- Low price of Kindle device has resulted in increased market share, which can be leveraged going forward.
- Strong position in the public-cloud market will be an important driver for Amazon.
- Expansion of distribution centers extends Amazon’s reach and effectively lowers variable costs.
2013 was a good year for Amazon (NASDAQ:AMZN). Shareholders of the company must be quite happy as its share price moved more than 52% last year, from $257.31 per share to more than $398 per share.
Amazon is a dynamic company with reach into multiple industries. As evident by its extension into cloud computing with AWS, digital streaming through Prime Instant Video, and entrance into wine retail, the company has and will continue to evolve and diversify it's business segments to gain a competitive advantage in the market. While Amazon does extend across many different industries, it competes primarily in the E-Commerce, Catalog & Mail Order House industry, currently holds nearly 40% of the industry market share.
From a longer term perspective, a strong catalyst for Amazon's business growth will come from it holding a large portion of market share in an industry that will continue to expand. The global e-commerce sales are growing by 20% every year. The U.S. e-commerce market is expected to increase 15% this year to $300.6 billion. The global e-commerce market is estimated to reach $1 trillion by 2016. As the company currently holds the largest percentage of the industry, it will surely benefit from the growing e-commerce market. Amazon's revenue is projected to grow 21% to $90 billion this year.
In the recent few quarters, Amazon has intentionally lowered the sales price of the Kindle device to attract more customers and gain market share over competitors such as Apple's iPad. Although, reduction in kindle prices impacted on the margins of the company, this strategy will provide great return in the near future. According to a Research report, Amazon customers who own a Kindle spend $1,223 on Amazon products per annum. Amazon customers without the tablet spend only $790 per annum. This $443 gap means that the strategy of selling Kindle Fire tablets at near zero margins is working like a charm. By Keeping the Kindle device pricing low, the company is increasing its market share and creating an army of consumers who are spending freely on its products. Once Amazon has distributed numerous units of the Kindle device to customers, it can then leverage this position through eBook, digital content, application and other recurring purchases going forward.
As mentioned earlier, Amazon has further expanded its business offerings by becoming a front-runner in the public-cloud computing market. Amazon Web Services (AWS) provides developers and enterprises access to technology infrastructure that enables any type of business. AWS is the market leader in cloud computing, ahead of Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG), and is Amazon's fastest growing business segment. AWS is an important revenue driver for the company going forward because the system enables businesses to replace upfront capital infrastructure expenses with lower variable costs. AWS is estimated to hit $24 billion in revenues by 2022. Having such a strong position in the cloud market will be an important driver for Amazon going forward. The growth of AWS will also contribute to increased gross margins.
Each year, Amazon devoted a large amount of capital expenditure to build storage centers, which became one of main sources of income. Though the capital expenditure in 2013 decreased slightly, it still maintained at $561.85 million. Expansion of distribution centers is important for the company's future growth because increasing the reach of distribution cuts down shipping cost and time, which increases margins and enables consumers to purchase from a wider catalog, for a more economical price, and in a convenient manner. As Amazon expands fulfillment and distribution centers, shipping time and costs will continue to decrease, drawing more customers.
Amazon is a dominant force, and will continue to take market share in a rapidly expanding industry. It is a dynamic company, positioned well ahead in the cloud computing market and continuously looking to diversify it's product mix to compete with new firms. While margins are currently thin, increased distribution centers and cloud operations will effectively lower variable costs and increase margins going forward. In my opinion, Amazon is an attractive investment opportunity for long-term investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.