- Amazon is well positioned for a solid price run-up driven by robust fundamentals and identifiable growth drivers.
- The company's current SKU development suggests a significant improvement room for user experience.
- It is best positioned to benefit from growth re-acceleration of global ecommerce market in 2014.
- Amazon Web Services and AmazonFresh are expected to be meaningful long-term growth drivers.
The share price of Amazon (NASDAQ:AMZN) has appreciated by 7% since I wrote my last article on the stock in early February. Looking forward, I believe the share price would continue to make its all-time high owing to recent healthy developments.
According to a recent inventory survey conducted by Baird, Amazon's total stock keeping unit ("SKU") has grown by 24% year-on-year quarter to date, while its Amazon-as-seller SKUs was up 30%. This reflects management's continued effort to convert third-party SKUs to fulfillment by Amazon ("FBA") SKUs by leveraging the company's fulfillment capacity in order to better manage customer experience and achieve higher service quality. As there are still 90% of total SKUs listed by third-party sellers, there remains a significant room for improvement.
Due to the 24% year-on-year growth, total SKUs has reached 228 million to date. However, of all the existing SKUs, only 10%, or approximately 23 million SKUs, are eligible for Prime membership. Hence, it is believed that there remains a substantial room for Amazon to enhance SKU selection for Prime membership, and this would benefit user experience and ultimately add more value to the membership. In the Q4 2013 earnings call, management indicated a plan to increase the price for Prime membership. Given the significant room for user experience enhancement, I believe the impact from price increase on customer churn rate should be less than some investors' bearish expectation as Amazon would be able to continue adding value to Prime. As a note, Piper Jaffray in a recent research report estimated the impact on customer churn to be around 5%. Their research was based on two historical price increases from Netflix (NASDAQ:NFLX) and Redbox, and the impact on the churn rate was in the range from 2% to 8%.
Global ecommerce growth slowed down from 18.8% in 2012 to 17.1% in 2013 driven by economic weakness in Europe, higher payroll tax in the US, and unfavorable FX rate in many key markets (e.g. Japan and India). However, the ecommerce growth is expected to re-accelerate in 2014. Goldman Sachs now expects the growth in 2014 to be 17.9% as emerging market ecommerce growth continues to become a larger share of the mix and economic outlooks in the US and Europe remain solid. Being the leader in ecommerce space, Amazon is believed to be best positioned to benefit from this trend.
Management has been continuously taking on initiatives to drive incremental revenue growth. The company's Amazon Web Services ("AWS") has gained significant traction. The platform has more than 5 times the combined capacity of Amazon's next 14 rivals in cloud service market. With Amazon's solid market position in this area and the high-margin nature of cloud service business, it is expected this business should contribute meaningfully to revenue and profitability growth going forward. Moreover, AmazonFresh has a potential to become the company's another long-term growth driver as this initiative not only allows Amazon to tap the $718B US consumer grocery market but also would potentially increase the opportunity of customer purchasing other merchandises.
The shares now trade at 1.5x 2015 estimated revenue and 17.9x 2015 estimated EBITDA, both of which are at huge discount to the average multiples of other high-growth internet companies. By adjusting both valuation multiples for consensus revenue and EBITDA growth estimates, Amazon still trades at large discount relative to the peers, suggesting its valuations are far more reasonable (see chart below).
In summary, share price of Amazon is well positioned to achieve another all-time high given the current solid fundamentals and identifiable long-term growth drivers. Investors should continue to accumulate shares.
All charts are created by the author, and data used in the article and the charts is sourced from S&P Capital IQ, unless otherwise specified.
Disclosure: I am long AMZN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.