The Future of Amazon.Com Report Highlights
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SPECIAL REPORT SEPTEMBER 23, 2013 THE FUTURE OF AMAZON.COM REPORT HIGHLIGHTS > Market share projections (p. 7). AMZN Is Our Top Pick Among Internet Stocks > Key metrics estimates (p. 10). For this report, we talked to more than 50 industry sources, encompassing public > Potential sales & margin impact of emerging efforts and private companies, industry experts, and government-related entities. (p. 11). Conducting the research for this report has increased our conviction on the name for > Price comparisons: vs. competition (pp. 15-18), 1P vs. the following reasons: 3P (pp. 33-34) vs. Quidsi (pp. 55-56) vs. Zappos (pp. 57-58), AmazonFresh vs. Safeway (p. 42), and vs. > We have a greater understanding of Amazon.com’s strategy regarding sales Whole Foods (p. 42). tax and greater appreciation of its efforts that could more than offset any > Case for/against collecting sales taxes affecting pressure on big-ticket sales, including adding fulfillment centers for expedited Amazon.com’s revenues and potential impact (p. 24). delivery, lockers, AmazonFresh, and (perhaps) pickup points. In addition, > Amazon.com vs. Walmart, by-state sales taxes (p. 28). several third-party sellers will still be able to offer merchandise on > Who offered the most choices Super Bowl Sunday (p. Amazon.com’s platform without having to collect sales tax, which should 37). allow Amazon.com to retain these sales and should be accretive to margins. > Online grocery services comparison (p. 41). > AmazonFresh SKU’s by category, Seattle vs. L.A. (p. > We have a greater appreciation for the levers the company could pull to 45). increase its long-term consolidated segment operating income (CSOI) > AmazonFresh buying experience (pp. 44-45). margin, including increasing its proportion of third-party unit sales, converting > Kindle Fire estimates (p. 47). Amazon Prime into more of a membership model (similar to the warehouse > Kindle smartphone estimates (p. 48). clubs), intensifying its advertising efforts, offering more private-label > Amazon Local cities (p. 51). merchandise, and leveraging its expanded fulfillment center footprint. > Spectrum of shipping options (p. 62). > Fulfillment centers forecast vs. Wal-Mart (p. 63). > A number of our industry sources suggest that Amazon cannot be disrupted > Emerging megaregions and FC footprint (p. 65). because it has been executing its strategy so effectively and has positioned > Lockers locations (p. 67), retailers (p. 68), and itself so well from a competitive standpoint. competition (p. 70). > Pickup points analysis (pp. 71-72). We are increasing our 12-month price target to $400 from $370. Our new price > Stores analysis (pp. 72-79). target is based on our free cash flow yield analysis, which compares our long-term > Same-day shipping analysis (pp. 80-86). forecast for Amazon.com, including a 7.0% CSOI margin, against current valuations > eBay Now has Amazon.com in its crosshairs (pp. 85- of more mature retailers – Costco, Target, and Wal-Mart. 86). > Amazon Instant Video content deals (p. 89). > Streaming video devices distribution (p. 90). > Amazon Studios pilots (p. 92). > Amazon Web Services analysis (pp. 94-102). > Margin Potential and Long-Term Outlook (pp. 103-107). > Who could Amazon.com disrupt and vice versa (pp. 108-116). > How to compete against Amazon.com (p. 117). > Stock anchor points (pp. 118-121). > Long-Term Outlook and Valuation (p. 122). Tom Forte, CFA 212.584.4636 / [email protected] James Cakmak, CFA 212.600.2803 / [email protected] Please read the important disclosure and analyst certification information in the Addendum section of this report SEPTEMBER 23, 2013 THE FUTURE OF AMAZON.COM SPECIAL REPORT CONTENTS REPORT HIGHLIGHTS ................................................................................................................................................................ 1 AMAZON.COM IS LEADING A RETAIL MOVEMENT ............................................................................................................... 7 LONG-TERM MARGIN ................................................................................................................................................................ 8 DISRUPTION ................................................................................................................................................................................ 8 EMERGING EFFORTS .............................................................................................................................................................. 10 SALES TAXES AND INCREASING ITS PHYSICAL PRESENCE ........................................................................................... 11 INVESTMENT CONCLUSIONS ................................................................................................................................................. 11 AMAZON.COM – OUR TOP PICK AMONG INTERNET STOCKS ......................................................................................................... 11 INCREASING OUR 12-MONTH PRICE TARGET TO $400 FROM $370 .............................................................................................. 12 OUR INVESTMENT THESIS .......................................................................................................................................................... 12 PRICING PHILOSOPHY ............................................................................................................................................................ 14 SALES TAX: ONE OF THE MOST COMPLEX ISSUES FOR AMZN ....................................................................................... 19 INDEPENDENT OF FEDERAL LEGISLATION, AMAZON.COM IS COLLECTING SALES TAX IN MORE STATES.......................................... 21 FEDERAL LEGISLATION STILL HAS TO GET THROUGH THE HOUSE ............................................................................................... 22 What Our Industry Sources Are Saying .............................................................................................................................. 22 IMPLICATIONS: WE ESTIMATE THAT 21% OF AMAZON.COM’S US RETAIL SALES AND 10% OF ITS TOTAL REVENUES ARE AT RISK .. 25 TABLES TURNED – COMPETITION WITH SALES TAX ADVANTAGE OVER AMZN ............................................................................. 27 AMAZON.COM RAMPING EFFORTS TO OFFSET POTENTIAL REVENUE DRAG .................................................................................. 27 THIRD-PARTY SALES VIA AMAZON.COM DRIVE LOW PRICING ....................................................................................... 29 THIRD-PARTY SALES THROUGH AMAZON.COM DRIVE SELECTION ............................................................................... 36 CATEGORY AND COUNTRY EXPANSION ............................................................................................................................. 38 AMAZONFRESH (GROCERY)....................................................................................................................................................... 40 Two Markets – Two Different Loyalty Programs: Big Radish and Amazon Prime for Prime Fresh .................................. 43 Big Radish ........................................................................................................................................................................... 43 Prime Fresh ........................................................................................................................................................................ 43 AMAZONSUPPLY (B2B) ............................................................................................................................................................. 46 HARDWARE: E-READERS, TABLETS, AND SMARTPHONES ............................................................................................. 47 SET-TOP BOXES AND THE BATTLE FOR THE LIVING ROOM ........................................................................................................... 47 SMARTPHONES – THE NEXT LOGICAL STEP FOR HARDWARE ....................................................................................................... 48 MYHABIT (APPAREL) ................................................................................................................................................................. 49 AMAZON LOCAL ....................................................................................................................................................................... 50 AMAZON GAME STUDIOS (SOCIAL GAMING) ................................................................................................................................ 52 ADVERTISING ............................................................................................................................................................................ 52 AMAZON PUBLISHING ............................................................................................................................................................. 53 SELLING MERCHANDISE OUTSIDE OF AMAZON.COM: QUIDSI AND ZAPPOS .............................................................. 54 QUIDSI – AFTERSCHOOL.COM, BEAUTYBAR.COM, BOOKWORM.COM, CASA.COM, DIAPERS.COM, LOOK.COM, SOAP.COM, VINE.COM, WAG.COM, YOYO.COM ............................................................................................................................................