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30th October 2018

Amazon Inc. Stock Rating BUY

Post Q3 2018 results, we maintain our BUY recommendation and Price Target of $2200. Overall, reported good results for Q3 2018. Sales came in at $56.6bln, Country United States Industry Consumer Cyclical at the high end of management’s guidance $54bln-$57.5bln. Ticker AMZN ISIN US0231351067 Having said this, shares were down heavily post results. Reason being that although sales came in towards the high end of management’s guidance, they came in slightly Price $1538.88 Price Target $2200.00 lower than market consensus. However, what trigger the sell-off in the shares was that Amazon’s Q4 2018 revenue guidance of 10-20% ($66.5B-$72.5B) was lower than Market Cap $752.46m expected. Shares in issue 487.7m Dividend Yield -- P/E 94.72x Although the lower guidance was the result of a $300mln headwind in Q4 2018 from an accounting change, with Prime subscription revenue now recognized on a straight 52-week 1086.87 – 2050.50 line basis over 12 months instead of with heavier allocation in Q4 2018 as was Range previously done.

We recognize that Amazon shares are still up 30% YTD and there will be increased concerns around deceleration and future growth. We believe shares could remain under pressure near term as a result, but we think there is 4Q profit upside and potential for re-acceleration in 1Q19. We believe any pullback will prove to be a good buying opportunity.

We continue to like Amazon because we strongly believe that its e-commerce and web services business (AWS) have further room to grow eCommerce – Amazon is the largest Internet retailer in the world as measured by revenue and market capitalization.

We believe Amazon is well positioned as the market leader in eCommerce, where it’s still early days with US eCommerce representing circa 13% of adjusted retail sales (ex-gas, food, and autos), which we view as likely going to continue to increase over time.

Amazon Web Services (AWS) – AWS at the moment only accounts for 10% of net sales. It offers a broad set of global cloud-based products including compute, storage, databases, analytics, networking, mobile, developer tools, management tools, IoT, security and enterprise applications.

We believe the company has much further room to grow in this business segment which at the moment only contributed 10% of overall net sales. AWS is the leader in the public cloud with a circa 70% US market share.

High AWS profitability gives us increased confidence in the business.

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Valuation

Our $2,200 based on our sum-of-the-parts analysis. We believe this methodology appropriately attributes value to the company’s large, fast-growing, and profitable AWS segment, in which Amazon continues to invest.

E-commerce - We applied a 1.5x multiple on 2019E Gross Mercandise Value (GMV) of $449B, which we believe is justified as large retailer peer Walmart trades at circa 0.6x GMV and as Amazon has a meaningfully higher growth profile.

AWS - We applied an 18x multiple on our 2020E AWS EBITDA of $23B, which is in-line with other Software-as-a-Service (SaaS) companies.

We then reduced debt of €23.1bln and added back cash of €60.7bln before we divided by the number of shares outstanding to get our price target of $2200.

What is Gross Merchandise Value (GMV)?

Gross merchandise value is the total value of merchandise sold over a given period of time through a customer-to-customer exchange site. It is a measure of the growth of the business, or use of the site to sell merchandise owned by others.

Gross merchandise value is one element of an e-commerce site's performance because the revenue of the business will be a function of gross merchandise sold and fees charged.

Net sales breakdown

Amazon rests on three main pillars, being , (AWS), and Marketplace. It operates through three main segments: North America, International, and AWS.

Net Sales - TTM

Amazon Web Services, 10% $21,244

North America, 60% $125,642

International, 30% $61,239

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30th October 2018

Second-Quarter Results

Net Sales Operating Income

$3,500 $2,983 $60,000 $3,000 $50,000 $2,500 $40,000 $2,000 $37,955 $30,000 $1,500 $52,886 $1,000 $628 $20,000 $500 $10,000 $0 $0 Q2 2017 Q2 2018

 Net sales increased 39% to $52.9bn, compared with $38.0bn in the same quarter last year.  Income from operations increased to $3.0bn, compared with $628m in Q2 2017.  Net income amounted to $2.5bn, reaching $5.07 per diluted share, against the $0.4 per diluted share in the second quarter of 2017.

Amazon's Net Revenue (2015-2018) (billions)

$60.5

$51.0 $51.9

$43.7 $43.7 $38.0 $35.8 $35.7 $32.7 $29.1 $30.4 $25.4

$22.7 $23.2

Q32016 Q22015 Q32015 Q42015 Q12016 Q22016 Q42016 Q12017 Q22017 Q32017 Q42017 Q12018 Q22018 Q12015 Looking at revenues generated by the firm every quarter, one can see significant growth, especially in the past year. The company sees a spike in revenues during the last quarter of every year, mainly attributable to the holidays and additional spending on gifts.

