As investors wait, some more patiently than others, for Amazon's (NASDAQ:AMZN) Annual Report for 2016, it is already apparent it will be the best stock to hold for the next few years. CEO Jeff Bezos highlighted the core pillars of the business in the 2015 Annual Report. An impatient analyst needs only to look at the fundamental vitality of these pillars in 2016 to forecast not only the contents of the 2016 Annual Report, but also the growth potential of the company in the future.
From the 2015 Annual Report, Bezos highlighted the fact that Amazon was the fastest company to reach $100 billion in annual sales. The three pillars of the company Bezos discusses are Amazon Web Services (the cloud computing branch), Marketplace (the veritable death of brick-and-mortar retail), and Prime (the premium service subscription branch).
Amazon Web Services in 2015
Bezos describes the Amazon cloud service for business as the most comprehensive cloud computing services in the market, and he may not be far off. Offerings such as Aurora, a commercial grade database service, provide top-level quality at prices close to 10% of competitors. Other services like Redshift (managed data warehouse service) and Lambda (serverless computing) form a long list of available services for customers as well as numerous avenues of innovation. The attractive line of products has attracted large-scale customers like Netflix (NASDAQ:NFLX), Intuit (NASDAQ:INTU), and Time, Inc. (NYSE:TIME) to name just a few.
Amazon Marketplace in 2015
Amazon's long-time breadwinner and online retail phenomenon, the Marketplace, has revolutionized how customers shop. Bezos mentioned in the 2015 Annual Report that nearly 50% of units sold on the Marketplace were done so by third-party sellers (of which Amazon receives a commission). Amazon has helped millions of sellers make more money selling their products to a wide swath of potential buyers and has made a pretty penny in the meantime. It was also stressed the international efforts of Amazon to expand its business outside the United States. The globalization of the Amazon Marketplace represents the single biggest growth opportunity for the company barring any new innovations. How much of the global market share of online retail can Amazon capture among competitors like Alibaba (NYSE:BABA)? Can international sales eventually dwarf the revenue derived from US-based sales in the future - in other words, how big can the Marketplace actually get?
Amazon Prime in 2015
There were three main sections of Prime that Amazon capitalizes on: Prime Now, Prime Two-Day, and Prime Video. While these products do not represent a large proportion of annual revenue for AMZN, they have vastly more important effects on the other branches of the company. For instance, Prime Now offers household items and essentials with no cost, same-day delivery. Prime Two-Day offers customers on Amazon's website free two-day shipping on millions of items sold on the Marketplace. Both of these products vastly increase the amount Prime members on Amazon spend annually. Prime Video, while not necessarily the largest streaming service on the Internet, adds further value to customers to justify the subscription fee (however reasonable it already may be).
Quick Glance at Amazon in 2016
During FY2016, Amazon's stock price rose 15.5%, demonstrating, in a simple manner, that the three pillars of the company have never been stronger. Fundamentals grew at substantial rates. For instance, YoY revenue in 2016 increased by 27.1%, YoY net income grew 297.8%, and YoY cash from operating activities increased by 37.9%. While these numbers are impressive, the potential for future growth is even more astonishing. Let's examine the same three pillars as before.
Amazon Web Services in 2016
While there is some promiscuity in users of cloud computing (average used 1.8 clouds for workloads), 57% of respondents to a recent survey disclosed using Amazon Web Services for workflows in the cloud. The second biggest proportion of use was Microsoft (NASDAQ:MSFT) Azure at 34%. Further, Amazon Web Services had 266% more clients using more than 1,000 virtual machines in the cloud than any other provider (What is a virtual machine?). In essence, not only is Amazon Web Services vastly more popular for cloud computing needs, but it also attracts bigger fish into its nets (think Netflix, Intuit, Time, Inc., etc.).
YoY revenue of Amazon Web Services grew from $7.88 billion in 2015 to over $12 billion in 2016, or 52.3%. Obviously, Amazon offers the premier cloud computing services in a market that is sure to blossom in the future (some estimate as much as 355% by 2026).
