Amazon (NASDAQ:AMZN) is scheduled to report earnings on Thursday after market. The stock remains one of my top picks in the e-commerce space given its dominance in North America, upside from the structural migration towards e-commerce, the strength of the Prime Ecosystem and growth in AWS. For the quarter, I will particularly focus on AMZN's third-party business (i.e. FBA) that has been partially driven by the increase in Prime membership.
Increased investment in distribution and content bodes well for the AMZN Prime ecosystem as well as distribution in India drive Prime's global penetration. I note that the recent expansion by AMZN Prime in India is a great example of Prime's stickiness amongst its users and the upside potential involved with its international expansion. Like anything else, these investments will continue to weigh in on margins because the management is more keen on corporate value rather than shareholder value.
Well, I can live with that and as such, AMZN remains my long-term pick in the e-commerce theme. However, keep in mind that my long-term preference continues to be Alibaba (NYSE:BABA) given its competitive logistics system and a more robust ecosystem built around its payment platform that is increasingly gaining prominence globally. Unless AMZN scales up its own payment arm.
Three focus areas: Prime growth, international expansion and other value-add projects.
Q2 should generally be muted with the general e-commerce segment but the focus will be on the guidance in the wake of AMZN's recent Prime Day, when AMZN delivered another record-setting volume in both the domestic and international markets that underscored the strength of AMZN's Prime ecosystem, the potential medium-term catalysts from cross-border e-commerce and the broader macro growth in e-commerce penetration as it takes incremental shares from offline retail (see - Amazon: Primed For Growth).
More importantly, strength from international markets validates AMZN's prior investment in fulfillments and logistics that drove volume growth of over 60% globally and 50% in the US and suggests that the international market remains attractive for Prime's medium-term growth outlook. Long-term speaking, Prime Day highlights the strong e-commerce demand globally and underscores my view that AMZN is best positioned for rising e-commerce penetration and this should be highly accretive to Q3 numbers.
International expansion is also essential to AMZN's fundamental story, particularly India where AMZN has been investing in fulfillment centers and scaling up its mobile payment networks. With a large and growing younger demographic, India is an attractive growth opportunity given the weak infrastructure (which promotes mobile ordering) and 1bn+ population (which promotes commercialization of goods and services).
Although competition is intense with local players such as Flipkart and Snapdeal as well as Alibaba all looking to dominate (see: Alibaba: Setting Up The Iron Triangle and Alibaba: Dancing With The Elephants), AMZN could differentiate by leveraging its scale and logistics, something that the local players have yet to perfect and expand its market share at the expense of local players (see - Amazon: Dancing With The Tigers).
Additionally, AMZN is also looking to launch its digital wallet in India as part of its plan to build an online payment business (see - Amazon: What's In Your Wallet?). My view is that payment is a critical component of any e-commerce platform. When we look at the success that BABA achieved with Alipay and how it drove growth in its core e-commerce platforms, it is inevitable for AMZN to create its own digital wallet to strengthen its ecosystem and control the e-commerce value chain.
Finally, Prime Video is gaining prominence and I believe that the recent weakness in Netflix's (NASDAQ:NFLX) domestic subs is partially due to the growing competitive threats by Prime as well as other OTT players such as Hulu, Sony and Dish (see - Netflix: Beginning Of The End?).
AMZN's rollout of Prime Video was largely written off as a supplemental service to its core shipping services, but over the years, Prime Video is becoming a competitive player in the SVOD market and potentially a contender against NFLX. With the cord-cutting trend working in favor of Prime Video and the growing subs base continues to allow AMZN to attract key content owners. AMZN is becoming a formidable media distributor. The value-added services ultimately lead to a stronger Prime ecosystem, in my view.
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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.