Amazon: Strong Buy For Value And Growth Not Buffett's Purchase

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About: Amazon.com, Inc. (AMZN)
by: Steven Fiorillo
Summary

Amazon's growth pattern should propel their stock well past the $2,000 share price and into the five digits in the 2020s.

Amazon’s net sales in 2018 topped $65 billion which was 45.1% of the entire sales achieved by the 15 largest e-commerce players in the United States.

In 2018, AWS generated over $25 billion in revenue as it grew at 45.32%. A consecutive growth multiple of 20% puts AWS revenue over $63 billion in 2023.

Amazon's revenue grew by 30.93% and exceeded $230 billion YOY in 2018.

Purchasing shares of Amazon.com, Inc. (AMZN) at a share price of $1,950.55 may seem expensive, but this is a company that is just scratching the surface on their true potential. If you were to go back to June 1st, 1985, the same statement about Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) could have been made as shares closed at $2,040. Today, shares of BRK-A are worth $320,000. AMZN is one of those companies investors shouldn’t get hung up on share price about. AMZN is a strong buy not because Berkshire purchased shares but because they haven’t yet unlocked their true potential. In five, ten or even twenty years from now, I am predicting that AMZN is one of those companies you're going to wish you bought even just one share of. Amazon has changed the retail space so much where “The Amazon Effect” has been defined as “the ongoing evolution and disruption of the retail market.” Amazon is also dominating cloud computing through Amazon Web Services (AWS) and both e-commerce and cloud computing still has tremendous growth ahead of them. I think Amazon is a strong buy for the long haul even if you just buy a few shares. There is no reason why shares of AMZN can’t get into the five digits in ten years from now and continue growing.

An e-commerce overview and Amazon’s stranglehold on the sector

It may seem as if everyone is purchasing the majority of their goods online as more and more packages are getting delivered to the office, your home or your neighbor's home. You may even ask how do stores stay in business with the amount of shopping that is conducted online? In 2017, retail sales broke the $5 trillion level and e-commerce accounted for only 9.1% of the total sales. Over the past four years from Q1 of 2015 to Q4 of 2018, e-commerce sales in the U.S increased 3% from 6.9% to 9.9%.

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(Source: Statista)

(Source: Steven Fiorillo) (Data Source: Statista)

In 2018, Amazon crushed net sales in the U.S online retail space. The top fifteen e-commerce retailers which include Amazon, Walmart (WMT), Apple (AAPL), etc., exceeded $144 billion in net sales. Amazon’s net sales in 2018 topped $65 billion which was 45.1% of the entire sales achieved by the 15 largest e-commerce players in the United States. If you break this down to just the top ten e-commerce retailers in the U.S., Amazon made up 51.15% of the top ten's sales as numbers 2-10 accounted for just over $62 billion in sales for 2018. Amazon is completely dominant in e-commerce, and in 2018’s 4th quarter, 56.1% of the leading online marketplace website visits were attributed to Amazon.

(Source: Steven Fiorillo) (Data Source: Statista)

Retail e-commerce sales in the United States is expected to continue its growth pattern. Over the next five years, e-commerce sales are projected to increase from $560.7 billion in 2019 to $735.4 billion in 2023. Amazon accounted for 45.1% of net sales in 2018 which is defined as gross sales minus sales allowances, sales discounts and sales returns. I would speculate that through Amazon's dominance in the e-commerce sector, they should be able to capture 25% or more of the gross sales on an annual basis over the next five years. If that comes true, AMZN would add over $57 billion in sales from e-commerce by the end of 2023. Amazon has redefined retail and should continue its dominance in the sector. This is just one segment which will help drive Amazon's growth in revenue and net income.

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(Source: Statista)

Amazon is also dominating in cloud computing through Amazon Web Services (AWS)

Over one million customers have entrusted their IT infrastructure to be built on Amazon Web Services (AWS). Some of the largest companies in the world, including Johnson & Johnson (JNJ), Comcast (CMCSA) and Pfizer (PFE), are utilizing AWS through Amazon. The AWS Cloud provides infrastructure services such as computing power, storage options, networking and databases to its clients. Currently, AWS can be utilized in 21 geographic regions globally with plans to expand into Bahrain, Cape Town, Jakarta and Milan. According to Gartner, Amazon has increased their share in the public cloud market from 35% in 2016 to 47% in 2019. In November 2018, Goldman Sachs (GS) released a report which indicated that AWS, Azure (NASDAQ:MSFT), Google Cloud (NASDAQ:GOOG) (NASDAQ:GOOGL), and Alibaba Cloud (NYSE:BABA) made up 56% of the total cloud market. Goldman projected that these four companies would grow that number to 84% in 2019.

Since Q3 in 2014, AMZN has increased its quarterly revenue from AWS with drastic increases in 2018. In Q4 of 2017, Amazon reported $5.1 billion in revenue from AWS as it sequentially increased to $7.43 billion in Q4 of 2018. AWS has had an explosive annual growth rate as it grew 47.03% in 2016, 44.6% in 2017 and 45.32% in 2018. In 2018, AWS generated over $25 billion in revenue as it grew at 45.32%. If we use a conservative growth multiple of 20% which is less than half of the current rate, the AWS business, which generated just over $25.6 billion in 2018, would generate over $63 billion in 2023. That number in 2023 jumps to over $95 billion in revenue if AWS has a 30% consecutive growth multiple over the next five years. All shareholders should be ecstatic about the prospects AWS could generate in a longer-term view.

Amazon AWS Revenue

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(Source: Statista)

Amazon’s metrics represent a company that is still growing and investing in their operations

From the end of Q1 2018-Q1 2019, Amazon increased their net sales by 25%, their operating income was up 129% while their free cash flow increased 217%. Amazon’s capital expenditures have increased consecutively each year from 2015-2018 and exceeded $13 billion in 2018. Over the same time period, Amazon grew their net income from $596 million in 2015 to just over $10 billion in 2018. Amazon more than doubled their revenue from the end of 2017 to the end of 2018 as it grew by 30.93% and exceeded $230 billion. Their Gross Profit also exploded over the past year, increasing by 42.16%. These are not typical growth rates from a company that has almost a trillion-dollar market cap. While Amazon is one of the most valuable companies in the world, they are showing no signs of slowing their growth any time soon. Unlike companies in different sectors, their two largest business segments are actually in their infancy. If Amazon can continue the blueprint, they have been illustrating they should continue to grow for years to come.

A screenshot of a cell phone Description automatically generated

A screenshot of a cell phone Description automatically generated

(Yahoo Finance)

Conclusion

Don’t own Amazon or go out and purchase shares just because Berkshire Hathaway did. You should invest in Amazon because of their future growth prospects. A stock's past is only a piece of the puzzle as the future outlook is what your investing in today. At conservative multiples, Amazon’s future growth prospects do not replicate a company which is about to surpass the $1 trillion market cap. AMZN is dominating both e-commerce and cloud computing which are both in the early innings of their growth stories. Amazon should continue their dominance in both sectors, pushing this stock well past the $2,000 share price and into the five digits in the 2020s. I believe you should invest in Amazon and hold it for the long term. Even at the current share price, an investment in Amazon should pay off in spades down the road.

Disclosure: I am/we are 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.