ANALYST PERSPECTIVE
Amazon.com AMZN has played a prominent role in the structural shift away from brick-and-mortar retail for the past several years, and it may lay waste to several other retailers in the years to come. Without the cost burden of physical retail stores, Amazon can price below traditional rivals and drive recurring traffic online. Aided by the network effect inherent in 209 million active customers and infrastructure investments to support third-party fulfillment, Amazon owns one of the wider economic moats in the consumer sector and should continue to disrupt traditional retailers.
Even with the threat of online sales tax collection in several jurisdictions, we believe Amazon can sustain its value proposition through other means, including adjustments to shipping policies or Amazon Prime. Given its efficiency, we expect returns on capital to remain well ahead of our cost of capital assumptions for the next decade.
VALUATION
| Economic Moat | Fair value | Stewardship Rating |  |
||||
| Wide | USD 300.00 | Exemplary | |||||
| Moat Trend | Uncertainty | Sector | |||||
| Stable | High |
Cyclische consumptiegoederen |
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KEY INVESTMENT CONSIDERATIONS
- Following an extended fulfillment, technology, and content investment cycle, we believe margins are now poised for an upward trajectory. Prime memberships and other subscription-based services, AWS, and third-party sales should add margin expansion to an already compelling growth story.
- New product categories, ancillary businesses, and the evolution of the Kindle should drive high-teens average annual revenue growth from 2013-17.
- Shares seem modestly undervalued versus our $300 fair value estimate; we believe Amazon has ample opportunities to diversify its business and add potential upside to our long-term assumptions.
BULLS
- Amazon dominates the online retail landscape with 2012 product sales ($51.7 billion, excluding service sales) that roughly equal the next nine closest nonauction competitors combined. AmazonSupply should allow the company to better capture a larger portion of the B2B category for industrial and other business customers.
- With more than half of the world's Internet users coming from developing markets, Amazon has a tremendous global opportunity. Amazon sells directly in nine countries outside of the U.S. and Canada (representing 43% of revenue in 2012), and we believe management is evaluating other geographies for expansion. International e-commerce trends are accelerating, and growth rates should exceed the U.S. over the next decade.
- Kindle products are intriguing customer acquisition tools that capitalize on the ongoing transition to digital media (e-books in particular) while also promoting Prime memberships and demonstrating cloud computing capabilities.
- Complementary e-commerce websites (Zappos.com, Diapers.com, Soap.com) and LOVEFiLM (an online movie rental subscription service) diversify Amazon and provide multiple layers for growth.
- Amazon has leveraged its assets in creative ways, such as allowing third-party sellers to sell on Amazon.com and use its Fulfillment by Amazon (FBA) services, licensing its platform to large merchants, and licensing its payment services. Third-party sales represented 40% of units sold in 2012.
BEARS
- A rapidly changing Internet landscape may be disruptive to Amazon's business model. The company faces competition from eBay, Google, Yahoo, Apple, and Walmart.com, which offer competing e-commerce websites, auction marketplaces, online payment services, comparison shopping sites, ad search engines, video streaming, and independent website hosting.
- An evolving regulatory landscape exposes Amazon to uncertainty. Legislation forcing out-of-state retailers to collect sales taxes could impair Amazon's low-price perception, making online offerings from brick-and-mortar retailers in commodified retail categories more competitive.
- International growth brings unique challenges, as foreign governing bodies are constantly amending online commerce laws. Additionally, in many instances, Amazon will square off with an incumbent local competitor in several international markets.
- Beyond core retailing, many of Amazon's other ventures have not been successful, including the A9 search engine, Amazon auctions, and Unbox--Amazon's original video-on-demand service.
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