Highlights  has tens of millions of paid customers.  New established brands were introduced on Prime Wardrobe in 2017. Introduction of Amazon Fashion in the US and expansion of Amazon Business to Italy and Spain.

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 Continuation of business, with expansion to more than 20 cities in the US.  Established as the presenting sponsor of the 2018 Special Olympics USA Games Closing Ceremony.

Hardware Sales  It is believed that Alexa revenue could hit $15 billion in revenue in the next three years combined.  Alexa-enabled devices have been the best-selling items across Amazon. Fire TV Sticks and Kids Edition Fire Tables this holiday season were purchased twice as much as the previous year.  Continuous enhancement of Alexa capabilities and expansion into the hospitality business. The development and implementation of on-device fingerprint technique.  Far-field speech recognition improved by 15% over the last year. In the US, UK, and Germany, Alexa’s spoken language has improved by more than 25% over the last 12 months.  2017 recorded Amazon’s biggest hardware sales.  Echo and Alexa were launched in France; Echo Spot launched in India and Japan. Amazon also announced that Echo and Alexa are coming to Italy, Mexico, and Spain by 2018.

Amazon Prime  CEO recently announced that Amazon hit 100 million subscribers.  In 2017, Amazon shipped more than 5bn items with Prime worldwide and more new members joined Prime than in any previous year, both worldwide and in the US.  Expansion into Mexico, Singapore, the Netherlands, and Luxembourg.  Business Prime Shipping introduced to the US and Germany.  Prime Free One-Day delivery available in more than 8,000 cities.  In 2016, Prime’s penetration amounted to 40-60% of all US households, showing good potential for growth.  Introduction to the monthly payment alternative, to attract lower-income shoppers into the program.  Launch of Amazon Prime in Australia.

Prime Day  The fourth annual Prime Day was Amazon’s biggest global shopping event until Cyber Monday, welcoming more new Prime members on July 16th than any other previous day in Amazon history.  Members purchased more than 100 million products.  Small and medium-sized businesses selling on Amazon exceeded $1.5bn in sales.  Global best-selling items: Fire TV Stick with Alexa Voice Remote; Echo Dot.

Amazon Prime Video  received 22 Emmy nominations for its original programming.

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 Renewal of its streaming partnership with the NFL and announcement that Premier League football matches will be available in the UK in 2019 at no extra cost to Prime members. It continues to launch Original Series around the world, including India, Mexico, and Japan.  Addition of new award-winning shows and new seasons of existing ones.

Amazon Web Services  $20bn annual revenue run rate and accelerating innovation in areas like machine learning, artificial intelligence, and Internet of Things.  The division grew 49% year-over-year; becoming the biggest contributor to Amazon’s net income.  Announcement of over 1,400 features last year, such as Amazon SageMaker.  An increase of 250% over the last year of active users working with AWS machine learning services.  New enterprise customers during the quarter, including Ryanair. Other entities are choosing to work with AWS, including 21st Century Fox, Verizon, Major League Baseball, and Formula One.  Announcement of DeepLens and Amazon Sumerian; Amazon QuickSight becomes the first business intelligence service with pay-per-session pricing.

Marketplace  Half of the units sold last year on Amazon worldwide were from third-party sellers like small- and medium-sized businesses.  Customers ordered over 40 million items from SMBs worldwide during Prime Day 2017, up more than 60% over Prime Day 2016.  Over 140,000 SMBs surpassed $100,000 in royalties through .

Market Share Amazon has grown into an international e-commerce company with separate retail websites in North America and international markets. Its audience reach is substantial: during 2016, 82% of internet users in the UK accessed Amazon’s e- retailing services within a month.

As of December 2017, Amazon.com had generated over 3 billion website visits across all devices. Although desktop computers and laptops remain the most popular purchase channels for US Amazon buyers, mobile shopping is set to overtake the traditional desktop purchase route.

Amazon owns more than 90% market share across 5 different product categories: home improvement tools, skin care, batteries, golf, and kitchen and dining accessories during the first quarter of 2018.

When looking at quarter-over-quarter growth between Q4 2017 and Q1 2018, Amazon gained share in seven product categories.

