Amazon (AMZN +0.26%) reported first-quarter earnings last week, smashing Wall Street's expectations on both the top and bottom lines. Revenue jumped 44% to $108.5 billion, but the real showstopper was profitability: Amazon's net income more than tripled to $8.1 billion.
The company's blowout performance may have many investors wishing they owned shares (or more shares) of Amazon. After all, the stock is up 50% in the last year alone, and 400% in the last five years. But I don't think you've missed your chance. Here's why.
1. Amazon is the largest e-commerce marketplace in North America
In the most recent quarter, revenue from Amazon's online stores and third-party sellers surged 44% and 64%, respectively. Its operating margin also expanded in the North America and international segments, driving a big uptick in profitability. These results highlight Amazon's many competitive advantages.
Image source: Getty Images
First, it's the largest e-commerce marketplace in North America, and the second-largest worldwide. That scale means Amazon makes more money than its rivals, allowing the company to aggressively reinvest in its business. For instance, Amazon can afford to offer Prime Video and one- or two-day shipping to its 200 million Prime members. Put simply, it's hard to compete with a company that is bigger, richer, and better known.
Second, a network effect creates a virtuous cycle that brings consumers and merchants to the platform. In other words, as more consumers shop on Amazon, more merchants will join the marketplace, and vice versa.
Finally, Amazon's extensive fulfillment and logistics network streamlines the shipping process, creating synergies that make the company more efficient as unit volume rises. Consider this example: If Amazon delivers a package to your house, it costs next to nothing for Amazon to deliver a package to your neighbor at the same time. In other words, Amazon benefits as delivery routes become more dense.
2. Amazon's digital ad revenue is accelerating
Synergies created by Amazon's marketplace (and content platforms like Fire TV) have also helped the company enter the digital ad market. During the most recent earnings call, Amazon CFO Brian Olsavsky said: "Advertising revenue within the North America and international segments also accelerated during the quarter."
And Amazon's digital ad business was already growing quickly. Its U.S. market share jumped from 6.8% in 2018 to 10.3% in 2020, according to eMarketer.
Amazon's growing dominance in this space has broad implications for its business as a whole. For instance, eMarketer estimates that e-commerce channel ad spending will reach $22.5 billion in the U.S. by 2021, and that Amazon will capture $18.2 billion, or 81% of that total. By comparison, second-place Walmart is expected to take just $1.6 billion, or 7.1%. This suggests that Amazon is by far the most valuable e-commerce ad platform.
Over time, that should bring more brands to Amazon, meaning consumers will see a more diverse range of sponsored search results and product recommendations, which could drive sales on Amazon's marketplace. In other words, Amazon's ad business not only boosts its top line directly, but it could also boost retail revenue and further solidify its lead in e-commerce.
3. Amazon is the global leader in cloud computing
Amazon's cloud computing business, Amazon Web Services (AWS), is also a product of synergies created by its marketplace. Roughly two decades ago, Amazon started offering compute, storage, and database services to support third-party merchants as they transitioned to the internet.
At the time, these efforts were necessary to support the growth of its marketplace, but they also allowed Amazon to hone its infrastructure management skills. In 2006 the company officially launched AWS, bringing cloud services to businesses on a global scale. It's worth noting that AWS beat Microsoft Azure to the market by two years, and that first-mover status has been a considerable advantage.
Image source: Getty Images
Today AWS still controls a dominant portion of the market, and still offers a broader range of services than any rival. Not surprisingly, AWS has been recognized as the best-in-class solution by research firms like Gartner and the International Data Corporation (IDC).
|
Market Share |
Q4 2019 |
Q4 2020 |
|---|---|---|
|
Amazon Web Services |
32% |
32% |
|
Microsoft Azure |
18% |
20% |
|
Google Cloud Platform |
6% |
7% |
Data source: Canalys.
Cloud computing is much more profitable than retail. For example, AWS's operating margin was nearly 31% in the most recent quarter, much higher than the mid-single-digit operating margin of Amazon's other segments. In other words, AWS is a cash-generating machine, and that has helped Amazon fund the expansion of its commerce empire.
Going forward, Gartner expects the cloud computing market to expand at 18.6% per year through 2022. As the clear leader, AWS is well positioned to capture value.
A final word
Over the last 27 years, Amazon has grown from an online bookstore into a $1.7 trillion titan. Is its stock going to double in the next three years? I doubt it. But I probably would have said the same thing three years ago, and I would have been wrong.
The point is that Amazon still has growth opportunities. Industries like e-commerce, cloud computing, and digital advertising are still getting bigger. Moreover, Amazon has an ironclad competitive position that few companies can rival. That's why the stock is still a buy.
