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Amazon.Com, Inc. October 19, 2017 AMZN * - NASDAQ Amazon.com, Inc. October 19, 2017 AMZN * - NASDAQ Rating: Buy Clash of the Titans - Amazon, Google, and Walmart Price: (10/18/17) $1,009.13 • The company is expected to report 3Q17 results on Thursday, October 26 and host a call with Price Targets: 12-18 month: $1,300.00 investors at 5:30 p.m. ET. 5-year: $1,800.00 • We project 29.5% sales growth to $42,359M, which is roughly in line with the consensus projection and higher than management’s guidance range (see Figure 1 on page 3 for our Industry: operating forecasts). Note, our estimates incorporate Whole Foods’ performance, as the deal E-Commerce & Commerce closed at the end of August, but it was not included in management’s guidance. On profitability, Enablement we look for GAAP operating income of $244M, which is higher than the consensus figure of $118M, and towards the high end of management’s guidance range. Lastly, we forecast GAAP Tom Forte, CFA EPS of $0.19, which is higher than the consensus estimate of a loss of $0.06. 212-223-5364 • We project sales for its Amazon Web Services (AWS) unit to increase by 41.5% to $4,572M, [email protected] with its mix of revenues reaching 10.8% versus 9.9% last year. • We forecast its mix of third-party units to reach 52% versus 50% last year and 51% in 2Q17. 1Adjusted EBITDA Note, last quarter marked the first time in Amazon’s history that more than half its units sold were third party. • On the call, we will be listening for management’s comments on: 1) its co-opetition efforts with Google, 2) the increasing competitive threat of Walmart (though it is unlikely management will comment on it directly, per its practice), 3) the initial performance of Whole Foods (following the August acquisition), 4) its search for a second U.S. headquarters, and 5) naming a new head of Amazon Studios. • We consider shares attractive at current levels and are reiterating both our BUY rating and $1,300 price target. Our price target is based on our discounted cash flow analysis that is built on our long-term adj. EBITDA projection of 17.5% versus 10.1% for 2017. Google, Don’t Be Evil, LOL! While much is made, including by us, about co-opetition with Amazon (the ability to leverage and compete against Amazon), we see Amazon’s co-opetition efforts with Google as becoming increasingly important, and in many ways, problematic for Amazon. At one time, Google’s motto was Don’t Be Evil. When considering the “evil” Google has done to a number of companies we cover, including eBay and Overstock, we find that motto laughable. According to our research, Google made changes to its search algorithm in May that resulted in prioritizing local stores with physical inventory of merchandise for product searches to the detriment of pure-play e-commerce companies, in an attempt to put the screws to Amazon. This would not be surprising to us as Google should feel threatened by Amazon because, by many accounts, more consumers search for products on Amazon instead of Google. This prodded Amazon to ramp its spending on Google’s product listing ads to salvage its traffic, which may have contributed to Amazon’s profits falling short of expectations last quarter and, conceivably, could result in the same thing this quarter. FY (Dec) FY16A FY17E Previous FY18E Previous EPS Q1 (Mar) $1.07 $1.48 A - n.a. NC Q2 (Jun) $1.78 $0.40 A - n.a. NC Q3 (Sep) $0.53 $0.19 E NC n.a. NC Q4 (Dec) $1.54 $2.35 E NC n.a. NC $4.90 $4.42 E NC $10.82 NC Valuation Data Price/EPS NM NM 93.3x Long-Term Growth Rate (E) 9% Revenue ($M) Q1 (Mar) $29,128.0 $35,714.0 A - n.a. NC Total Debt/Capital (6/30/17) 49.6% Q2 (Jun) $30,404.0 $37,955.0 A - n.a. NC Cash per share (6/30/17) $(5.06) Q3 (Sep) $32,714.0 $42,359.2 E NC n.a. NC Book Value per Share (6/30/17) $47.18 Q4 (Dec) $43,741.0 $60,549.1 E NC n.a. NC Dividend $0.00 (0.0%) $135,987.0 $176,577.3 E NC $226,823.0 NC Return on Equity (T-T-M) 10.2% Price/Revenue 3.7x 2.8x 2.2x EBITDA ($M)1 $3,442.0 $4,232.0 A - n.a. NC Trading Data Q1 (Mar) Q2 (Jun) $3,962.0 $4,419.0 A - n.a. NC Shares Outstanding (M) 492.0 Q3 (Sep) $3,435.0 $3,543.6 E NC n.a. NC Market Capitalization ($M) $474,912.8 $4,447.0 $5,554.5 E NC n.a. NC 52-week range $710.10-$1,083.31 Q4 (Dec) $15,286.0 NC Avg. Daily Volume (3 mos.) (K) 3,940.0 $17,749.2 E NC $24,090.3 Float (%) 81.3% EV/EBITDA 29.9x 25.7x 