmazon Prime\nOther powerful revenue engines are subscription services i.e. Amazon Prime membership fees, video-on-demand, etc. What Amazon offers its customers is pretty unique - by subscribing they get a combination of cheaper and faster orders' delivery and access to a rich library of movies, series, and songs. And it is very affordable! Thanks to that the retention rate is very high and the user base is constantly growing, exceeding already 200 million people. And almost130 million are using the Video Prime service at least once a month. That gives Amazon Prime Video servicesecond position worldwide just behind Netflix.\nAgain, also from this trend, Amazon is trying to make use of. The expectations are that OTT and VoD services will growbetween 14%and18% for the next 4-5 years.The acquisition of MGMand gaining such IPs like James Bond, The Silence of the Lambs, Fargo, and a few thousand others, shows that the company takes it pretty seriously and will fight for its share of the pie.\nLooking once more into the annual report, we may see that subscription services brought ~$25bn in FY 2020. It seems not much compared to $386bn of total revenue, but $25bn was also the total revenue of Netflix last year! And it is growing faster than Netflix revenue.\nSource: Amazon Annual Report 2020\nOthers\nIf it was not enough, Amazon constantly tries to revolutionize some aspects of our lives and create new expansion opportunities. It isa leader in the smart speaker market(50% of the US market). Kindle dominates the e-reader market in the USA. FireTV streams videos to millions of homes. Etc., etc.\nMany experimental initiatives can easily become another mega-trend and contribute even more to customer satisfaction and the company's success, e.g.:\n\nAmazon Go - cashier-free stores\nAI-powered home robots\ngame streaming services\ninvesting in self-driving technology\nbuilding a fleet of delivery drones, etc.\n\nHow did the business perform?\nAmazon does not provide as detailed information about its user base asAlibaba(BABA). Investors have only vague data announced from time to time during Earnings Calls or from Letters to Shareholders. For example,in the last letter, Jeff Bezos writes that Amazon Prime has already over 200 million members.Over 75% are Americans. However, the number of active users is much higher. Already inQ2 2016, there were over 300 million active customers globally.\nLet's move to the financial information to see the revenue generation power of Amazon's customers. The revenue is growing consistently at a high rate. The pre-pandemic slowdown was quickly corrected last year.\nSource: Chart created by the author with data from annual reports\nThe significance of the AWS, the golden goose of Amazon, and its contribution to the revenue was also growing from 7% in 2015 to almost 12% in 2020. Disappointing is the fact that the international sales represent currently only 27% of total revenue (a drop from 33% in 2015). It reduces the diversification of revenue streams and shows that the competition abroad is strong.\nSource: Chart created by the author with data from annual reports\nOn a plus side, we can see below that all segments are growing, but international revenue is simply growing slower than sales in North America or AWS. Another small positive is the fact that international sales saw last year almost 40% jump, slightly better than the other two segments.\nSource: Chart created by the author with data from annual reports\nSimilar to revenue, the operating income made a huge jump last year as COVID hit.\n\nThe biggest contribution to the operating income is AWS. In 2020, cloud services generated over $13bn, which represented ~60% of total profits.\nSource: Chart created by the author with data from annual reports\nSource: Chart created by the author with data from annual reports\nNorth America brought around $9bn or 37% of the total operating income last year.\nSource: Chart created by the author with data from annual reports\nProfits from AWS and North America used to subsidize international retail sales which only last year turned profitable. We may attribute this positive result to two factors - improving the efficiency of operation and favorable currency exchange rate last year.\nLet's have a look at Amazon's margins below. They are nicely trending higher almost every year. There are at least a few good reasons for that e.g. the scale of Amazon's operation, growing AWS, cash flow from Amazon Prime, and other subscription services. Margin expansion underlines the quality of the business and the good investment decisions of the management.\nSource: Chart created by the author with data from annual reports\nIn annual reports, Amazon presents also an alternative way of categorizing revenue streams. The chart \"Net sales by groups of similar products and services\" summarizes this method for the last few years. In 2020, slightly over 50% was attributed to online stores. We can see that AWS, advertising, subscriptions, and 3rd party seller services are growing faster than online stores. It shows the strength and diversity of Amazon's platform. It is nicely reflected in growing margins and recurring revenue streams.