Amazon is the leading global e-commerce and cloud computing provider globally.

Amazon has spent decades building out its fulfilment infrastructure which would be almost impossible for a new player to replicate. This infrastructure allows it to deliver goods to consumers faster and more cheaply than its competitors. Despite the jump in e-commerce usage during the pandemic, e-commerce penetration of retail sales is still in the mid-teens globally outside of China. Amazon built excess capacity during the pandemic, putting pressure on margins at the same time that the world began to re-open and people began to shop in-store. There are many reports of the company slowing capacity expansion and as revenue growth re-accelerates post the re-opening headwind, earnings and free cash flow are likely to accelerate. In addition, Amazon is ramping up its advertising business, which operates similarly to Google’s search advertising business. Amazon is better able to attribute sales to its adverts than competitors, which helps merchants clearly see their return on advertising spend. Amazon’s retail business, including this lucrative ad business, is trading on c0.8 times gross merchandise value (effectively revenue), compared to 0.64 times for Walmart, despite Amazon growing its revenue in the mid-teens compared to Walmart at low-single digits over the next five years.

Amazon’s other large business, AWS, is a cloud platform where Amazon builds, maintains and operates computing infrastructure for other businesses. The cloud industry is an oligopoly between Amazon, Microsoft and Google, with economies of scale in R&D and power consumption making it difficult for potential entrants to be sustainable. Amazon continues to take the most incremental share, despite being the largest. This business generates healthy operating margins in the high twenties. We value this business at 17 times earnings five years from now, when it should still be growing in the mid-teens.



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