Amazon.com, Inc. (AMZN) is an American multinational technology company which focuses on e-commerce, cloud computing, digital streaming, and artificial intelligence. It operates through three segments: North America, International and Amazon Web Services (AWS). AMZN is the leading e-commerce player globally and accounts 39% of the US ecommerce business. AWS which provide on-demand cloud computing platforms is also the global leader accounting 34% of the market share.
Investment Overview
AMZN’s Retail segment (North America plus International) is expected to become a key driver of growth. AMZN’s retail segment achieved operating profit in 2Q23 and continue to booked a record high margins in 4Q23 after seven quarters of losses due to challenges stemming from macroeconomic factors. According to eMarketer, US e-commerce industry is expected to grow at a CAGR of 12.3% over FY24F-27F, representing 21.2% of total retail sales in 2027 (15.0% in 2022). AMZN is still the leading ecommerce player accounting for 41% of the US e-commerce and there is a significant portion of untapped market to capture. The Retail segment operating margin improved to 6.1% vs a negative 0.3% in 4Q22, driven by lower delivery costs stemming from regionalizing AMZN’s delivery network. Consensus expects revenue CAGR of 11% for the retail segment of AMZN over FY24F-26F, driven by growth in its online stores and third-party seller service. While retail operating margins are projected to improve from 1% in 2023 to 3% in 2025. The focus will shift towards profitability as the retail segment completes its fulfilment build cycle. AMZN’s flexibility in pushing 1P vs 3P inventory and its Prime offering both serve as major advantages in its retail business. Amazon Logistics is likely to deliver well over 50%+ of packages from AMZN Fulfillment Centers, all of which should reduce dependence on 3P shippers. We expect AMZN’s retail segment operating income to be a key driver of share price from 2023 onwards, dethroning AWS’s operating income.
Amazon Web Services (AWS) continues to be the most valuable business for AMZN. Rising inflation and US technical recession are expected to hamper cloud infrastructure spending. AWS accounted for 32% share of this global market and is undoubtedly the most valuable business for AMZN, considering that it contributed only 17% to the group’s revenue in 4Q23, but accounting for 70% of company’s profit. Street expects slower AWS revenue growth in 2024 of 13% due to macro uncertainties, while expects revenue and EBIT CAGR of 19% and 25% for the AWS segment over FY24F-26F.
Amazon is ambitious to increase its share in the advertising market. Insider Intelligence expects Amazon to enjoy a 13% market share in the digital advertising industry by 2024, from 7.3% in 2022. According to eMarketer, Digital advertising market was US$570bn in FY22, and is expected to grow at a CAGR of 10% over FY22-26F. AMZN’s ad services recorded 2Q23 revenue of US$10.7bn rising by 22% y-o-y, much better than competitors (SNAP’s -4% and META’s +11%) and comprised 8.0% of group revenue. More advertisers are turning to AMZN’s retail media network to deceive Apple’s privacy changes and get closer to shoppers. That explains why AMZN’s ad sales have grown dramatically compared to peers. Street expects revenue CAGR of 17% over FY23F-25F for AMZN’s ad services.
E-commerce could face supply chain disruption & a tight labour market, along with inflation & slowing consumer discretionary spending, all of which could weigh on growth & profitability. Furthermore, if top-line demand in the e-commerce business and/or AWS slows during a period of heavy long-term investments, could result in limited margin expansion. On the other hand, future regulatory action could pose additional risks too.
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