A business which went public at $16 in 1997 is now priced at more than $2,000 per share today and analysts are still bullish
Feb. 5, 2020
Here are five reasons why:
1. It’s a Founder led business
Amazon (NASDAQ: AMZN), still headed by its founder Jeff Bezos, has just rejoined the $1 trillion club. Bezos has worked on building Amazon from scratch and has done a very good job at it. This is a big factor for investors as it’s often believed that original founders are better at managing their companies because they have a certain level of emotional connection with the business and Bezos still holds an 11.5% ($117 billion) stake in the company.
2. Fulfillment centers
Amazon has a wide network of fulfillment centers in key cities. These centers are responsible for storing and transporting goods for the sellers and are very efficiently managed through automated processes and minimal manpower. These centers are the backbone of one-day delivery and express shipping options provided by the company and are essential for an e-commerce firm to survive in this market. There is an enormous amount of capital expenditure required to build that kind of a network and workflow for a new e-commerce company, which creates barriers for entry, or an economic moat for Amazon. It has spent roughly $16 billion on capital expenditure, up from $ 5 billion in 2015.
3. Sticky, ‘Prime-centric’ business model
Amazon’s lavish spending on its own membership scheme Amazon Prime in its earlier stage is now paying off. One-day delivery option to Prime members has led to a significant increase in Prime subscriptions in recent years. In the fourth quarter of 2020, it reported $18 billion in recurring revenue through its Prime membership, pushing its online retail sales up to $46 billion for the year. More than 150 million people now pay $119 per year for Prime membership, up from 100 million two years ago. The segment is expected to drive growth higher in the coming years as faster delivery and exclusive deals are highly demanded by online shoppers. In addition, Prime subscribers enjoy Amazon’s streaming services, music, games, and books which truly makes it value for money.
4. Online shopping still has lots of room for growth
E-commerce has taken over from traditional retailers and has grown significantly over the last decade. Global e-commerce sales grew 17.9% from $2.93 to $3.53 trillion in 2019 and are expected to go up to $6.54 trillion by 2023. Amazon, being the largest e-commerce player in the world with nearly 14% global market share, will of course share a big part of this. A large part of this growth will come from emerging markets like Mexico and India which are expected to grow in double digits over the next few years. Amazon’s increased investment across these countries will lead to higher revenue growth as competition from less sophisticated and fragmented players continues to be minimal.
5. Diversification into many different sectors
Over the years, Amazon has invested and diversified into multiple business segments like physical stores, cloud computing, streaming, groceries, electronics, etc. This reduces the risk of being exposed to downturns in specific sectors, hence making it a better investment with stable earnings. Its leading position in the cloud industry gives it an edge over others as Amazon Web Services comprises 60% of its operating income and generates an enormous amount of cash which helps Amazon to survive.
The next big move for big tech is finance. Apple (NASDAQ: AAPL), Google (NASDAQ: GOOGL) and Facebook (NASDAQ: FB) are aggressively leading their way into commercial finance with Apple Pay, Google Pay, and Facebook’s Libra project. Amazon is focused on building financial service products that support its core strategic goal of increasing participation in the Amazon ecosystem, but the growing participation from other big tech firms might change that in the future.
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MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Amazon. Read our full disclosure policy here.