Company Background
Amazon owns the leading e-commerce platform in the US, and the world’s largest cloud computing business – Amazon Web Services (AWS). Amazon’s online stores generated 51% of FY20 revenue, retail third-party seller services 21%, AWS 12%, retail subscription services 7%, advertising 6%, and physical stores 4%. The US (68% revenue) is Amazon’s biggest market, followed by Germany 8%, UK 7%, Japan 5%, and the rest of the world 12%.
Investment Merits
We initiate coverage with a BUY rating. Our target price is US$4,329 based on DCF valuation with a WACC of 6.2% and terminal growth of 5%.
REVENUE
Amazon has six sources of revenue: online stores (51% of FY20 revenue), retail third-party seller services (21%), Amazon Web Services (12%), retail subscription services (7%), other – ads (6%), and physical stores (4%). The US (68% of FY20 revenue) is Amazon’s biggest market, followed by Germany (8%), the UK (7%), Japan (5%), and the rest of the world (12%). Total revenue has expanded at 30% CAGR over the past 5 years, riding on the growth of e-commerce, cloud, and digital ad markets, where Amazon holds leadership ranks.
Advertising is Amazon’s fastest growing segment, which makes up 90% of ‘other’ revenue. It grew 66% CAGR from FY15 to FY20 and is expected to grow 53% in FY21. We expect AWS to emerge as the second fastest grower at 33% in FY21 as revenue from online stores and retail third-party seller services normalise after spiking from the onset of COVID-19.
EXPENSES
Cost of sales grew at 20% CAGR in the past five years, compared to revenue growth of 30%. Operating expenses grew more in line at 28% CAGR. Operating expenses include fulfilment (15% of FY20 revenue), technology & content (11%), marketing (6%) and general & administrative (2%) costs. Technology & content, marketing, and general & administrative costs have remained in stable ranges of 11.1% to 12.8%, 5.3% to 6.7%, and 1.7% to 2.1% of revenue respectively. However, fulfilment costs have risen from 13.0% to 15.2% due to fulfilment network expansion, higher staff costs and COVID-19 productivity reduction.
MARGINS
Operating margins have gradually risen from 3% to 6% from FY16 to FY20. AWS and advertising are Amazon’s main sources of operating income and margins. AWS operating margins are at 30%, up from 25%, while advertising margins are estimated to be higher than 50%, in line with other large pure-play digital ad companies. We estimate the retail business (merchandise sales) to operate at a negative 0.4% operating margin.
BALANCE SHEET
Assets: Fixed assets have grown by four times to US$113bn in the last five years as Amazon expanded its network of fulfilment warehouses and data centres. It spiked 56% in 2020 as Amazon accelerated fulfilment capacity to meet pandemic demand for online sales. Fixed assets made up 35% of total assets, and is expected to grow an additional 15% in 2021.
Liabilities: Amazon has a net cash position of US$53bn, which grew at 30% CAGR from US$18bn in the past five years (Figure 3).
CASH-FLOW
Cash-flow from operations spiked 72% YoY to US$66bn in FY20 from increased profitability during the pandemic, while capex almost tripled YoY to US$35bn from aggressive expansion (Figure 4). Capex as a % of operating cash-flow is expected to remain above 50% compared to the pre-pandemic average of 41% as Amazon continues to expand fulfilment and AWS capacity
Timothy covers the US technology sector focusing on hardware companies. Previously a credit analyst, he handled bond analysis and research for the fixed income desk. He has presented seminars for organisations such as SIAS, SPH and IRAS, commentated live market updates for 93.8FM, and authored investment articles for the Business Times newspaper. He graduated with a Bachelor of Commerce in Accounting & Finance from the University of Western Australia.