Amazon.com is relatively less interesting. E-commerce, while clearly growing, is a crowded space with very limited barriers to entry. Amazon for all its might commands about 30% of total US e-commerce sales, a decent share of a growing pie but a lot less dominant than China’s Alibaba, which has 80% of the domestic market. In fact, outside of the US, Amazon’s international e-commerce business has struggled and fluctuates between small losses and profits. Nevertheless, Amazon is a strong competitor with sales growth about 20% per annum as it disrupts traditional brick-and-mortar retailers by offering better prices and broader selections to consumers.
Its philosophy of customers first, then employees and lastly shareholders is probably a sound one and is a break from conventional business practices. This has helped Amazon attract and retain a group of loyal customers or Amazon Prime members. However, question marks remain around logistics costs and whether an internet-only retail model is the best long-term business model.
Amazon’s strong share price performance last year was fuelled by excitement over Amazon Web Services (AWS), its cloud-based IT services segment that has grown sales about 60% year over year with expanding margins. This could become the crown jewel in years ahead, although the nature of IT infrastructure outsourcing means it will face a continual trade-off between winning more business and price cuts.
Amazon looks expensive on a price-to-earnings ratio of 109 but it is free cash flow positive and growing, which means it makes enough to keep the lights on and fund its growth initiatives. What we don’t like is that investors had started to hope that Amazon would make more consistent sizeable profits going forward. This raised expectations which Amazon hasn’t delivered on. Based on its philosophy and the founder’s track record, we expect most of Amazon’s profits to be reinvested for long term growth and accounting earnings will continue to look minuscule compared to its market value. We will look more closely at Amazon at lower share price levels.
Amazon’s share price has fallen 27% this year vs. 9% for the S&P500 index; 3.5% for Facebook and 10% for Google (Source: YCharts)
The final part of this blog, regarding Netflix, will be released tomorrow 19th February.
Disclaimer: This blog is intended to provide general information only. It does not take into account your investment needs or personal circumstances and so is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to an Authorised Financial Adviser.