Amazon: 4 Key Long-Term Growth Drivers

Amazon.com  (NASDAQ: AMZN  )  is part of an extremely rare breed. Year in and year out, almost all traditional valuation metrics make the company seem to be overvalued. Despite this, its stock has managed to go through the roof every year, without many signs of slowing down aside from minor hiccups. Amazon's outsize growth prospects from a number of different sources will pave the way for it to do very well in 2014. 

Retail and AmazonFresh
Amazon's retail sales from its own inventory still make up roughly 81% of the company's total sales volume. Amazon is taking huge strides in growing its retail sales to consumers, by constantly diving into newer markets. The company is getting into the massive consumer packaged goods industry in the U.S., which is estimated to be a $850 billion market.

Amazon is moving into Wal-Mart's (NYSE: WMT  ) territory by selling consumer packaged goods and household essentials. However, Wal-Mart is fighting back by testing out same-day delivery in select cities. Wal-Mart is enabling customers in some cities to order online, and ship to their desired locations, for a flat $10 fee, and in the process developing a more robust e-commerce presence. 

In the U.S., only 9% of all shopping is conducted online. And over time, online shopping as a percentage of total retail should grow much faster as well. The secular shift from offline to online has been accelerating this year, driven by purchases on mobile devices. Amazon recently disclosed that 50% of its customers during the holiday season made a purchase from a mobile device. 

Amazon stands to benefit as more consumers across the globe shop more online. Amazon has a small presence in the shipping of groceries and consumer staples through its subsidiary Soap.com and AmazonFresh locations in select U.S. cities. The robust growth of Amazon Prime subscriptions in the last few quarters will almost certainly guarantee the growth of the e-tailer as well.

Third-party business
Amazon continues to gain market share in its relatively high-margin third-party business driven by Fulfillment by Amazon and Prime. Amazon is signing up more merchants and reducing time to ship the products by placing more fulfillment centers near major U.S. cities. Amazon's Marketplace business is doing well, in spite of competition from rival eBay  (NASDAQ: EBAY  ) . 

In the last quarter, eBay's revenues grew 14% year over year to $3.9 billion. The company is a favorite among merchants because it doesn't sell goods from its own inventory and offers a payment processing platform in the form of PayPal.

However, Amazon's service sales, which includes the commissions the company earns from its Marketplace business, are growing more than twice as fast as its own retail operations. This growth far outstrips eBay's growth. In the third quarter of 2013, Amazon's service sales grew 45% while sales from its own retail business grew 20%. 

Amazon's presence in emerging markets is very small compared to its presence in the United States. Amazon earns about 40% of its total revenues from international markets, and the big three markets for Amazon are Japan, the U.K., and Germany. The company also recently started offering a price-comparison platform under the Marketplace business model in India called Junglee.com. Amazon's presence as a marketplace in large markets like India and its retail operations in China will fuel the company's long-term growth prospects from these emerging markets.

Amazon Web Services
Amazon's cloud business is gaining steam. The company doesn't reveal the revenues of its AWS business, but in the most recent quarter the company's revenues from its "Other" segment grew 56% year over year to $1.01 billion. It is widely believed that Amazon Web Services makes up the majority of these revenues, with advertising and credit card fees making up the rest.

The company's cloud computing business enables enterprises, governments, and startups to utilize back-end computing power at variable costs instead of laying out large-scale infrastructure expenses. Amazon charges on a pay-as-you-go basis instead of an annual subscription, giving customers more flexibility at a much lower cost. Amazon is likely to remain a leader in the cloud infrastructure services as it attracts large government and agency customers through the introduction of newer cloud computing products and a host of new features. 

Amazon's revenues in the Infrastructure-as-a-Service, or IaaS, arena is bigger than that of its four largest competitors combined; this means that it beats out GoogleIBMMicrosoft and salesforce.com, according to Synergy Research Group. In the third quarter of 2013, Synergy estimates that Amazon's revenues from the segment were more than $700 million. Amazon will gain more market share in the growing cloud computing market moving forward, allowing the gross margins to ramp up notably from current levels of 27% to 28%.  

Kindle ecosystem
Owing to the success of its Kindle line of tablets and e-readers, Amazon is generating billions in revenue from content sales. The company recently disclosed that the Cyber Monday weekend was the best ever for Kindle Fire tablets and e-readers. 

Amazon now has more than 20 million Prime customers. And this growth in Prime subscribers will lay the foundation for a lot more sales in Amazon's ecosystem, because Prime users are a lot more likely to shop on Amazon's massive platform. 

Amazon is constantly adding more digital media for its customers, and recently stated that its offerings of movies, books, TV shows, audiobooks, songs, apps, games, and similar content surged to 27 million items in 2013. With a larger base of Kindle owners, the company's revenues from its Kindle ecosystem will see stellar growth in 2014 and beyond.

The takeaway
Amazon is a lot less global compared to numerous other leading tech companies. As the company expands and builds its business infrastructure in newer countries, however, the company's revenues will continue to swell. The company's higher-margin businesses, including AWS and Amazon Marketplace, will lead to margin expansion of the overall business after its current investment cycle. And up-front payments from Prime subscribers will enable Amazon to control its shipping costs as well. Amazon investors have a lot to cheer for. 

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