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Amazon.Com Inc AMZN [XNAS] | QQQQ ? Amazon.com Inc AMZN [XNAS] | QQQQ Last Price Fair Value Consider Buy Consider Sell Uncertainty Economic Moat™ Stewardship Morningstar Credit Rating Industry 249.74 USD 300.00 USD 180.00 USD 465.00 USD High Wide Exemplary A- Specialty Retail Strong Start to 2013 for Amazon as it Monetizes Market CSOI margins during the second quarter (versus 2.8% posted Share Gains, Fortifies Its Already Wide Moat in the second quarter of 2012), with revenue comfortably within the $14.5-$16.2 billion guidance range (representing 13%-26% growth, or 16%-29% excluding currency). by R.J. Hottovy, CFA Analyst Note Apr. 26, 2013 Director However, as the year progresses, modest CSOI margin gains Analyst covering this company do not Amazon AMZN continued to build a case as one of the most own its stock. could offer a possible upside catalyst. disruptive and diverse players in the consumer universe in the first quarter, while also layering in a steadily improving Pricing as of Apr 29, 2013. Thesis Mar. 04, 2013 Rating as of Apr 29, 2013. margin expansion story. Active users grew 21% to 209 A shakeout among traditional brick-and-mortar retailers is million, total units sold grew 30%, and third party units were under way, particularly in commodified categories. With up 33%, driving revenue growth of 21% (24% excluding minimal customer switching costs and intense competition, Currency amounts expressed with "$" currency). Although these trends represent a nominal are in U.S. dollars (USD) unless we've already seen Circuit City, Linens 'N Things, and deceleration on a sequential basis, they keep Amazon well otherwise denoted. Borders meet their demise in the past few years, while ahead of global e-commerce sales trends, as well as names like Best Buy, Barnes & Noble, Sears, Office Depot, comparable sales trends among most bricks-and-mortar Stock Price and OfficeMax struggle to reverse deteriorating retailers. This implies market share gains, and reinforces our 300 fundamentals. Mass merchants like Wal-Mart and Costco views about Amazon's ability to price below peers through certainly have played a role in this trend, as has the rapid 250 structural cost advantages as well as its strong network growth of key original-equipment manufacturers like Apple. effect. 200 However, we believe the most disruptive force in retail in recent years has been Amazon.com. Amazon's low-cost 150 Gross margin grew 260 basis points, to 26.6%, which we operations, network effect, and laser focus on customer attribute to third-party digital content sales, Amazon Prime 100 service provide the company with sustainable competitive memberships, and Amazon Web Services, each of which is a 50 advantages that traditional retailers cannot match; this building block of our longer-term cash flow forecasts. The 09 10 11 12 13 should yield additional market share in coming years. Armed strong gross margins drove consolidated segment operating with one of the most capital-efficient models in e-commerce, income, or CSOI, of $441 million, well ahead of the high end Amazon generates economic returns well ahead of our cost of guidance ($350 million). The CSOI figure was a modest of capital assumption, supporting our view that it has a wide contraction as a percentage of sales (down 30 basis points to economic moat. 2.7%) due to increased fulfillment, AWS, and content costs (particularly in international markets). However, North Amazon's primary advantage is its low-cost operations. The American CSOI came in at $457 million, or 4.9% of segment cost to maintain its network is much lower than having a revenue, which gives us increased comfort with our five-year large physical retail presence, allowing Amazon to price consolidated CSOI margin target of approximately 6%. below its brick-and-mortar peers while still generating excess economic returns. Additionally, tax laws mandate that We plan to make minor model adjustments based on the online retailers collect sales tax in states where they have a first quarter, but they won't sway our $300-per-share fair physical presence, with the tax responsibility falling to the value estimate. We'd prefer a bit more margin of safety, but end consumers themselves. As a result, Amazon currently still find Amazon to be one of the more intriguing long-term collects sales tax in a handful of states where it maintains a growth stories in our consumer coverage universe. Near-term physical presence, providing additional cost advantages. fundamentals could remain choppy amid further fulfillment center, AWS, and content investments (largely to support Amazon also prides itself on superior customer service, emerging market