Amazon is the largest online retailer and cloud computing provider in the world. By offering customers vast selection, low prices and convenience, Amazon has established market leadership in online retailing, a secularly growing industry that Amazon should lead for many years given its scale, delivery, and logistics footprint, installed Prime membership base and trusted brand. With the largest online retail revenue base, estimated at $400B for 2021, Amazon has unmatched scale and resources to reinvest in its supply chain, logistics network, Prime subscription program, and customer experience. Amazon’s superior shopping experience has made it one of the most trusted and shopped brands in the world. Customers can shop almost anywhere; the fact that so many continue to choose Amazon proves its value proposition in online retail remains unrivaled.
Amazon’s Cloud business, AWS, is the leading provider of cloud computing services, including data, storage, security and a variety of applications that a growing number of enterprises perform in the cloud. AWS allows customers to save money, scale faster, and develop and implement more advanced applications and services. AWS customers trust Amazon with their most sensitive data, and often architect their technological infrastructure to work specifically with AWS. Cloud computing services are an increasingly essential, non-discretionary service for the enterprise. Once a business has moved its digital footprint to Amazon’s cloud, the business is likely to be sticky, recurring, and durable. Cloud services are mission critical and cannot be easily moved or changed without business disruption. AWS has built and deepened customer relationships globally across all sizes and types of enterprise. AWS will generate ~$50B in revenue in 2021. AWS should continue to grow its revenue between 20-30% per year for the foreseeable future, as the multi-trillion dollar global IT market continues its secular shift to the cloud.
Inspired by founder and long-time CEO Jeff Bezos, Amazon’s culture is defined by invention and innovation, customer-obsession, long-term thinking, and operational excellence. Few companies practice their cultural values as fully and consistently as Amazon, as evidenced by its long-history of bold innovation, its customer-centric product and service offerings, its development of new large businesses that required long-term investment and patience, and its operational excellence as measured by leadership in online delivery and scaling of the cloud. Amazon’s culture, combined with its scale and financial resources, provide a strong competitive advantage because Amazon is willing and able to make investments against long-term horizons at greater scale than almost any company in the world. Amazon does not get distracted with immaterial side projects. Amazon has been ingenious at leveraging its existing asset base to create new, large, and profitable adjacent businesses (marketplace/advertising/Amazon Video). Amazon is competitive with any company in the world at attracting and retaining top technology talent, a position that will be increasingly important as advanced technologies such as AI/Machine learning become more essential to businesses.
Amazon stock is currently trading at 3x E2022 sales, 19x E2022 EBITDA (earnings before taxes, interest, taxes, depreciation, & amortization), and 48x E2022 earnings. We believe these are attractive valuations given Amazon’s growth, competitive position, and dominant scale. From 2016 to 2020, Amazon grew sales from $135B-$386B, EBITDA increased from $12.3B to $48B, and EPS increased from $4.90-$41.83. The growing revenue and profit contribution from higher margin revenue segments have driven substantial operating leverage which should continue as the retail and cloud businesses grow. By 2025, we estimate that Amazon’s retail business alone could generate $800B in revenue, $80B in profit and be valued at $2T versus a current market capitalization of $1.6B for the whole business. Amazon has dominant scale in two relatively economically insensitive and essential categories: retail and cloud. No matter economic or market conditions, customers will need to buy a wide array of essential products and services from Amazon,
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