Amazon.com Inc – Prime opportunities ahead June 24, 2019 308

Description

Amazon.com, Inc. is an online retailer that offers a wide range of products. The Company products include books, music, videotapes, computers, electronics, home and garden, and numerous other products. Amazon offers personalized shopping services, Web-based credit card payment, and direct shipping to customers.1

 

Company Highlights

  • Grocery and pharmacy represent a combined $900bn Total Addressable Market (TAM) opportunity for Amazon.
  • Amazon Web Services (AWS) will continue to experience stellar growth with the hybrid cloud market growing 23% CAGR to US$92bn by 2021.  
  • Advertising is the key growth driver that may translate to an additional US$3bn revenue gain in 2019

 

Investment Rationale

We think that Amazon (AMZN) still has great growth potential despite slowing retail revenue growth. We think there are 3 key drivers for AMZN’s growth in 2019.

  • Grocery and pharmacy markets represent an expansion of US$900 of TAM respectively for AMZN.
  • AWS remains the dominant cloud service provider with 32% market share. AWS would continue to experience robust growth as 80% of the workload has yet to be migrated to cloud. Worldwide public cloud market to grow at 17.3% CAGR to reach US$206bn in 2019.
  • Advertising (ad) remains a huge opportunity. We estimate that AMZN will gain revenue of US$3bn from search ads with a market share of 8.8% in 2019.

 

Reasons for Buying

The expansion into new product categories such as groceries and pharmacy will be crucial in driving AMZN’s retail business growth. AMZN already captures 52% of the total U.S. e-commerce market share in 2018. By category, AMZN has more than half of the online market share in 7 of 17 categories, especially in books (90%), toys (70%) and baby products (65%). We think that the venture into groceries and pharmacy is key to the reacceleration of revenue growth for AMZN. The total retail sales for groceries is US$680bn in 2018. Assuming the current trend of 3% annual growth for grocery spending continues, the TAM is close to US$700bn, or 12% of the core retail TAM in 2019. As for pharmacies, it represents a US$200bn market opportunity in 2019.

 

AMZN Web Services (AWS) will maintain its dominance in cloud services by leveraging on scale and expanding its service offerings. We continue to see robust AWS revenue growth (41% YoY in Q1 2019). In our view, cloud remains an enormous opportunity as 80% of the workload has yet to be migrated to the cloud. AWS remains the dominant cloud service provider with 32% market share, followed by Azure at 16%. AWS would be able to offer more competitive price points against its competitors, given its larger scale of operation. More importantly, the market has moved beyond cost to look at hybrid offerings that provide deep domain expertise and bridges legacy systems with new cloud service platforms. AWS’ introduction of AWS Outposts, which allowed cloud services to be run on on-premise facilities, will likely differentiate its offerings from Azure and carve market share from Microsoft.

 

Ad has been the largest growth story for AMZN since 2018. Revenue growth for ad has been more than 100% from Q1 2018 to Q4 2018. Although constant-currency ad revenue growth has slowed 61 percentage points to 36% YoY for Q1 2019, we believe the story is not yet over. We think AMZN is well positioned due to its scale and data from the in-market customers. Unlike its competitors, AMZN can collect data of what customers bought, what they add to shopping carts and their entire journey through completion of purchase. The constant stream of data would improve AMZN’s algorithm to drive ad conversion rate. According to Statista DMO, worldwide search ad will grow at a CAGR of 6.5% to reach US$141bn by 2023. Assuming that AMZN will capture 8.8% market share of the digital ad space, it would translate to a US$3bn revenue gain from ad in 2019.

 

RECOMMENDATION

We maintain our POSITIVE rating for AMZN. AMZN continues to show great strength in its engagement, cloud offerings and ability to disrupt industries by leveraging on their leading technologies. Based on our analysis, we think valuations for AMZN is reasonable, given its robust revenue growth and earnings power. AMZN is currently trading at 82x earnings, which is lower than the historical average of 263x earnings.

 

Amazon’s bullish trend is likely to continue based on our analysis on the weekly chart. The most pronounced evidence is the hammer formed by the weekly candlestick three weeks ago, which closed directly above the 22 and 50 Simple moving average cross. The subsequent candlesticks confirmed the bullish sentiments.

From a long term perspective, the stock prices have converged into a symmetrical triangle pattern, which usually signifies price fluctuations. However, if we factor in the long rise from March 2019, the formation is a strong bullish pennant, indicating that Amazon is preparing for a strong rally ahead.

 

The current price action and Elliott wave analysis of the pennant suggest that Amazon may head lower to 1731.65, which is at the third leg of the sub wave of wave C. However, it is possible that there may not be a retracement and Amazon goes for a strong breakout rally of 1971.00, which is at the crest of wave B. The stock price will most likely break out of wave B and shoot for a target price beyond the 2000.00 psychological level.

 

CHART LEGENDS

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———— 22 periods MA

 

 

1 Source: Bloomberg

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