Ama­zon

Share price: $946.94 Price-to-earn­ings (P/E) ra­tio: 178

Finweek English Edition - - COVER STORY -

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

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