What does the Future hold for Amazon?
It is no secret that Amazon (NASDAQ:AMZN) is expensively priced. However, is the company really worth it? Amazon's business model is not focused on making higher profits but rather on making higher cash flows. The company has been able to play off of the growth of online shopping and increasing volumes have led the business to have a lower cash conversion cycle.
Amazon is really just borrowing cash flow from suppliers as accounts payable but so far this plan has worked for Amazon as it kept growing. However, if it increases product prices, growth will stop and consequently the growth of the cash flow will also stop or in the worst case scenario it may be reversed.
A negative operating cycle generates cash flow as long as revenues growth keeps up. Therefore, the operating cycle continues to make cash even if the company is not making profits.
Going forward, I believe that with the lower cost to conduct online business there will be few barriers to enter in the industry. So despite offering lower prices, it might be hard for Amazon to keep posting top line growth with the current pace of growth.
Was 2013 a Good or Bad year?
In the North America segment, revenue grew to $15.33 billion reflecting an increase of 26% and media revenue grew 21% to $3.51 billion. EGM revenue grew 25% to $10.65 billion and represents 69% of North America revenues (down from 70%). Other revenue grew 52% to $1.17 billion. The North America segment's operating income increased 19% to $725 million and had a 4.7% operating margin. Similarly, in the international segment revenue grew to $10.26 billion reflecting an increase of 13%.
On a full-year basis, revenues from the North America region grew by 22% to $74.45 billion while international revenues grew by 14% to $29.94 billion. Trailing operating cash flow increased 31% to $5.47 billion. Similarly, free cash flows increased to $2.03 billion. The holiday season lifted the fourth quarter revenues of the company but not enough to match Wall Street's projections.
EGM Market Share
Amazon continues to have the best consumer experience on the web which kept it in a good position on the market share front. Historically, it has doubled its Electronics and General Merchandise (EGM) market share from 3.9% in 2008 to nearly 8.5 % in 2012. During 2013, the company was able to increase its market share to 10.4%.
This does not appear to be the case going forward. The competition becomes stiffer and the other players in the industry are also pursuing different strategies to attract more customers. Promotions such as low pricing and free shipping are factors that are hindering Amazon from increasing its market share. However, the huge size of the company coupled with its ability to remain competitive will help it to increase its market share up to 14.7% by 2020.
Amazon has been able to increase its international popularity. With the addition of new products and standardized money back policies Amazon is expected to increase its share from 2.65% in 2013 to 4.75% in 2020.
E-Commerce as a Percentage of Retail Sales
With advancements in online security making transactions over the internet more secure and reliable the trend of online shopping is gaining momentum. The percentage of share of e-commerce increased from 3.95% in 2009 to 5.66% in 2013. Going forward, the increase in the market share will not keep up with the historic pace. However, I expect that the penetration of online shoppers will continue to grow. It is expected to grow to 9.16% by the end of 2020.
Similarly, Amazon's online book and music market share that currently accounts for 1.9% of the international market is also projected to grow to 2.20% by 2020 while in the U.S. the company might not be able to increase its current market share of 4.09% due to stiff competition. The comparatively lower cost of having an online presence provides big opportunities for small and medium enterprises and therefore creates stiff competition for Amazon.
Amazon performed well during the past couple of years. The company has been able to benefit from the shifting trend to online shopping. The company's growth driver has been the increasing volumes of transactions but with new entrants and other peers the competition becomes stiffer and poses a grave threat to the company's volume.
Similarly, with its current ability to generate free cash flows it can surely continue like this but as far as the long term is concerned I don't believe that this model is sustainable.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by a Blackstone Equity Research research analyst. Blackstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Blackstone Equity Research has no business relationship with any company whose stock is mentioned in this article.