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Consumer Internet the Future of Amazon Companies Mentioned: Summary EQUITY RESEARCH INDUSTRY UPDATE June 6, 2017 Consumer Internet The Future of Amazon Companies mentioned: Summary AMZN Buy Amazon.com will become simply Amazon as consumers increasingly interact Target Price: (Prior:$1,075.00) $1,300.00 with the company in physical locations (i.e. offline). In this white paper, our Closing Price: $1,011.34 10th on the convergence of the technology and retail sectors, we analyze 18 BURBY Buy opportunities for Amazon to fuel its future growth and further disrupt the retail Target Price: $26.00 sector. For each one, we project the opportunity to drive incremental sales Closing Price: $23.41 growth and the impact on profitability. This research increases our conviction EBAY Buy in the stock and accordingly, we are raising our 12-month price target to $1,300, Target Price: $36.00 from $1,075. Closing Price: $35.55 ETSY Buy Details Target Price: $17.00 Closing Price: $13.54 Opportunities: 4 New and 14 Existing EVLV Buy The 18 opportunities include 14 categories the company is already pursuing: Target Price: $2.50 Closing Price: $1.24 • Advertising, Apparel, B2B E-Commerce, Cloud Computing, the Consumer GRPN Buy Internet of Things, Delivery, Grocery, Hardware, Professional Services, Target Price: $4.25 Publishing, Restaurants, Stores, Video Content, and Video Games Closing Price: $3.05 and four new ones: GRUB Hold Target Price: NA • Credit, Gas Stations, Pharmacy, and Travel Closing Price: $44.52 Sales Implications: 10 $1 Trillion Categories HSNI Buy Target Price: $46.00 We estimate the global total addressable market for these 10 categories exceeds Closing Price: $32.45 $1 Trillion: JWN Buy Target Price: $56.00 • Apparel, B2B E-Commerce, the Consumer Internet of Things, Gas Stations, Closing Price: $41.65 Grocery, Pharmacy, Professional Services, Restaurants, Stores, and Travel OSTK Buy Margin Implications: Half Accretive and Half Dilutive Target Price: $25.00 Closing Price: $14.55 We project success in nine categories would be accretive to margins: QUOT Buy • Advertising, B2B E-Commerce, Cloud Computing, Credit, Delivery, Publishing, Target Price: $15.00 Travel, Video Content, and Video Games Closing Price: $11.60 QVCA Buy While dilutive in nine categories: Target Price: $39.00 Apparel, the Consumer Internet of Things, Gas Stations, Grocery, Hardware, Closing Price: $24.02 • Pharmacy, Professional Services, Restaurants, and Stores SHOP Hold Consumer Internet Target Price: NA Sources Closing Price: $97.48 In addition to leveraging our experience from our 15+ years of covering the consumer W Buy and technology sectors, we relied heavily on three sources: Target Price: $75.00 Closing Price: $68.59 • Professor David Bell from Wharton, author of the seminal book “Location Is (Still) YELP Buy Everything: The Surprising Influence of the Real World on How We Search, Shop, Target Price: $41.00 and Sell in the Virtual One” Closing Price: $30.09 • Sucharita Mulpuru, led Forrester's research on E-Commerce, Retail, and Marketing • Kelly Stickel, Founder & CEO of Remodista, a social think tank examining disruption in global retail Increasing Price Target to $1,300, from $1,075 Our price target is based on our updated discounted cash flow analysis that includes our long-term adjusted EBITDA margin forecast of 19.0% (up from our prior forecast of 17.5%) vs. 11.2% in 2016. Tom Forte, CFA 212-895-3527 [email protected] SEE PAGE 66 FOR IMPORTANT DISCLOSURES AND DISCLAIMERS Consumer Internet TABLE OF CONTENTS Overview…………………………………………………………………………………. 2 Executive Summary…………....………………………………………………………. 4 Sources……….……………....…………………………………………………………. 6 Increasing Target Price….……………………………………………………………... 7 Financial Forecasts……………………………………………………………………... 7 Management…………………………………………………………………………….. 11 Advertising……..………………………………………………………………………... 12 Apparel…………………………………………………………………………………… 14 B2B E-Commerce.……………………………………………………………………… 17 Cloud Computing……………………………………………………………………….. 18 Consumer Internet of Things………………………………………………………….. 21 Credit…………………………………………………………………………………….. 24 Delivery…………………………………………………………………………………... 25 Gas Stations…………………………………………………………………………….. 29 Grocery…….…………………………………………………………………………….. 31 Hardware…..……………..….………………………………………………………….. 35 Pharmacy…………………..…..……………………………………………………….. 37 Professional Services………………………………………………………………….. 38 Publishing……………………………………………………………………………….. 39 Restaurants………………………………………………………………………….….. 41 Stores…….……………………………………………………………………………… 42 Travel…….………………………………………………………………………………. 45 Video Content……………………………………………………………………….…... 46 Video Games……………………………………………………………………….…… 48 Competition……………………………………………………………………………… 49 Wild Cards……………………………………………………………………….………. 50 Who Survives an Amazon-Led Nuclear Winter In Retail? ..…….………..