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30th October 2018

Market Cap of Largest US Internet Companies - June 2018 (billions)

Amazon.com $823.1

Alphabet $793.2

Facebook $558.5

Alibaba Group Holdings $535.4

Verizon Communications $198.2

Netflix $159.0

Amazon plans to continue spending on warehouses, logistics capacity, data centres, and product capacity. As it grows its market cap, Amazon faces strong competition, including Google Assistant targeting Alexa and Microsoft’s Azure targeting AWS. Investors can feel assured that Amazon’s combined forces are strong enough to withstand such competition. Projected Market Share of Amazon in the US

50% 45% 47% 41% 34% 37%

2016 2017 2018E 2019E 2020E 2021E

Despite its strong presence in international markets, Amazon generates the majority of its revenues from North America. In the coming years, it is forecasted that Amazon’s market share in the US will continue to grow at a constant rate.

Acquisitions Since its start, Amazon has acquired a number of companies, all of which have played a role in Amazon’s success. Its business has expanded beyond its bookselling origin to become a retailer of almost everything imaginable. It even sells groceries, after its $13.7bn purchase of Whole Foods Markets in 2017. Upon this acquisition, the first changes was the lowering of prices for avocados, organic brown eggs, and responsibly-farmed salmon, with further price reductions in November, to portray the firm as more affordable.

Amazon has also built a network of data centres that hosts the online services of other companies and produces award-winning shows that compete against traditional TV networks.

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Largest Acquisitions by Amazon in the Last 10 Years

2008 2009 2012 2014 2015 2017 2018

• • • Kiva • • Annapurna • Whole • PillPack Systems Labs Foods • • AWS • Souq Elemental

In 2017 alone, Amazon acquired a record ten start-ups, including Harvest.ai, Thinkbox Software, Body Labs, and Goo Technologies, most of which will support AWS growth. More recently, it branched into healthcare involving Berkshire Hathaway and CEO Warren Buffet and into security equipment manufacturer through Ring.

In Amazon’s strategy, growth is the core objective, surrounded by a never-ending cycle between selection, customer experience, traffic, and sellers, while keeping in mind the importance of a lower cost structure, which in turn keeps prices lower and making customer experience even better.

Lower Cost Lower Structure Prices

Sellers Selection

Growth

Customer Traffic Experience

Swot Analysis Strengths  Strong brand with early successes and expanded growth.  Extensive product mix: Amazon is assumed to sell more than 560 million of various products in Marketplace.  Highest revenues in its industry, partly due to the considerable low costs and efficient delivery network.  Third party sellers offer products that are not available through Amazon’s retail division.  Synergies between Marketplace, Amazon Web Services, and Prime.  Customer centric, capable of recording data on buying behaviours to offer individual products. Weaknesses

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30th October 2018

 Limited brick-and-mortar presence.  Shrinking margins due to extensive delivery network and trade wars.

Opportunities  Expansion into developing markets.  Opening of physical stores outside the US.  Further acquisitions to broaden business. Threats  Cybercrime.  Aggressive competition with large retail firms.  The low entry barriers of the industry allow for tough competition, price wars, shrinking margins, and losses.

Top Holders

BlackRock Capital Group Bezos Jeffrey Vanguard Group Inc. Inc. Cos. Inc 16.17% 5.85% 5.17% 3.78%

AMAZON INC.

About the Company Amazon.com, Inc. engages in the retail sale of consumer products and subscriptions through three main segments: North America, International, and Amazon Web Services (AWS) segments. It sells merchandise and content purchased for resale from vendors through physical stores and retail websites, manufactures and sells electronic devices such as kindle e-readers and fire tables, and provides Kindle Direct Publishing, allowing authors to make their books available in the . It also offers programs that enable sellers to sell products and allow artists to publish and sell their work. Further, the company provides storage, database, and other AWS services as well as digital content subscriptions and advertising, among others.

Additionally, it offers Amazon Prime, a membership program which provides free shipping of various items, access to unlimited streaming of movies and TV, and other services. The company serves consumers, sellers, developers, enterprises, and

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content creators. The company was founded in 1994 and is headquartered in Washington.

Disclaimer & Holdings

This document is being issued by Calamatta Cuschieri Investment Services Ltd (“CC”) of Ewropa Business Centre, Dun Karm Street, Birkirkara BKR9034, Malta and bearing company registration number C13729. CC is licensed to conduct Investment Services in Malta by the Malta Financial Services Authority. This information is being provided solely for information purposes and should not be deemed or construed as investment advice, advice concerning particular investments, advice concerning investment decisions, tax, legal or any other ancillary regulatory advice. Similarly, any views or opinions expressed are not intended and should not be construed as investment, tax and/or legal recommendations or advice. CC has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this document. CC does not accept liability for actions, proceedings, costs, demands, expenses, damages and losses suffered by persons as a result of information, views or opinions appearing on this document. No person should act upon any opinion and/or information in this document without first obtaining professional advice.

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