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Amazon: Growth Is Far From Over

Amazon: Growth Is Far From Over
27 Dec 2018
  • Amazon’s core e-commerce business continues to be the primary revenue driver, at ~88% of sales in the MRQ; upside remains when looking at penetration levels across North America.
  • AWS remains the firm’s fastest growing segment, +46% y/y in Q3. Again, when taking a step back, the rapidly growing cloud market reflects further room for growth.
  • Home assistants are expected to be in 55% of U.S. households by 2022, paving the road for further e-commerce growth – all while expanding use of cloud services.
  • Given projected EPS growth rates, shares are more than reasonably valued – in the long run, Amazon is likely to be a multi-bagger.

Amazon (AMZN) shareholders have seen heavy volatility throughout 2018, with shares down over 25% from their high this past summer. Despite that, shares remain up nearly 30% year-to-date. When disregarding the company’s daily stock price fluctuations, and focusing purely on the fundamentals of the business, investors have all the reason to be optimistic.

The company’s core e-commerce business continues to grow at an impressive rate, with plenty of upside remaining. Additionally, Amazon Web Services – the company’s fastest-growing segment – is continuing to see strong market share and top-line growth, contributing to the firm’s operating income. Although many argue that today’s valuation is too high for comfort, investors should keep the big picture in mind. When combining the potential for each segment, the upside is considerable.

North American E-Commerce

In FY17, Amazon generated just over $106 billion in North American e-commerce revenues (~$134 billion in the LTM). Many argue that at this size, there is no way for Amazon to sustain its growth. Zooming out, however, paints a different picture. Retail sales in North America totaled over $5.6 trillion dollars (+3.4% y/y) in 2017. Of this, roughly $490 billion was conducted online, and categorized as e-commerce. The data shows that only ~9% of North American retail sales are e-commerce. This relatively small penetration rate implies a considerable amount of upside left.

Source: Seeking Alpha