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Amazon – A Dynamic Shift in its Business Model
Posted by: Damian Illia (IP Logged)
Date: November 28, 2013 04:06PM
As promised in a previous article, today I will look into the E-Commerce King: Amazon.com Inc. (AMZN) as an option to eBay Inc. (EBAY).
Growing the Old-Fashioned Way
Years ago the company was the biggest bookstore in the world, in the recent years it has expanded into a number of other product categories allowing other businesses and individuals to sell new, used and collectible products on its Web sites through its Merchant and Amazon Marketplace programs. The company has organized its operations into two principal segments: North America (57% of 2012 net sales) and International (43%). In the last quarter the company recorded earnings that were in-line with Zacks estimates, so let´s have a look at main drivers for the upcoming quarters.
Long Term Growth Opportunities
The industry pattern has shifted from catalog to internet sales as consumers are increasingly buying things online. Forrester Research projects that U.S. e-commerce sales will increase from $231 billion in 2012 to $370 billion in 2016. So the growth of the e-commerce industry demonstrates strong potential for increased Internet usage and e-commerce sales abroad which we consider a key factor for the company in this fast-growing market.
Due to significant opportunity within emerging markets (like India, China, and Brazil) the international segment could boost earnings in the next quarters. It is essential for the company develops and operates the buying process to increase e-commerce, in a platform like Paypal´s from eBay.
In terms of valuation, the stock sells at a trailing P/E of 1349x, trading at a premium compared to the industry average of 18.2x. We have to take into consideration that a higher P/E ratio than its peers can signify a more expensive stock or higher growth expectations. Analysts’ expectations imply a forward P/E of 143.52. To use another metric, its price-to-book ratio of 19.5 indicates a premium versus the industry average of 1.7x (a higher price-to-book ratio makes a stock less attractive) and the price-to-sales ratio of 2.51x is above the industry average of 0.73x.
Investors care about total returns, which consist of share-price appreciation plus dividends paid, which in this stock does not apply. In terms of stock price appreciation, Amazon's stock price is up 67.3% in the last 12 months, and in a five-year period the comparison versus the SPY is tremendous as we can see it in the next chart.
Regarding profitability measures, return on equity (ROE) and return on assets (ROA) are at negative levels. We have seen the evolution for the prior ten years of ROE in a previous article.
In my point of view, an extremely important risk inherent in Amazon's business model is that it is characterized by low switching costs when shopping online. The firm must focus on technologies investments as they are key drivers for long-term growth opportunities.
Hedge fund gurus like Stanley Drucken Miller, Steve Mandel and Murray Stahl bought this stock. Meanwhile, Jim Simons, Louis Moore Bacon, Ken Fisher and Tom Gayner added Amazon to their existing positions. I would advise fundamental investors to consider adding this stock to theirs as well, as it seems to be an industry in a growth phase.
Disclosure: Damian Illia holds no position in any stocks mentioned.
Guru Discussed: Jim Simons: Current Portfolio, Stock Picks
Ken Fisher: Current Portfolio, Stock Picks
Stocks Discussed: AMZN, EBAY,