Amazon Marketplace in 2016
It was reported recently that third-party sales reached record levels in 2016, and it seems to be the case for Amazon as a whole as well. In addition to the holiday shopping season being the best on record for sellers, Amazon also doubled the number of items it delivered for its third-party sellers (taking bigger total commissions on those sales by charging storage, shipping, and packaging fees). It was stated that 2016 Cyber Monday orders increased 18% YoY. According to the research firm Slice Intelligence, Amazon is estimated to have accounted for 43% of all U.S. online retail sales in 2016; a number it came up with by tracking online receipts emailed to customers. This level of market share is simply astronomical when compared to traditional brick-and-mortar retail stores.
In the future, U.S. online sales are forecasted to rise 8-12% in 2017 by the National Retail Federation to total between $427 billion and $443 billion. Now, even if Amazon's online retail market share fails to grow in 2017, a phenomenon that has never happened before, this would leave it with a hefty chunk of revenue. However, the most exciting aspect of the Amazon Marketplace does not come from the incredible numbers posted on U.S. soil, but on the vast opportunities it has to globalize itself with international e-commerce. This represents the single biggest avenue of growth in revenue for Amazon. International e-commerce sales are projected to rise through 2018 to $2.489 trillion (that's a 32% increase from the 2016 numbers).
Amazon Prime in 2016
Consumer Intelligence Research Partners estimated that Prime members outnumber non-Prime customers, and that Prime enrolled customers spend 140% more annually on the website. While Prime's revenue is less than the Amazon Marketplace or Amazon Web Services, its positive effects on the company as a whole far outweigh the lack of revenue. Members enrolled in Prime spend significantly more than non-Prime members. While Prime makes Marketplace spending more likely, Prime Video has been receiving a lot of attention and investment by management. Amazon even won more Golden Globes than one of its prominent Amazon Web Service clients, Netflix, in 2016. With more money and effort going into Amazon's streaming service, the positive synergy the rest of the company receives will only increase. These improvements will likely drive the estimated 100% increase in Prime membership in the United States (which would bring the number of Prime subscribers to the same level as Netflix). Aside from the strength Prime adds to Amazon's other subsidiaries, it is on pace to become one of the premier paid streaming services on the market.
Amazon represents the best growth opportunity in large-cap stocks for the future.
When one weighs the success of each one of the pillars of Amazon, it is not hard to see that it will continue to experience massive growth in the future. Amazon Web Services, Amazon Marketplace, and Amazon Prime are all the biggest (if not near the biggest) in each of their respective sectors. Cloud computing, online sales, and paid streaming services are all sectors that are forecasted to have great growth in the future, so it does not require much thought to realize that this growth will also be realized by Amazon. As Amazon works to globalize its reach, it will also be able to enjoy pure geographical growth in revenues. It has been the best at what it does in the past, and it will continue to do so in the future. It is as simple as that.
Is this growth priced into Amazon's current valuation?
When looking at AMZN's P/E ratio, traditional comparisons between competitor companies demonstrate a lack of understanding of Amazon as a company. Each of its subsidiaries (Amazon Web Services, Amazon Marketplace, Amazon Prime) have already been shown to be dominant in their respective markets. While the markets are generally very good at pricing in forecasted growth, the markets have not gotten in right with Amazon yet. On the surface, yes, a P/E ratio might be somewhat high for some investors, but the company is in a position to grow in three sectors that EACH justify a P/E as high as Amazon's current one.
For instance, Netflix, probably one of the most dominant paid streaming services, has a P/E ratio of 335. Obviously, the markets are pricing in heavily the growth of Netflix and the digital streaming sector in the future. This is demonstrative of only a fraction of the growth Amazon will have in the future, and this type of growth is forthcoming for the rest of the company as well.
Further, Amazon's EPS growth is projected to be up 77% next year and up 38% over the next five years (it was already up 292% this year). While the stock price surely has grown (and the P/E has followed), there will be large-scale buyers in Amazon's future for a long time to come.
Disclosure: I/we 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.