\nSource: Chart created by the author with data from annual reports\nThe growth for all segments is very strong. I would like to underscore here one component - advertising (\"Other\" in the chart below). It is still pretty small with \"only\" ~$21bn in revenue but is growing at a staggering pace, adding another very lucrative business area to Amazon's portfolio.\nSource: Chart created by the author with data from annual reports\nLast but not least, the amount of free cash flow (\"FCF\") generated may show the quality of the business. It is one of the most important metrics for shareholders. FCF is used to pay dividends, repurchase shares, or for acquisitions. Amazon provides investors with three different metrics of FCF trying to adjust standard definition (FCF = Cash from Operations - Capex) to include heavy usage of finance leases used for faster expansion of AWS infrastructure and other equipment.\nSource: Chart created by the author with data from annual reports\nThe most important is the fact that all three metrics are rising. The Internet explains all of them for those interested in the nitty-gritty details of accounting.\nSource: Chart created by the author with data from annual reports\nValuation\nNote: I suggest subtracting 1,3% from CAGRs calculated below. 1,3% is an average shareholder dilution over the last 5 years. As long as there is no meaningful repurchase program, the dilution will continue.\nSimulation of P/EPS\nAnalyst estimate is that Amazon's EPS will grow at 38% on average for the next five years. Assuming massive ratio reduction (from the current P/E=61 to P/E=18-26), we arrive at a potential return between 47% and 113% in 2026 (or 8% to 16% CAGR).\nSource: Own calculation\nSource: Own calculation\nDCF\nFor DCF analysis I use Free Cash Flow less equipment finance leases and principal repayments of all other finance leases and financing obligations. With Amazon, this metric better presents the ability of the business to generate cash than standard FCF.\nI simulated much lower growth than presented in the last five years (and lower than analysts suggest). The reason is to be conservative and show likely outcomes of investing in Amazon at the current share price.\nDCF Worst-Case Scenario\nFCF growth drops gradually from 20% in 2021 to 11% in 2030. The first implication of this assumption is that the FCF in 2030 will be 4,5x higher than it is today. That would also imply that the current share price of ~$3200 will probably return around 6% annually.\nSource: Own calculation\nDCF Best-Case Scenario\nFCF growth drops gradually from 26% in 2021 to 17% in 2030. The FCF in 2030 would be almost 8x higher. That would also mean that the current share price of ~$3200 will probably deliver a return of 8% per annum.\nSource: Own calculation\nPrice to Sales\nIn the last few years, it was a good deal to buy AMZN when the PS ratio was at 3,3 or lower (with average PS=3,6).\nPS TTM is currently at 3.9. That suggests a slight overvaluation between 10-15%. PS=3,3 would represent the price of $2750 per share. Buying at an average PS=3,6 would mean waiting for the price to fall to $3000.\nThere is also a second option: the price will move sideways for the next 1-2 quarters and let the business catch up. Looking at forecasted sales growth, it will happen sooner rather than later.\nSource:Seeking Alpha\nConclusion\n2020 was for Amazon a great year. For Amazon shareholders too. Coronavirus caused a rapid acceleration in shifting the way we work, spend our free time, and buy things. It led to an explosion in revenues and profits. As a result, the share price doubled in a matter of a few months. But this is not over. Every single part of Amazon keeps growing at a high double-digit rate. And it will not stop soon.\nA lot of this growth is already in the share price. However, even quite conservative analysis shows that buying AMZN today may still generate at least 6-8% return p.a. in a long run. If the company continues improving efficiency, keeps innovating, and expands its portfolio of great products, the return may be even higher.\nTo sum it up, I rate Amazon shares to be fairly valued and expect better-than-average performance.","news_type":1},"isVote":1,"tweetType":1,"viewCount":94,"commentLimit":10,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"symbols":[],"verified":2,"subType":0,"readableState":1,"langContent":"EN","currentLanguage":"EN","warmUpFlag":false,"orderFlag":false,"shareable":true,"causeOfNotShareable":"","featuresForAnalytics":[],"commentAndTweetFlag":false,"andRepostAutoSelectedFlag":false,"upFlag":false,"length":4,"xxTargetLangEnum":"ORIG"},"commentList":[],"isCommentEnd":true,"isTiger":false,"isWeiXinMini":false,"url":"/m/post/185629577"}
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