“We believe that a fundamental measure of our success will be the shareholder value we create over the long term. This value will be a direct result of our ability to extend and solidify our current market leadership position.” While this is an excerpt from Amazon’s 1997 shareholder letter, it remains true today. Amazon (AMZN) achieved the glory of being a trillion-dollar company and yet remains committed to this vision. Here is what makes Amazon a strong case going forward.
1. India holds huge potential for Amazon
While e-commerce has grown significantly in India in recent years, there is a huge potential for penetration given that online sales accounted for a mere 1.6% of total retail sales in India, compared to 15% in China and around 14% globally. The Indian retail market is projected to reach $1.375 trillion, while its e-commerce industry is expected to cross $200 billion mark by 2026, growing at a CAGR of 30% for gross merchandise value. This means a market penetration of 12% compared to around 2% currently. Some of the important growth drivers which would turn these figures into reality are growth of rural consumption, growing income, increased online spending, rising use of internet and smartphones and addition of young millennial households. Companies such as Amazon.com and other e-commerce players will be the beneficiaries of these trends.
Amazon has recently pledged to invest $1 billion to help digitize traders and micro, small, and medium-sized businesses (MSMBs) across India, with the goal of bringing more than 10 million MSMBs online by 2025. Amazon expects this investment to enable $10 billion in cumulative Indian exports by 2025. This is in sync with the World Bank’s broader vision for South Asia, “Increasing use of e-commerce by consumers and firms in South Asia could potentially help increase competition and firm productivity and encourage diversification of production and exports.”
2. e-Pharmacy may be the next big thing for Amazon
In 2018, Amazon announced its acquisition of PillPack, an online pharmacy, for $750 million. PillPack is a full-service pharmacy. It has an in-network pharmacy with all major pharmacy benefit managers, including CVS Caremark, Express Scripts, Optum Rx, Prime Therapeutics, Humana Pharmacy Solutions, Cigna, Aetna, MedImpact, EnvisionRx, and CastiaRX. It is estimated that U.S. prescription sales totaled $476.2 billion in 2018.
The global e-Pharmacy market size is projected to reach $177.79 billion by 2026 from $49.72 billion in 2018. The use of internet, penetration of e-commerce, discounted rates and more convenience especially for chronically ill patients as well as the elderly will support this growth. A combination of Amazon and PillPack has the potential to emerge strong in this space.
3. Prime numbers continue to stay strong
With 150 million paid Prime members, “Prime membership continues to get better for customers year after year. And customers are responding — more people joined Prime this quarter than ever before,” said Jeff Bezos, Amazon founder and CEO, during the recent . The number of items delivered to U.S. customers with Prime’s free one-day and same-day delivery more than quadrupled during Q4 2019 compared to last year.
With incentives such as same-day delivery, Prime Video, unlimited music streaming, photo storage, two-hour grocery delivery from Amazon Fresh and Whole Foods market and more for an annual subscription of $119, Amazon Prime has gained traction. Today, around 51.3% of US households are Amazon Prime members—about 5.2 million more households than last year according to a report by eMarketer. Prime subscriptions are an important segment in Amazon’s ecosystem. A report by CIRP concluded that prime customers spend up to 2.3x more than non-prime subscribers. Thus having more prime customers not only generates a consistent revenue stream but also helps boost sales on the marketplace.
4. AWS, a strong business and diversifier
With more than a million active customers, Amazon Web Services (AWS) is a leader in cloud computing. AWS dominates one-third of the market share with clients such as Goldman Sachs, Coca-Cola, Johnson & Johnson, Siemens, Shell, Comcast, Airbnb, FINRA, FDA, Kellogg, Unilever, Dow Jones, Expedia, Adobe, Novartis, AirAsia, and GE, among others. AWS has an extensive global cloud infrastructure; it has 69 availability zones within 22 geographic regions around the world and has announced plans for 16 more availability zones and five more regions.
During Q4 2019, AWS’s growth closely mirrored overall market growth, and it maintained a 33% share of the worldwide market, according to data by Synergy Research. Gartner estimates that the worldwide public cloud services market is forecast to grow 17% in 2020 to total $266.4 billion, and further reach 354.6 billion by 2022. During 2019, AWS sales increased 37% vis-à-vis 2018. While AWS accounted for 12% of the net sales for Amazon during the year, it contributes significantly to the company’s operating income. With nearly $10 billion in net sales during Q4 2019, Amazon is at $40 billion annual run rate roughly.
5. Innovation is core to Amazon
Amazon believes that “scientific innovation is essential to being the most client-centric company in the world.” Amazon’s research and development expense, which is set forth within “technology and content” in the financial statement, was a whopping $35.93 billion during 2019 (12.8% of net sales). Advanced technologies—AI, machine learning, computer vision—are the core of its ventures—be it cloud computing, voice-based virtual assistant, cashless Go stores, drone deliveries, robotic warehouses, fraud detection, or cyber security.
“We believe that advances in technology, specifically the speed and reduced cost of processing power, the advances of wireless connectivity, and the practical applications of artificial intelligence and machine learning, will continue to improve the consumer experience on the Internet and increase its ubiquity in people’s lives”, reads the 10K report. To work in these fields, Amazon has set up a number of research labs. It was granted 2,427 patents during the same year; an increase of 19% over the previous year.
While Amazon faces challenges with rising competition across its business segments, the company continues to stay on its toes and work towards the future.
At Amazon, “It remains Day 1.”
The author has no position in any stocks mentioned. Investors should consider the above information not as a de facto recommendation, but as an idea for further consideration. The report has been carefully prepared, and any exclusions or errors in reporting are unintentional.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Prableen Bajpai
Prableen Bajpai is the founder of FinFix Research and Analytics which is an all women financial research and wealth management firm. She holds a bachelor (honours) and master’s degree in economics with a major in econometrics and macroeconomics. Prableen is a Chartered Financial Analyst (CFA, ICFAI) and a CFP®.
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