Question

FOR AMAZON What are the future financial projections of the company and how does it plan to get there?

Answer 1

Amazon is an American electronic commerce and cloud computing company based in Seattle, Washington that was founded by Jeff Bezos on July 5, 1994. The tech giant is the largest Internet retailer in the world as measured by revenue and market capitalization, and second largest after Alibaba Group in terms of total sales. In 2015, Amazon surpassed Walmart as the most valuable retailer in the United States by market capitalization. Amazon is the third most valuable public company in the world (behind only Apple and Alphabet), the largest Internet Company by revenue in the world, and after Walmart, the second largest employer in the United States.

Investment

• 2008: Engine Yard, a Ruby-on-Rails platform as a service (PaaS) company.
• 2010: LivingSocial, a local deal site.
• 2014: Acquired the 'buy' domain in an auction for $4,588,888.
• 2014: Amazon announces a US$2 billion investment in India.
• 2016: Amazon announces an additional US$3 billion investment in India^.
• 2017: Between May and July 2017, Amazon had invested ?2,000 crore (US$310 million) in India with ?130 crore (US$20 million) invested into its payment arm Amazon Pay India. In November 2017, Amazon invested another ?2,900 crore (US$440 million) in the Indian arm.
• 2018: In January, an additional sum of ?2,000 crore (US$310 million) was invested by Amazon in its Indian arm.

As per latest media report, Amazon is expected to sell 7.2 billion items this year. By 2020, that number is expected to grow to 12.6 billion items. But getting that kind of growth isn't cheap, and involves heavy investment in transportation. Amazon spent $11.5 billion on shipping last year — that's twice what the company spent two years ago. With Amazon’s joint initiative with J.P Morgan in healthcare, the stage is set for Amazon to truly enter banking and financial services sector.

Amazon (AMZN) is a stock that investors dream on. The narrative of an increasingly dominant Internet retailer with 20%-plus annual revenue growth is extremely powerful. And when coupled with an equally explosive public cloud infrastructure business, the story becomes intoxicating. That does not mean the stock is bound to be overpriced. What it does mean is that the range of possibilities for AMZN’s future fundamentals is unusually broad.

1 - Ultimate ecommerce penetration across retail sectors

This array of variables is probably the most important determinant of future value. Over the past few years, AMZN has made incursions into retail categories like grocery and pharmacy that previously seemed off limits to substantial ecommerce penetration. We estimate that approximately 13% of retail sales (excluding auto dealers and gasoline) will originate over the Internet this year, up from 12% in the prior year. And it is clear that ecommerce penetration will increase substantially over the coming decades. Our best guess at the moment is that nearly half of all retail sales will originate over the Internet within the next 20 years. This includes items that are ordered online but picked up in a physical store, which could become an increasingly important source of ecommerce sales in categories like grocery.

2 - Amazon share of U.S. ecommerce

Amazon is the undisputed king of U.S. ecommerce, with an estimated market share of 34% based upon the estimated gross market value of the products sold via Amazon’s marketplace. Based upon our model, Amazon actually has increased its U.S. market share by more than 2 percentage points over the past year. Two factors will promote a stable or slightly increased share of the market served from current levels. First, Amazon is not afraid to compete on price in selected categories where it views market share as strategically important. The recent price cuts at newly acquired Whole Foods are a good illustration of this approach. Second, an increasing proportion of third-party sellers in the Amazon marketplace are utilizing the company’s fulfillment capabilities.

3 - Amazon share of key non-U.S. ecommerce markets

AMZN’s market share varies across international markets, but the company is the leading ecommerce retailer in Germany, the U.K., Japan and Canada. These markets account for over 80% of AMZN’s retail business outside the U.S. We estimate that collective retail ecommerce sales in these countries will total $340B in 2017, and that AMZN’s international retail gross market value will equal 19% of this amount. Notably, we do not explicitly model a contribution from the world’s largest retail market, China. AMZN’s estimated share of the Chinese market is a scant 1%, far behind market leaders Alibaba and JD.com that account for roughly two thirds of retail ecommerce in the Middle Kingdom. We would expect AMZN’s share of its key international markets to be stable or increase slightly given the same reasons cited for our U.S. market share forecast. For purposes of our base case model, we estimate that international retail gross market value served will equate to roughly 20% of the size of AMZN’s four biggest non-U.S. markets.

4 - AWS market share of IaaS

Amazon Web Services (AWS) is the current leader in offering public cloud computing and storage. However, unlike with its ecommerce business, Amazon faces plenty of competition from mega cap giants. Specifically, Microsoft’s Azure appears to be close behind AWS is terms of application workloads served by their public cloud infrastructure. AWS currently accounts for about 50% of the Infrastructure-as-a-Service (IaaS) market

5 - Returns on invested capital for Amazon’s ecommerce and cloud businesses

We are obsessive about ensuring that our valuation models reflect realistic assumptions regarding future returns on capital. The preceding variables discussed have a broad range of potential values, but analyses of capital return histories for selected public companies provide excellent guidance for what AMZN investors can reasonably expect.