………… 50 Company Milestones.……………………………………………….………..………… 57 Performance Against Guidance…………………………………….…….…………… 58 Appendix……………………………………………………………….………………… 59 OVERVIEW The Future of Amazon Amazon.com will become simply Amazon as consumers increasingly interact with the company in physical locations (offline). Figure 1. The Future of Amazon, 1 of 4, June 2017 Source: Company reports and Maxim Group For example, consumers will be able to save money at the Amazon gas station because they belong to Amazon Prime, much like Costco members today. They will also be able to pick up and return their merchandise ordered online at the Amazon gas station. They will purchase groceries from Amazon via many different means, including: 1) ONLINE and have them delivered to their homes or offices, 2) ONLINE and pick them up at an Amazon pick-up point or an Amazon retail store (book store, convenience store, grocery store), and 3) OFFLINE and pick them up at an Amazon convenience or grocery store. Maxim Group LLC 2 Consumer Internet For those interested, they will be able to dress from head to toe in Amazon’s private label apparel from Buttoned Down non-iron dress shirts to Goodthreads chino pants to underwear, t-shirts, and socks. Additionally, if they are more brand focused, they can purchase products from designers on Amazon including Burberry – both the full-priced merchandise and markdowns - with many items delivered by Amazon itself. Figure 2. The Future of Amazon, 2 of 4, June 2017 Source: Company reports and Maxim Group They will shop for furniture in small-format showrooms that leverage augmented reality to enable them to see a large selection but carry minimal inventory at the location. They will be presented with advertisements in many formats (such as audio, video, and display) when they watch their Amazon TV’s (both Amazon branded TV’s and those of other brands using their Amazon set-top boxes), drive in their connected cars, and live in their smart homes - and not just when they shop on the Amazon website. While still somewhat reliant on FedEx, UPS, and USPS, given its massive size, we expect Amazon will increasingly deliver merchandise to consumers leveraging its own assets and infrastructure from end to end, including air freight, ground, fast delivery (such as Prime Now), physical stores, pick-up points, and even its drones. Additionally, a growing amount of merchandise will be made at its fulfillment centers with 3D printers and shipped directly to its consumers. Figure 3. The Future of Amazon, 3 of 4, June 2017 Source: Company reports and Maxim Group Consumers will have the option of purchasing merchandise or services from Amazon using cash (deposited at a participating physical store or one of its own retail locations), credit and debit cards (including branded ones), a blockchain enabled e-currency (akin to today’s Bitcoin), and by using their Amazon credit line. Consumers will watch a blockbuster movie from Amazon Studios and purchase licensed merchandise at Amazon and, even, Walmart (unless it is renamed Jet, similar to Amazon.com becoming Amazon). Depending on how many add-on services they have chosen as part of their Amazon Prime membership they will pay Amazon for subscription video services (instead of Comcast and DirecTV), car insurance (though the company may just serve as a reseller for Geico, for example), and wireless service (instead of AT&T or Verizon Wireless). Maxim Group LLC 3 Consumer Internet Figure 4. The Future of Amazon, 4 of 4, June 2017 Source: Company reports and Maxim Group They will book airfare, hotels (or even overnight stays at private residences, similar to Airbnb), rental cars (or pre-arranged trips from Uber), and cruises on Amazon Travel. If they chose to, they will have all the essentials waiting for them at their final destination that were previously bought on Amazon and, increasingly, shipped by Amazon, including, but not limited to, groceries and apparel, not to mention sunscreen and sunglasses. Looking even farther out, consumers will fly to Mars on an Amazon rocket; however, we still need more time to determine the long-term sales and margin impact from that one. What are the gating factors to such a future? 1) Amazon’s real competition, including Alibaba, Apple, Facebook, Google, Walmart/Jet.com, and startups that have not even been funded as of today (the next Amazon.com); 2) antitrust laws (what slowed AOL and Microsoft); and 3) Jeff Bezos’ long-term health and the ability of the company to replace him. EXECUTIVE SUMMARY In this white paper, we discuss a number of the categories Amazon is either already pursuing or may consider doing, including the potential impact on its top-line and profitability. Amazon’s Strategy for Pursuing New Categories Innovation is core to the company’s culture and it strives
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