growth). We project a small contraction in © 2013 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported. The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. ? Redistribution is prohibited without written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. Amazon.com Inc AMZN [XNAS] | QQQQ Last Price Fair Value Consider Buy Consider Sell Uncertainty Economic Moat™ Stewardship Morningstar Credit Rating Industry 249.74 USD 300.00 USD 180.00 USD 465.00 USD High Wide Exemplary A- Specialty Retail in 2012) move from physical to digital distribution, Close Competitors Currency (Mil) Market Cap TTM Sales Oper Income Net Income warehouses and an expansive distribution network will not Wal-Mart Stores Inc USD 258,095 469,162 27,801 16,999 provide the same advantages. Nevertheless, we like eBay Inc USD 68,575 14,543 3,035 2,716 Amazon's chances to compete in digital media given its Best Buy Co Inc USD 8,198 50,705 1,085 -1,231 sizable customer base and the symbiotic hardware/software Barnes & Noble, Inc. USD 1,089 6,942 -117 -105 ecosystem of its Kindle products. We continue to the Kindle suite of products as meaningful customer acquisition tools that add multiple layers of upside to our base-case resulting in high-quality service scores. A user-friendly assumptions, including additional Prime memberships, interface, product recommendations, and wish lists help accelerating digital media sales, and a positive halo effect on drive (and retain) website traffic. In fact, the percentage of general merchandise sales. While we aren't expecting traffic to Amazon derived from search has fallen in recent Amazon to supplant Apple's dominance in digital media, we years at a time when other online retailers have become believe it could develop into a formidable player given its more dependent on search. We think this indicates that vast content offerings and ability to sell hardware as a loss Amazon is increasingly becoming the starting point for online leader. purchases, akin to a mall anchor tenant. Not surprisingly, Amazon has grown its active customer base to 200 million Although it's experienced its share of growing pains, we are users as of December, representing five-year compounded also intrigued by the growth potential of Amazon Web annual growth of more than 20%. This compares favorably Services. In particular, Amazon's cloud computing services with eBay's marketplaces, which has an active customer (EC2) eventually could develop into a multibillion-dollar base of more than 112 million users that has grown at a 6% revenue stream as corporations look for ways to reduce CAGR during the same period. technology expenditures. We estimate that AWS generated approximately USD 1.6 billion in revenue during 2012 and Despite its leading position in an industry with secular expect average annual revenue growth of more than 30% tailwinds, Amazon faces a few potential risks. Given state during the next five years. With recent investments for budget deficits and lobbying efforts by brick-and-mortar additional capacity, we also expect AWS to become an retailers, we haven't been surprised that online sales tax increasingly positive margin contributor due to its highly collection has garnered more attention, with lawmakers in leverageable nature. several states introducing legislation encouraging online retailers to collect sales tax. Obviously, implementation of Valuation, Growth and Profitability sales tax collection would narrow Amazon's advantages and Our discounted cash flow-derived fair value estimate is USD make traditional retailers more competitive. Still, even if 300 per share. We do not believe traditional price/earnings more stringent tax collection laws were put in place, we and enterprise value/EBITDA metrics are meaningful in believe Amazon could maintain its value proposition and Amazon's case, given the impact that ongoing technology, attract customers through other means, including changes to content, and infrastructure investments will have on shipping policies or new Amazon Prime membership near-term margins. Still, we believe Amazon warrants a features. Margin expansion would be mildly more premium valuation based on its wide economic moat, challenging to realize under these circumstances, but our meaningful avenues for growth, and margin expansion longer-term outlook for profitable growth would remain potential. intact. Amazon's strong competitive position and compelling value As media products (which contributed 33% of total revenue © 2013 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported. The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. ? Redistribution is prohibited without written permission.
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