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Amazon Inc. Stock Rating BUY EQUITY RESEARCH 30th October 2018 Amazon Inc. Stock Rating BUY Post Q3 2018 results, we maintain our BUY recommendation and Price Target of $2200. Overall, Amazon 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. Calamatta Cuschieri Research | Amazon Inc. EQUITY RESEARCH 30th October 2018 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 Amazon Prime, Amazon Web Services (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 Calamatta Cuschieri Research | Amazon Inc. EQUITY RESEARCH 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 Q3 2016 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q1 2015 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 Amazon Music 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. Calamatta Cuschieri Research | Amazon Inc. EQUITY RESEARCH 30th October 2018 Continuation of Whole Foods Market 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 Jeff Bezos 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 Amazon Prime Video received 22 Emmy nominations for its original programming. Calamatta Cuschieri Research | Amazon Inc. EQUITY RESEARCH 30th October 2018 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 Kindle Direct Publishing. 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.
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