Primed: Amazon Keeps its Wide Moat Growing

Ticker: AMZN
Sector: Consumer Discretionary
Industry: Internet Retailer
Headquartered: Washington, USA
Moat: Wide: Intangible assets – Brand, Switching costs, Scale

Action at date of this post

Accumulate as of 3.13.2024
This is technically a buy opinion. Accumulate means if you are an investor that buys periodically then keep buying Amazon. If you do not own it, but are looking to buy, this is an indication to open a position of no more than 25% of your intended, total position.

Fair Value Analysis as of date of this post

I do a fair value analysis on every stock in two ways. The first is the Discounted Cash Flow (DCF) method which I use for most stocks. I also run the Peter Lynch Fair Value method on stocks as well. I like running both as there are times where one way is more meaningful than the other depending on the stock.

Amazon Corporate Overview

Amazon stands as a preeminent force in the global e-commerce and technology sector, solidifying its position as a market leader since its founding in 1994 by Jeff Bezos. The company, originally an online bookstore, has transformed into a multifaceted conglomerate, encompassing diverse business verticals. Amazon’s core business involves e-commerce, offering an extensive selection of products to customers worldwide. The introduction of Amazon Prime, a subscription service with perks like free shipping and exclusive content, has fostered customer loyalty and contributed significantly to the company’s robust revenue streams.

A key driver of Amazon’s success is its cloud computing division, Amazon Web Services (AWS), which has emerged as a dominant player in the global cloud services market. This segment not only fuels the company’s profits but also underscores its commitment to technological innovation. However, Amazon faces challenges, including regulatory scrutiny and competition in various markets. Investors keenly analyze the company’s financial performance, international expansion efforts, and innovation strategies to gauge its long-term growth potential. As a versatile and dynamic player in the digital economy, Amazon continues to shape the future of commerce and technology, making it a focal point for investors seeking exposure to a diversified and forward-thinking market giant.

Amazon Segment Analysis

Amazon operates in three reportable segments: (1) North America 61%, (2) International 23%, (3) Amazon Web Services (AWS) 16%. There is a lot of rolled up in both North America and International. Meaning in each of the two segments you have multiple revenue verticals such as online retail, physical retail and advertising to name a few.

Amazon Moat Source

Amazon’s wide moat stems from many competitive advantages. On the e-commerce front the companies sheer scale allows it to offer goods at prices that others cannot beat. The same goes for the AWS business. As a pioneer in cloud computing, the early advantages continue to pile up. With high switching costs in money and time, as well as massive scale, AWS is almost untouchable. Like Apple, Amazon has built a solid ecosystem, that once pulled in, is hard to separate from for businesses and consumers alike.

Amazon Growth Outlook

After a shaky run post pandemic, Amazon has found its footing with right sizing itself for the current environment. I like it when a company finds its problems and addresses them without haste and in public view. As of the end of its 2023 fiscal 4th quarter sales were up 12% year over year. This represents a nice rebound from it’s dip into single digit growth in 2022. 

Drivers of growth continue to be AWS and now advertising is making a meaningful contribution to the bottomline. Advertising grew 27% over a year ago for the 4th fiscal quarter of 2023 on a YoY basis. This is important for Amazon’s growth trajectory as both AWS and advertising have much higher margins than e-commerce. 

Amazon’s many competitive advantages give confidence that it can continue to earn returns on capital above its costs of capital. On the e-commerce side, the gulf between it and the next largest rival is enough to ensure solid growth for years come from that segment alone. Along the same lines, the early mover status of AWS has meant all others are playing catch-up to a still fast moving target. 

On the horizon there is still pharmacy which could be an interesting addition to the company. 

The Numbers

Amazon’s numbers are trending back in the right direction after its adjustment to the post pandemic world. Free cash flow jumped back well into positive territory and ROIC and ROCE are moving up as well. The company is selling slightly below its long-term median on a price to sales basis and above on a price to free cash flow basis. Debt is coming down and as is typical of Amazon, capital expenditures are where we have come to expect from this mega cap non-dividend payer.

This website and associated newsletter along with its content/links are not financial advice. Nothing in this newsletter is an investment recommendation. All content is created for entertainment, educational, or informational purposes only. My strong buy, accumulate, hold, reduce or sell opinions are exactly that – opinions. Be sure to do your own research for your own particular circumstances or higher a professional advisor.

At the time of writing this post, the author does have a position in AMZN.