March 31, 2021 - 1:15pm EST by
2021 2022
Price: 3,110.00 EPS 0 0
Shares Out. (in M): 510 P/E 0 0
Market Cap (in $M): 1,540 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 0 TEV/EBIT 0 0

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Amazon is the largest online retailer and cloud computing provider in the world. By offering customers the most selection, lowest prices and most convenience, Amazon has established market leadership in online retailing, a secularly growing industry that Amazon should lead for many years given its scale, delivery and logistics footprint, installed Prime subscription membership base, and trusted brand. Amazon has leveraged its 1P online retail platform to develop new and growing business, with Advertising and Marketplace being the largest. Advertising and Marketplace likely generate triple the operating margins of first party retail given the low marginal cost of delivering an ad unit, and the fee-based model for marketplace. At scale, mass market retailing is a high return on capital and durable business given that once a retailer has entrenched its position as the provider with the best selection, prices and convenience, customers are likely to become loyal, repeat purchasers, thereby reducing customer acquisition costs. With the largest revenue and customer base, Amazon is able to reinvest more resources into its supply chain, logistics network, Prime member benefits, and user experience, thereby driving more customer value.


            Amazon’s Cloud business, AWS, is the leading provider of cloud computing services, including compute, data, storage, security and a variety of applications that a growing number of enterprises perform in the cloud. With a seven-year headstart, and nearly 40% market share, Amazon has been able to scale AWS’s physical footprint and services faster than competitors.


            Cloud computing services are an increasingly essential, non-discretionary services for the enterprise. Once a business has moved its digital footprint to Amazon’s cloud, the business is likely to be sticky, recurring and durable. Cloud services are mission critical and cannot be easily moved or changed without business disruption. Because it is still early in the shift of enterprise IT spending to the cloud, AWS should continue to grow its revenue between 30-40% per year for the foreseeable future, as the IT spending continues to shift to the cloud. Globally, IT spending is a multi-trillion dollar market.


             AWS is already generating high operating profit ($13B/$45B in sales/28.8% operating margin) which should be sustainable as AWS’s continues to leverage its physical fixed cost footprint and add new high-value services to its product offering. From 2015-2020, AWS revenue increased from $7.8B to $45B, while operating profit increased from $1.5B to $13.5B.


            Amazon has predicted that AWS can become the largest business inside of Amazon, implying a revenue base that can grow much larger than the +$50B in sales that AWS will generate in 2021.


            Amazon is one of the most trusted and shopped brands in the world. 70% of product searches in the U.S. online begin on Amazon; Prime is the largest subscription business in the world, and Amazon has captured 50% market share in online retail. Amazon’s low prices, convenience, selection and dependable delivery have cemented its position as the leading online retailer. Customers can shop almost anywhere; the fact that they continue to choose Amazon proves its value proposition to consumers.


            AWS allows customer to save money, scale faster, and develop and implement more advanced applications and services. AWS customers trust Amazon with their most sensitive data, and often architect their technological infrastructure to work specifically with AWS. AWS has built and deepened these relationships globally, across all size and type of enterprise.


            Amazon has a history of putting customers first. Customer reviews, free shipping with Prime, Kindle, Alexa, are also examples of non-obvious new product and services that have won customer love and trust by providing value, and convenience or an improved shopping experience. The accumulation of inventive, consumer-facing products and services has made Amazon one of the strongest consumer franchises in the world.


            Like Walmart before it, Amazon leverages its scale and negotiating power to drive better terms for itself, and for customers. This has created some friction between various constituencies in the Amazon ecosystem (suppliers/publishers/third-party sellers). As Amazon’s market power has grown, so too has the tension with a suppliers/actors that are reliant on the Amazon platform to distribute product or reach customers. 


            Inspired by founder and long-time CEO Jeff Bezos, Amazon’s culture is defined by a invention and innovation, customer-obsession., long-term thinking, and operational excellence. Few companies practice their cultural values as fully and consistently as Amazon as evidenced by its long-history of bold innovation, its customer-centric product and service offerings, its development of new large businesses that required long-term investment and patience, and its operational excellence as measured by leadership in online delivery and scaling of the cloud. Amazon’s culture, combined with its scale and financial resources, provide a strong competitive advantage because Amazon is willing and able to make investments against long-term horizons, that may not yield profits, at greater scale, than almost any company in the world. Crucially, Amazon does not get distracted with side projects that are immaterial to a company’s of Amazon’s size. Amazon has been ingenious at leveraging its existing asset base to create new, large and profitable adjacent businesses (marketplace/advertising/Amazon Video).


            Amazon is competitive with any company in the world at attracting and retaining top technology talent, a position that will be increasingly important as advanced technologies such as AI/Machine learning become more essential to businesses.


            Amazon is trading at 3.3x Sales, 21.9x EBITDA, and 65x E2021 Earnings. From 2016 to 2020, Amazon grew sales from $135B-$386B, EBITDA increased from $12.3B to $48B, and EPS increased from $4.90-$41.83. The inherent operating leverage in retail, and growing revenue and profit contribution from higher margin revenue segments (AWS/Advertising/Marketplace) have driven substantial operating leverage.  


