Shares of Amazon.com (AMZN -1.44%) are down 15% since the company reported disappointing revenue growth of "just" 20% for the fourth quarter. Many investors fear that this is the beginning of slowdown in Amazon.com's growth. Revenue growth is a key component of Amazon.com's premium valuation, so it is important to understand whether there is cause for concern regarding Amazon.com's future growth potential.
"Other" revenue is turning into a big deal
Amazon.com's highest growth segment continues to be "other" revenue; while this portion of the business represents just 5% of consolidated revenue, its importance should not be under-emphasized. Other revenue grew 56% last year to almost $4 billion thanks mostly to the continued surge in demand for Amazon Web Services, Amazon.com's cloud computing business.
If the 56% growth rate is not sufficiently impressive, consider the fact that only 5% of Amazon.com's other revenue was earned outside of North America. The opportunity for international growth in combination with the rise of cloud computing offers a significant opportunity to continue this growth rate into the future.
Even at 5% of total revenue, it will not take long for AWS to be a major part of Amazon.com's valuation. Analysts predict that AWS will reach $8 billion in revenue and command a stand-alone valuation of $50 billion by next year. As a point of comparison, AWS is already significantly larger than cloud computing favorite Rackspace Hosting (RAX), which is expected to deliver approximately $1.5 billion in revenue in 2013 and grow approximately 17% in 2014.
Groceries, streaming video, and just about everything else
Aside from the potential of AWS within the megatrend of cloud computing, Amazon.com is growing into a number of other new areas. Groceries are a fantastic example, with the expansion of Amazon Fresh into three markets with further plans to roll it out more broadly once the logistics (and economics) are fine tuned. Like many of Amazon.com's initiatives, Amazon Fresh has the ability to join Kindle and Amazon Prime as methods that CEO Jeff Bezos has unveiled to encourage larger and more frequent purchases of goods from the company.
The biggest growth driver of all is often forgotten
Cloud computing, expansion into new markets, and international growth are often cited as primary growth drivers for Amazon.com going forward. While each has the potential to contribute meaningfully to growth, what is frequently forgotten is the largest growth driver of all: growth in existing e-commerce business.
Sales of electronics and "other general merchandise" ranging from apparel to toys currently comprise two thirds of Amazon.com's consolidated revenue. These are the products that helped get Amazon.com into the dominant position it is today against competitors like Best Buy (BBY 0.15%). While Best Buy appears to be just a few missteps away from following Circuit City in Amazon.com's path of destruction thanks to an ill-fated decision to encourage "showrooming" this holiday season, Amazon.com grew this portion of its business by 25% in North America and 23% in total during the fourth quarter. In contrast, Best Buy's failed strategy led to revenue declines and a corresponding plunge in share price.
The Best Buy comparison can be attributed partially to Amazon.com's superior management and execution, but there is a larger force at work that is often overlooked. E-commerce growth continues to outpace overall retail growth by a wide margin, and it is important to emphasize that this trend is not expected to change. E-commerce sales in the United States are expected to almost double from 2012 to 2017 to $434 billion. This staggering increase is really just the beginning; in 2017, Forrester Research anticipates that e-commerce will represent just 10% of retail sales in the United States.
Buried within these tremendous growth numbers is the emerging trend of mobile commerce or m-commerce. M-commerce represents just 5% of total e-commerce in the United States today, but this figure is expected to almost double by 2017 and reach $31 billion according to Forrester Research.
Guess which company is uniquely positioned to gain market share while also benefiting from the continued migration to e-commerce and m-commerce? That's right, Amazon.com. The point here is that Amazon.com's "boring" business of selling televisions, sporting goods, apparel, and just about everything else you can think of is positioned for double-digit growth rates for the foreseeable future even without further SKU expansion.
Growth is everywhere for Amazon.com
As Jeff Bezos always notes in his letters to shareholders, today is "day 1" in Amazon.com's growth story. While most of the attention is typically focused on AWS, Amazon Fresh, and other new initiatives, there is tremendous opportunity for growth within Amazon.com's existing core business. Thanks to ongoing trends toward shifting retail sales to e-commerce, Amazon.com is poised to continue its tremendous growth for the foreseeable future.
With shares down 15% in the past couple of weeks, investors have a great opportunity to purchase shares in the company despite no changes to the long-term investment thesis.