Amazon Part I

RESEARCHNovember REPORT23, 2020 Amazon PartNovember I: The Retail 23, 2020 Business Insert Picture in Master View Ticker AMZN Amazon.com, Inc. Market Cap (MM) $1,555,127 Amazon Part I: The Retail P/E 2021E 79.09x Business 52 Week Performance Since the QUIC Consumers team first purchased shares of 250 Amazon.com in November 2016, the company has grown dramatically, entered into new business lines, and seen its share price more than triple. In light of the COVID pandemic and how much Amazon has evolved in recent years, the Consumers team believed it 190 was a good time to re-evaluate Amazon’s growth prospects going forward and how the company should (roughly) be valued considering these growth prospects. Given the size and complexity of Amazon, our review of the business will be split into two parts 130 with Part I focusing on the retail business and Part II focusing on AWS and the company’s other bets. 70 As CEO Jeff Bezos famously wrote in his 1997 letter to shareholders, 01-Oct-19 01-Mar-20 01-Aug-20 “It’s All About the Long Term” when talking about Amazon.com. For this reason, the Consumers team chose to build a 10-year financial AMZN S&P 100 Index model wherein we projected revenue and EBIT for the company’s North America and International segments through 2030. While not an extremely detailed model, we believe that in the case of Amazon, Consumers it is better to be approximately right than precisely wrong. We then applied a 25x multiple to our 2030 EBIT projection to arrive at a value Bronwyn Ferris of ~$1.7T for Amazon’s retail business, which is more than the market capitalization of the entire company today. bferris@quiconline.com James Boulter jboulter@quiconline.com Anchal Thind athind@quiconline.com The information in this document is for EDUCATIONAL and NON-COMMERCIAL use only and is not intended to Taras Wylynko constitute specific legal, accounting, financial or tax advice for any individual. In no event will QUIC, its members or directors, or Queen’s University be liable to you or anyone else for any loss or damages whatsoever (including twylynko@quiconline.com direct, indirect, special, incidental, consequential, exemplary or punitive damages) resulting from the use of this document, or reliance on the information or content found within this document. The information may not be reproduced or republished in any part without the prior written consent of QUIC and Queen’s University. Michelle Chou QUIC is not in the business of advising or holding themselves out as being in the business of advising. Many mchou@quiconline.com factors may affect the applicability of any statement or comment that appear in our documents to an individual's particular circumstances. © Queen’s University 2020 November 23, 2020 Amazon Part I: The Retail Business Table of Contents The Evolution of Amazon’s Retail Business 3 Retail Business - Competitive Advantages 5 Competition 9 Amazon and Antitrust: I. Differing Views 12 Amazon and Antitrust: II. Implications for Equity Holders 14 Retail Business Valuation Summary 17 References 18 2 November 23, 2020 Amazon Part I: The Retail Business The Evolution of Amazon’s Retail Business Since it started selling books online in 1995, brands, such as Amazon Basics. Amazon.com, Inc. (“AMZN”) has expanded into scores of markets, from online platforms to brick-and-mortar Moreover, Prime, the membership program that stores, but retail remains at the core of its success, underpins the entirety of Amazon’s retail business representing more than half of its 2019 revenue. model, incentivizes customers to continue shopping Amazon is the largest e-commerce business in the U.S., on the platform through exclusive deals, products, amassing roughly 44% of the market share, according discounts, and free delivery. to Bank of America estimates. In order to understand the scope of Amazon’s reach, it is important to analyze Amazon Marketplace the company’s retail strategy and its many moving parts, including a platform for third-party sellers and Vendors and other independent third-party retailers technology for checkout-free shopping. can use Marketplace to sell their own products to Amazon’s e-commerce audience. In addition to the Amazon.com referral fee sellers must pay, Amazon receives a royalty of all sales. Third-party sellers contribute to 50% of the AMZN’s online shopping platform, which makes up company’s total e-commerce sales. most of the company’s retail business, offers a wide selection of items, accompanied by reviews and ratings Amazon Physical Stores to inform customers’ purchase decisions. The company was an early online retailer and set the standard for Since the launch of its first bookstore in 2015, AMZN the e-commerce customer experience. This platform has taken its retail business into physical stores, includes sales from the over 100 Amazon private-label through both acquisitions and its own