Share price: $946.94 Price-to-earnings (P/E) ratio: 178
Leading this charge is Amazon, which in the fourth quarter to December increased revenue by 22% to $43.7bn while operating income grew 13%. Free cash flow was $9.7bn ($7.4bn).
Founder and CEO Jeff Bezos commented that Amazon Prime members can now choose from over 50m items – up 73% since 2015. The group delivered more than 2bn units on behalf of sellers in 2016, and the number of active sellers grew more than 70%.
In just one example of its ability to innovate, it launched an Amazon Go store in Seattle, where there is no checkout, with sales taking place using the same types of technologies used in selfdriving cars: computer vision, sensor fusion, and deep learning.
Coronation’s developed market analyst Humaira Surve says both its online and cloud businesses are long-term growth drivers. “Online penetration of retail sales in the US is 13%, and cloud penetration is 5% so there is still a long way to go.”
Amazon management, she says, is excellent and has orientated itself towards the long term. The company’s valuation is also reasonable. “Over the last five years, it has grown gross merchandise value at 21% a year. By comparison, Walmart grew revenue at 2% a year.
“Amazon is such a strong brand, which has become synonymous with low prices. Its success is based on growing the business, which results in more sellers on the platform, which improves customer experience, which results in more traffic. As the company grows, it improves the cost structure, and as costs fall, it reinvests in lower prices.
“What we really like is that it has the leading infrastructure for online delivery. With 95 warehouses in the US, delivery times are much shorter and delivery more reliable than competitors’. It is such a superior experience and this is a multiyear lead that they have.”
Looking at its cloud services, multiple enterprises are able to share infrastructure and this lowers operating cost considerably.
“Amazon was a pioneer in this space. In terms of computing capacity, it has about 10 times the next 14 consecutive players combined. This is important as cloud computing has advantages as you scale.”
Anchor Capital’s chief investment officer Sean Ashton says that Amazon “has been a stellar performer, but the valuation is arguably approaching levels which require some circumspection, but we retain it as a hold. “Of all the major technology companies in the world (barring Tencent), Amazon currently deserves the greatest respect for its ability to successfully innovate across a wide range of products and services – cementing its title as the ‘Everything Store’.
“After mastering online retailing in the developed world, it has also taken a substantial lead in cloud computing through Amazon Web Services (AWS).” Ashton says this accounted for much of the share price appreciation from early 2015. He says Amazon also has its sights set on the global logistics industry. “This strategy of innovating in areas aligned to the core retail business, unlike the more risky ‘moonshot’. approach at Alphabet, makes it a remarkably successful innovator.”
Future growth could be curbed by anti-trust measures, but there is no sign of that yet.
“With a market capitalisation of $430bn and strong growth ahead, investors are probably correct in believing that Amazon will continue to expand into new areas. As was the case with AWS, this is ultimately what is required for the share price to keep on rising. The current market value of the business implies a forward P/E multiple to December 2017 of 48 on both the core e-commerce business (assuming a 3% operating margin) and AWS (33% operating margin),” Ashton explains.
The group delivered more than 2bn units on behalf of sellers in 2016, and the number of 70%.active sellers grew more than
Jeff Bezos Founder and CEO of Amazon