The fastest-growing companies are usually on the smaller side. It’s a lot easier to go from $1 billion in revenue to $1.5 billion in revenue than from $100 billion to $150 billion in revenue – though both equate to 50% growth.
The opposite has been true for Amazon (NASDAQ: AMZN), however, if only by a bit. Over the past 20 quarters, Amazon’s revenue has grown at an average rate of 28.4%. Over the 20 quarters before that, its revenue grew at an average rate of 27.2%.
In its most recent quarter, Q3 2020, Amazon reported revenue of $96.1 billion, up 37% yoy. The pandemic has been kind to Amazon, encouraging consumers to shop online like never before. But Amazon’s growth story is not going to end at the same time as the pandemic. Far from it, in fact.
Amazon Web Services (AWS) is Leader in Growing Market
Amazon is perhaps best known for its online retail operation. But any discussion on the company’s investment merits should start with AWS. The cloud-based infrastructure-as-a-service (IaaS) segment generated net sales of $11.6 billion in Q3 2020, which is only around 12% of the company’s total net sales. But its operating income of $3.5 billion makes up around 57% of Amazon’s total operating income. Cloud computing services is a high margin business, while online retail is a low margin business.
But AWS revenue growth has been slowing; it was 55.1% in 2016, 42.9% in 2017, 46.9% in 2018, 36.5% in 2019, and 31% over the last 12 months. Ideally, growth wouldn’t be slowing down but 31% growth is still pretty good.
Data indicates that the growth rate may stabilize soon. Public cloud services currently account for around 9% of global IT spend – Gartner expects that to increase to 14% by 2024. As the No. 1 player in cloud services with around one-third market share, Amazon is set to capitalize on this trend.
Online Retail is Still a Small Percentage of Brick-and-Mortar
It seems like e-commerce took over the retail sector in 2020, but brick-and-mortar sales still dwarf e-commerce sales. US e-commerce sales are projected at nearly $800 billion for full-year 2020, up 32.4% from 2019. Brick-and-mortar sales, on the other hand, are expected to be $4.71 trillion, down 3.2% yoy.
So, will brick-and-mortar sales increase at the expense of online retail sales in 2021 and beyond? That’s unlikely. According to eMarketer, e-commerce sales were around 14.4% of all US retail spending in 2020 and are projected to reach 19.2% by 2024. That percentage should grow even more over the second half of the 2020s.
Amazon has a 39% share of the retail e-commerce market. Let that sink in for a minute – 39 cents of every dollar spent in online retail goes to Amazon. Walmart (NYSE: WMT) is a very distant No. 2 with a 5.8% share of the market.
If Amazon merely maintains its market share, the company’s online retail sales will soar over the next four years. If it grows its market share? Look out.
Amazon is Expanding into New Markets
If there are three things you can count on in life, it’s death, taxes, and Amazon expanding into new markets. The pharmacy market is Amazon’s latest target; the company launched “Amazon Pharmacy” in November 2020.
The US pharmacy market is worth an estimated $75 billion, so even if Amazon gets 10% of the market, it would provide a nice boost to the top line. But it’s Amazon we’re talking about; it wouldn’t be surprising if the company takes 30% of the market – or more.
Amazon has been in grocery delivery services for longer than pharmacy, but its expansion into that market is still in its early stages. Total US grocery sales were nearly $700 billion in 2019. It will be hard for Amazon to get a large share of the grocery market – there are several advantages to buying groceries in-person, after all – but just 5% of $700 billion is $35 billion…
How Should You Play Amazon?
Amazon shares haven’t set a new all-time high since September. Shocking, right?
Some investors might be getting scared off by the massive market cap – it is just over $1.6 trillion at the moment. But that looks like a mistake. Amazon’s forward P/E ratio of 71.8 is high, but this is a company with A LOT of growth in its future. And maximizing earnings is only a secondary consideration for Amazon at this time.
When Amazon exhausts its growth opportunities – which could be in the very distant future – and focuses on maximizing its earnings, $1.6 trillion could look cheap.
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