builds. EXHIBIT I Amazon’s Top 10 Acquisitions Timeline ($USD M) $20,000 $16,000 $12,000 $8,000 $4,000 $0 2007 2009 2011 2013 2015 2017 2019 Source(s): CBInsights 3 November 23, 2020 Amazon Part I: The Retail Business The Evolution of Amazon’s Retail Business Amazon made its biggest move into physical stores or all of these criteria, proving to be capable of growth with the $13.7B acquisition of Whole Foods in 2017, and durability in the long run. When comparing marking its entrance into the food retail industry. Amazon’s 2005 income statement to its 2015 business There are now approximately 500 Whole Foods lines, it is evident that the company has used locations, up from 470 at the time of acquisition. acquisitions to turn its expense lines into revenue sources. Amazon added checkout-free shopping to its retail strategy with Amazon Go and Amazon Go Grocery. Even years later, many of these are still fast-growing, Amazon Go is a chain of 25 convenience stores located significant aspects of the company’s structure. Kiva’s in Chicago, New York, San Francisco and Seattle, which robots have helped cut operating expenses in first opened in 2018. Customers scan the Amazon Go fulfillment centers by 20%, while Zappos played a app when they enter the store and fill their carts with crucial role in building Amazon’s retail business and items. When customers finish shopping, they exit the the creation of private label clothing brands. The store without checking out at a register. The Amazon Souq.com purchase allowed Amazon to expand its e- Go app tracks a virtual cart of all the customer's items commerce footprint into Egypt, Saudi Arabia, and the and then bills the person's Amazon account. UAE, and came at a time when Amazon’s overseas efforts, particularly in Asia, were beset by intense Acquisition Strategy competition. In a 2015 shareholder letter, Jeff Bezos stated that a While Amazon’s biggest-ticket M&A deals helped it great acquisition has four characteristics: “Customers establish itself in new markets and technologies, the love it, it can grow to a very large size, it has strong recent theme has undoubtedly been about fortifying returns on capital, and its durable in time”. its AWS offerings. Notably, many of Amazon’s largest deals meet some EXHIBIT II Comparison of Amazon’s 2005 Income Statement and 2015 Business Lines Source(s): Social Capital 4 November 23, 2020 Amazon Part I: The Retail Business Retail Business - Competitive Advantages Since Amazon’s humble beginnings as an online bookstore, it has grown to over 2.5B desktop and mobile visits to its site per month. Its priority in Scale Advantage customer experience, scale advantage by acquisitions and supply chain, and the network effect result in its 1. Acquisitions & rising total addressable market (TAM) leading eCommerce and retail market share. In 2017, Whole Foods was acquired for $13.7B to High Degree of Consumer Trust create Amazon Fresh, a grocery delivery and pickup service, to target the $1T US grocery market. Two years When shopping within a bricks-and-mortar retailer, later, Amazon Fresh removed its $14.99 monthly fee consumers are fully immersed in a transparent and became free to Prime members, expanding to environment where they can touch and see their over 2,000 cities in the US. In 2020, Fresh opened its products or ask employees for support. However, this first chain of checkout-free experience grocery stores interactive experience is entirely stripped away with an that can additionally serve as Amazon package return online platform. In turn, consumers must be confident and pick-up sites. These unique features, along with that their delivered product reflects the perceived integrated voice technology and the smart Dash Cart, quality described in the virtual marketplace. With a all represent long-term points of differentiation from widespread trust from its consumers, Amazon can take other big retailers. advantage of a halo effect of trust, to secure consumer conversion. Additionally, third-party sellers take In 2018, the acquisition of PillPack, Haven Healthcare consumer trust seriously as Amazon’s level of and Halo, unlocked an opportunity of over $1B in the consumer trust also impacts their own ability to retail pharmacy market. As 78% of US adults over 55 generate sales on the site. years have at least one chronic condition, Amazon can tap into the business of supporting the baby boomer Amazon also obtains its trust through years of population in managing their illnesses. Amazon Halo’s achieving the “perfect delivery rate”, which includes a wristband collects health data, which can then be used low rate of substitution. Consumer attraction and by healthcare companies such as John Hancock and retention is gained through its sustained promise and Cerner to create personalized health (insurance) plans performance of fast delivery.

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