Amazon.com, Inc. (AMZN) is now the sixth biggest U.S. company according to stock market value, overtaking Facebook Inc (FB) to gain the position. But its growth probably won’t stop there.
In fact, it could be bigger even that Apple Inc. (AAPL), the current big fish, believes one analyst. Indeed, it seems lately as if Amazon can do no wrong, and various firms have been picking it apart piece by piece to value its many different parts.
Amazon’s Massive Growth Engines: Retail and the Cloud
MKM Partners analyst Rob Sanderson told Barron’s that he believes Amazon could be the biggest U.S. company by stock market value by 2020 because it has a greater runway for growth than all other big companies. He particularly called out the online retail and cloud computing businesses, both of which are massive growth markets currently.
As the first quarter earnings reporting season comes a close, we’ve seen some huge trends among retailers that point to Amazon having a very bright future. For one thing, department store chains like Macy’s, Inc. (M) and luxury brands in general did not perform well. Instead, cost-conscious consumers favored big box retailers like Walmart Stores, Inc. (WMT). Amazon has long fared well among consumers worried about cost over brand.
Further, the mix shift away from brick-and-mortar shopping and toward online shopping continues, which of course makes the company an even bigger beneficiary from the ongoing trends in the retail business. Amazon has also made headway in categories like apparel, which has made these two trends even more pronounced as it steals share from major department store chains which once fought each other for a stranglehold over the apparel market but now have to deal with the online threat.
Amazon Web Services has also proven to be its own engine for growth as the business’ revenue soared 64% to reach $2.57 billion in the first quarter. The business is also becoming more and more profitable as its operating margin reached 26%, almost double what it was in the year-ago quarter.
Amazon Prime Pushes Growth
And then there’s Amazon Prime, which shows no signs of slowing down. The latest numbers from Consumer Intelligence Research Partners indicate that the service is highly addictive as 96% of those who pay for a subscription for two years will sign up for a third year. Further, 91% of first-year subscribers renew for a second year, and 73% of those who sign up for a free trial go on to pay for a subscription.
Amazon hasn’t been ignoring this growth engine either, as it recently announced even more services to be bundled into it in order to keep subscribers hooked. CIRP estimated in January that Amazon had 54 million U.S. subscribers for its Prime service, which amounts to about one-fifth of U.S. adults or 50% of U.S. households, reports Quartz.
Bernstein analyst Carlos Kirjner pegs the number of global Prime subscribers within a wide range of 58 million to 69 million as of the end of 2015, including about 8 million subscribers who were on free trials at that time. He notes that the company doesn’t release any hard data on Prime, which makes it extremely difficult to quantify the service.
However, his own survey suggests that Prime Instant Video drives incremental subscriptions, which might be surprising to some because much of the focus is on free shipping.
Further, Prime Instant Video has a long way to go to catch up with Netflix, Inc. (NFLX), although Amazon has been rapidly building its own library of original content in order to compete at the same level.
Many academics claim investing is a “random walk.” We believe this to be only partially true. It is our core belief that value investing can outperform the market, hence the name “ValueWalk.” Your number one source for breaking news and evergreen content on everything value investing and hedge funds.
Check out our new free Underrated Small Cap Stocks newsletter
Also Sign Up For Our Free Newsletter and receive in-depth ebooks on famous investors