            Over the next five years, Amazon should be able to compound revenue growth at 20-30% per year given the continued secular shift to online retail, growth of new large verticals such as grocery and pharmacy, and cloud revenue growth. From 2016-2020, Amazon grew revenue between 20-35% per annum. Assuming Amazon’s revenue multiple remains constant, the compound revenue growth will approximate the market value growth. For reference, Amazon’s trades at a lower multiple of revenue than large technology peers (Alphabet: 5.6x; Apple: 5x; Shopify 30x);


            It is quite possible that Amazon’s retail business currently represents the majority of the value of company. Amazon’s retail business generated $340B in revenue in 2020. If the retail business can grow at revenue at 20% per annum through 2025, retail will generate $846B in revenue in 2025 At a 10% pre-tax margin, Amazon’s retail business would generate $80B in profit. At a 25x multiple, the retail business alone would be worth $2T, or about $1.3T discounted at 10%. Given the entire business is valued at $1.5T today, an investor is paying $200B, or 4x sales, for AWS, a very attractive valuation for a dominant global digital platform with market leadership and one the largest addressable markets in the world.


            Conversely, the downside should be relatively protected at current valuation (i.e. $3000/share/$1.5T market value). In 2021, Retail should generate $400B in sales and AWS should generate $55B in sales. At 3x sales for retail ($1.2T) and 10x Revenue for AWS ($550B), Amazon’s valuation would be $1.7T, or $3333/share. These multiples are reasonable given the growth rate, competitive position, global scale, and essential, recurring revenue of each business.


            Over the next several years, Amazon’s earnings power will also benefit from a growth in advertising and marketplace, two businesses that may earn 30-40% operating margins at scale based on peer margins. It is possible that by 2024, Marketplace (3P) will generate $150B in revenue and Advertising will be at $50B in revenue=$200B in revenue ex anything from 1P retail/physical stores. A 35% blended EBIT margin is not unreasonable given the margins on scaled marketplaces/digital advertising businesses, which would result in $70B in EBIT; that earnings stream could be worth 20x EBIT, or $1.4T.


            The flywheel on marketplace + advertising is remarkable. More buyers=more sellers=more valuable advertising inventory. It is not clear why Amazon's advertising business can't reach $100B in revenue. One challenge of high-value advertising businesses is to keep customer attention at scale--historically, new technologies have disintermediated dominant advertising mediums--this is especially true with media (newspaper/print magazine/television). Another risk is that high-value advertising is hit-driven. Scaled media-supported advertising businesses are incredibly profitable, but not easy to defend over the long-term. The businesses are also economically sensitive. The network effects businesses have a different risk--which is the network unwinds. The risk is maybe greater here when the network does not control supply-i.e UGC content-the switching cost are arguably low (that is certainly debatable) and the competition for attention (Instagram/Twitter/Snap) is fierce.


            Amazon does not seem to have those problems. The advertising moat is supported by the online retail dominance--which is reinforced by a level of scale and tangible capital investment that would be almost impossible to recreate. This scale and capital allows Amazon to have the most selection and the fastest delivery to the most customers. The advertising moat is also reinforced by the best online shopping experience i.e. most reviews/best personalization. That moat is also deep and getting deeper. To the extent that the advertising business is sustained and defended by Amazon's advantages in online retail (70% of product searches start on Amazon/Prime Member base/supply chain and logistics) AND the advertising model is valuable given commercial intent, quality of ad formats and targeting----it's not clear what the constraints on Amazon's advertising business are (other than risks associated with 3P marketplace over time i.e. competing with sellers). Given that Marketplace and Advertising are potentially triple the operating margins of 1P retail, Amazon will not have a lot of incentive to compete with 3P sellers if that meant upsetting the apple cart.


            Amazon has several other unique advertising advantages, Prime Video being a huge one. Prime Video is a global internet television service, moving deeper into live and sports. That advertising pool is large. And I don't know how Twitch or Alexa will factor in, but both could be drivers over time.     


            Lastly, an entire ecosystem of advertising is developing around marketplace--agencies are being built purely to help 3P sellers sell on Amazon--and PE/Strategics are acquiring 3P sellers to create modern online CPG conglomerates (i.e. Thrasio). The more sophisticated and developed the ecosystem--probably the more entrenched the advertising can become. I don't think Amazon's valuation today takes into account the possibility of advertising reaching $100B


            Amazon has dominant scale in two relatively economically insensitive and essential categories: retail and cloud. No matter economic or market conditions, customers will need to buy a wide array of essential products from Amazon, including a growing assortment of staples. In a difficult economy, it is entirely possible that Prime’s value proposition will become more attractive for cost-conscious consumers. AWS’s cloud services are akin to electricity—it is last likely one of the last services that an enterprise would or could eliminate. Cloud customers often sign multi-year contracts and are increasingly independent on AWS to support core businesses functions.




I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


continued growth of retail/AWS

growth of new high-margin, high-return on capital businesses

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