19.0x Please refer to pages 11 - 12 of this report for detailed disclosure and certification information. * D. A. Davidson & Co. makes a market in this security. D.A. Davidson & Co. Member SIPC Price Chart 1,100 1,000 900 800 700 NASDAQ:AMZN - Share Pricing 15M Nov 10M 5M 0 Source: Bloomberg Dec Company Description: Amazon operates the second largest global e-commerce platform. It also runs the largest cloud computing effort, Amazon Web Services (AWS). Nov Jan Potential Risks: Amazon faces significant succession risk. AWS accounts for a majority of its revenue growth and profits, and is facing increasing competitive pressure from Google and Microsoft. Thanks to Marc Lore, we see Walmart as a much more significant competitor to Amazon's retail efforts. Dec Feb Mar Jan D.A. Davidson & Co. NASDAQ:AMZNApr - Volume Feb Mar May Apr Jun May Jul Jun Aug Jul Sep Aug Oct Sep powered by: BlueMatrix Oct 2 D.A. Davidson & Co. FINANCIAL PROJECTIONS Figure 1. Amazon: 3Q17 Operating Forecast YOY YOY Change Change ($M) 3Q17E 3Q16 (%) (BPs) Total Revenue 42,359 32,714 29.5% Consensus 42,151 Guidance - Low End 39,250 Guidance - High End 41,750 GAAP Oper. Inc. 244 575 (57.6%) Consensus 118 Guidance - Low End (400) Guidance - High End 300 Adj. EBITDA 3,544 3,435 3.2% Consensus NA Adj. EBITDA Margin 8.4% 10.5% (213) GAAP EPS $0.19 $0.53 (63.9%) Consensus ($0.06) Source: Company reports, Capital IQ, and D.A. Davidson. Google, Don’t Be Evil, LOL! (Cont.) More recently, according to Engadget, among others, Google has stopped supporting YouTube on Amazon’s Echo Show hardware. Additionally, it has forged deals with Target and Walmart to enable consumers to purchase their products via its Google Home devices, much like consumers can from Amazon via Alexa. To be clear, while we like Amazon’s odds to compete against Google on many of these fronts, when considering Google’s vast reach (such as its Android mobile operating system) and deep pockets, we believe Amazon needs to find a way to maximize its co-opetition efforts with Google in much the same way as retailers must do with Amazon. While it is unlikely Amazon’s management would directly comment on Google on the earnings call, we will be listening for any comments, at all, related to this important subject. Jet.com Is the New Walmart We have long admired Marc Lore and consider Walmart’s acqui-hire decision (buying his startup Jet.com to secure his services) as potentially one of its finest moves in a long time. We believe he has breathed some much needed life into Walmart’s online efforts and he almost seems to come up with a new and innovative way to leverage Walmart’s greatest assets – its size, scale, and physical store base – to drive its online and offline sales, on a daily basis. While some of these may never bear fruit (such as having employees deliver products to consumers on their way home from work or stocking your fridge and pantry at home, much in the same way the company keeps its stores “in stock”), we believe Mr. Lore is making Walmart a much more viable competitor to Amazon and will continue to do so, so long as its management enables him to have the freedom to experiment. At the minimum, Jet.com has solved one of Walmart’s greatest challenges, by giving it a more upscale brand. Again, we believe it is unlikely Amazon’s management will make direct comments on Walmart (per its usual policy of not commenting on the competition), but we will be listening for any comments related to this matter, nonetheless. Welcome to Whole Foods (Powered by Amazon) As we have discussed previously, we believe Amazon’s August acquisition of Whole Foods will usher in the era of bricks AND clicks. Prior, for the most part, omnichannel efforts were created by having e-commerce technology bolted onto a bricks and mortar platform. With the combination of Amazon and Whole Foods, we see the potential for a cleaner combination with bricks and mortar integrated to the premier e-commerce platform. That said, we see the need for several iterations by Amazon, which is one of its greatest competitive strengths, in our view, to maximize its grocery effort, including the 460 physical stores it gained with the Whole Foods deal. We see management’s decision to lower prices on a number of food staples, such as eggs, as the first step of many to lower prices at Whole Foods to drive volume.
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