In early July, Amazon’s market value topped the $1.5 trillion mark for the first time, becoming just the third company to reach this landmark achievement after Apple and Microsoft. Amazon’s shares are currently trading at $3124.18, up 44.0% since the pre-virus peak in mid-February and up 64.6% year to date, significantly outperforming the NASDAQ-100 index which is up 13.9% and 24.7% since mid-February and last year. The multinational e-commerce giant, which has come under scrutiny regarding the way it treats third-party sellers on the Amazon platform in a congressional hearing last week, has benefitted from the rising sales during lockdown with record-breaking quarterly profits. Amazon’s strong financial results and expansion into new industries could provide an exciting investment opportunity.
Amazon.com (all details correct as of 3rd August)
Founded: July 1994
CEO: Jeff Bezos (May 1996 – present)
Sector: Consumer services
Share price: $3124.18
1 year target: $3,650.00
P/E ratio (ttm): 120.11
Forward P/E ratio 1 year: 151.29
Market cap: $1.59 trillion
Enterprise Value: $1.59 trillion
Strong growth through the pandemic
Boom in e-commerce sales
The closure of shops due to the coronavirus pandemic has led to rapid growth in the e-commerce sector, with Amazon, the world’s leading e-commerce company, achieving record profits in a “highly unusual” quarter as described by CEO Jeff Bezos, who had previously warned investors that the new costs mean that the company could lose money for the first time since 2015. Amazon hired an additional 175,000 new employees to deal with the extra business brought in by the pandemic, with 125,000 of whom are due to remain to deal with the permanent rise in demand. Alongside costs of staff bonuses and protective equipment, this has brought COVID-19 costs for Amazon up to $4 billion for the period. Despite this, Amazon has doubled its Q2 net income in 2020 compared to the same period last year, reaching an all-time quarterly record of $5.2 billion, far above analysts’ expectations. This was driven by, amongst other factors, the surge in demand from lockdown shoppers, with sales reaching $88.9 billion, up 40% year-on-year.
Increasing demand for cloud services
The growth of Amazon Web Services (AWS), a subsidiary of Amazon which provides cloud computing platforms, has been another key driver of its increased profitability, having posted an operating income of $3.4 billion in Q2, almost 60% higher than the same period last year. Cloud computing is an industry that has been on the rise for over 2 decades, particularly over the past 5 years, where spending on cloud computing has increased from 7% of IT budgets in 2015 to 15% in 2019 according to analysts at Morgan Stanley. The closing of workplaces and offices has significantly accelerated this transition, with companies such as Zoom drawing on AWS for extra computing capacity to accommodate for the 20-fold rise in the number of minutes spent using their video conferencing services. AWS, which has a 50% global market share in the market for cloud platforms, is strongly positioned to reap the benefits from this ongoing and accelerating transition towards cloud computing at present and in the future.
Strengthening positions in new and existing sectors
Online groceries – expanding outreach of Amazon Fresh services
Since the start of the year, demand for online groceries has risen from 7% of total UK food sales to 13%, making Amazon keen to strengthen its position in the industry to profit from this transition. On the 28th July, Amazon announced that they plan to expand the outreach of their Amazon Fresh services to millions more Prime members by the end of the year and abandon the additional monthly charge of £3.99, utilising their existing infrastructure and distribution centres to best meet customer demand. Amazon’s Fresh services were previously limited to Prime members in about 300 postcodes in the UK, mostly in London and surrounding areas in the South-East, giving Amazon just a 3% share of the UK online grocery market, compared to Tesco and Ocado with 30% and 14% respectively. This move is aimed to reinforce Amazon’s position in the online groceries market, putting pressure on supermarket chains, for whom online groceries is usually their least profitable sales channel.
Autonomous vehicles – Amazon’s acquisition of Zoox
In late June, Amazon announced that they will acquire the vehicle start-up Zoox for over $1.2 billion, the biggest investment of the group into the autonomous vehicle sector, and their second biggest acquisition since the 2009 purchase of shoe retailer Zappos. Zoox, which has been seeking a sale since May owing to coronavirus knockback, will continue to operate independently under current CEO Aicha Evans, with Amazon expected to invest billions more to help bring Zoox’s purpose-built vehicle to market. The race for robotic taxis, currently pursued by the likes of Uber and Lyft, will now be put under more competitive pressure as Amazon enters the market, having the potential to lead to further partnerships in the industry. This move by the e-commerce giant will not only help them take advantage of the rapidly expanding market for driverless taxis, but will also be used by Amazon to design self-driving delivery vehicles, helping to develop a more efficient long-term delivery network, which could save Amazon $20 billion in annual costs according to analysts at Morgan Stanley.
Amazon’s expansion of its presence in the online groceries and autonomous vehicle markets could be a significant source of future profitability for the firm, both by entering new industries and by implementing potential cost-saving innovations. Furthermore, the Coronavirus pandemic, which has accelerated the ongoing transition into e-commerce and cloud services, means Amazon can capitalise on its dominant market position in these times of change. Amazon, which has a track record of financial success and several new and expanding potential sources of future profitability, could be a good buy for investors looking to purchase stocks that can offer stability and long-term growth.