Is the Amazon (AMZN) Stock A Buy or Sell?
What started out as the world’s largest bookstore, has gradually transformed itself into the world’s largest everything store. Although Amazon.com (AMZN) still offers consumers a choice of millions of books, music, games, movies and other popular items (often delivered the same day they are ordered), it has developed into much more. The company is also the number one cloud services provider on earth, an influential force in entertainment, a grocery giant with the acquisition of Whole Foods as well as leading the way in the development of personal assistant devices, such as the Echo product line.
We believe that, despite the volatility of the tech sector, Amazon stock is still a great buy. This is because, in recent years, this company has managed to go against a broad sell-off current, thanks to its underlying growth narrative. Amazingly, its profitability has remained largely unaffected by the company’s scale.
AMZN Revenue Structure and Geographic Reach
Amazon has organized its main business operations into three distinct segments: North America, that accounts for about 60% of its revenue, International, with about one third, and Amazon Web Services that takes care of about 10%.
In addition, the company tracks sub-divisions into category groups. Among these, its own retail operations and those that it handles for third-party sellers on its website which generates close to 85% of its current revenue. Amazon’s own retail sales of both physical products and digital goods generate two-thirds of total revenue. Third party services that include affiliates’ commissions, fulfillment and shipping fees account for 20% of revenue.
The 10% of revenue brought in by Amazon Web Services comes from computing resources, database systems, data storage and related services offered by Amazon to a variety of customers – startups, medium and large companies, as well as government agencies.
The firm also runs several lucrative retail subscription services that bring in about 5% of its revenue. These include Amazon Prime membership fees, in addition to digital videos, music and audiobooks, among others.
Although most of the company’s sales are from North America, a growing portion comes from overseas. Among its biggest international markets are Germany, Japan and the UK, each of which contributes between 5% and 10% in revenue, with the rest of the world accounting for 8%. Amazon conducts its business globally, in other countries such as Spain, Brazil, Italy, the Netherlands, China, Australia and France. Its App store is also open to customers in 200 countries.
AMZN Unique Strategic Approach to Growing Its Business
Amazon advertises through a range of online channels that include portal advertising, email campaigns, sponsored searches and direct sales. Every year, the company spends more than $54 billion on advertising. Its strategy seems to boil down to one word – more; More products, more services, more industries and more delivery options, all of which have led to more customers and more profits over the years.
Perhaps the most important right now is more information. This is clear in how Amazon extensively uses artificial intelligence within all its systems to collect usage data that can be used to improve the systems and improve the customer experience overall. The most visible applications resulting from this focus are the Alexa digital assistant, AWS and its autonomous drone delivery service.
Amazon wants to make it easier for consumers to buy the products they need from its website. To this end, its $99-per-year Prime service offers customers free 2-day delivery or next-day delivery by stocking products in a collection of distribution centers. Echo owners can order products off Amazon.com’s catalog through Alexa. To ship products to customers even faster, Amazon has gone on a fulfillment center building spree.
Strong AMZN Stock Performance
Is there anyone who really recalls a time when Amazon was unprofitable? Investors who may have been around for a while might remember founder Jeff Bezos’ warning to some of Amazon’s first investors back in 1997 that the company would take a long time before realizing a profit. His strong will and ‘in it to win it’ attitude kept Amazon pushing through a variety of strategies, culminating in its first profit in 2003.
Amazon stock has remained on a perpetual rise through a strategy of continuous growth, allied with acquisitions of potentially profitable companies. Through maintenance and development of this strategy, the value per share for its shareholders has continued to grow over the past decade and seems likely to continue to do so for a long time, with the result being the impeding prospect of an AMZN stock split in the near future.
An impressive note in point is the fact that over the last 10 years, the company’s overall sales have grown from about $15 billion, to stand at more than $130 billion annually. What’s more, this indicator is projected to hit $200 billion by 2019, and a whopping $1 trillion in a few years.
This extraordinary growth in revenue can be seen by the gains made by investors, who have seen the Amazon stock price rise from about the $90 mark to stand at more than $1,400 today. None of the earnings are to be distributed as dividends in the foreseeable future. The plan is to optimize the company’s free cash flow and plough it back into the company.
Finally, much like another tech behemoth, Apple, and its founder Steve Jobs, most of the success factors that have driven Amazon’s founder can be attributed to its maverick CEO, Jeff Bezos. His drive and eye for innovation have pushed the company to heights that its early critics believed were impossible. You could say that he primed his company to totally dominate the industries it operates in.
How Amazon Became the Undisputed King of The Cloud With AWS
If you take a cursory look at the burgeoning cloud computing market and the companies that operate in this segment, Amazon Web Services’ (AWS) position as the undisputed leader may come as a bit of a surprise. What is even more surprising is that Amazon is set to blaze the trail for such industry heavyweights as Microsoft, Oracle, Google and IBM for the foreseeable future.
Of all its product categories, AWS has been, without a doubt, Amazon’s supercharged growth engine, managing to attract a wide range of customers – from startups that need only the most basic of computing resources to giant operations like Netflix, a company that streams millions of hours of video each day to consumers all over the world from AWS’ servers. Following in the philosophy that has been behind the success of Amazon (AMZN) itself, AWS has continued to add functionality and capacity, while improving its efficiency, ensuring that it attracts more users than any of its rivals.
But how did AWS manage to work its way into such a position of complete dominance? The most simple answer is that it was the first to hit the ground, but some industry insiders believe that it has more to do with the dynamics of disruption; when it started, its competition simply refused to believe that there was a large enough market for the new entrant to worry them. It is a classic case of dismissing an irritant until it is too late. In most industries, dominant players rarely have any reason to be concerned about someone attacking the bottom end of the market, which is exactly what Amazon Web Services was doing in its early days.
Also, getting into the cloud computing business raised fundamental questions that these companies were reluctant to face. For them, the model that AWS was pursuing was highly disruptive to their core businesses and undermined their value propositions. The differences that concerned them were the radically lower margins, delivery models and pricing structures. However, the success of AWS made them all sit up and take notice, convincing them to join the party, offering AWS stiff competition in a market that is worth trillions of dollars.
Still, because of Amazon’s dominance in the market at this point, it will be a monumental task for these latecomers to catch up. Also, its development of hybrid cloud software that divides corporate data between the cloud and on-site servers is a step that they could not have been anticipated. The cloud computing market will continue to grow, resulting in major players displaying impressive growth figures, but AWS has built up a big lead that it shows no sign of ceding to the competition any time soon.
Amazon (AMZN) stock doesn’t come cheap, and even the most optimistic of its early investors would be surprised at just how fast the share price has risen of late. Still, you are buying into a business – one whose performance is unprecedented. This comes at a big price. However, we expect investors will be happy to buy AMZN, unless of course something drastic happens.