Is Amazon's (AMZN) Growth Sustainable?

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Amazon.com, Inc. (AMZN) has shown some exceptional share price movement, supported by robust earnings. Every time Amazon’s stock breaches a new high or it sets a new sales record, the question ‘is this growth sustainable?’ comes up. Amazon’s firm belief that “a fundamental measure of its success is the shareholder value that it creates over the long term,” answers that question in a yes.

Here's why.

E-Commerce

While it may appear otherwise, retail e-commerce sales in the U.S. are still a small percentage of its total retail sales, as per data reported by the Census Bureau of the Department of Commerce. During the past four quarters, the percentage has averaged at 8.1%, or $393.85 billion out of the total retail sales of $4.83 trillion.

This clearly indicates that the online retail marketplace has ample room for growth, especially with the increasing number of Internet users; the World Bank estimates Internet users per 100 people in the U.S. at 75.5.

The online spending by U.S. consumers is projected to grow to $632 billion in 2020, according to BI Intelligence and with Amazon currently accounting for about 43% of total U.S. e-commerce sales, its future looks bright.

In terms of revenue, approximately 58% of it is generated by North America alone, which is the world’s second largest regional e-commerce market.

“The region will see consistent double-digit growth through 2020, fueled by increased spending from existing digital buyers, expansion into newer categories such as grocery, and growing m-commerce [mobile commerce] sales,” according to an eMarketer report.

The markets outside North America account for approximately 32% of its sales, and thus are an important factor to its growth story. Although international sales increased 12%, 6%, and 24% in 2014, 2015, and 2016 respectively, this segment has been reporting operating losses due to its focus going into the expansion of fulfillment capacity, spending on technology infrastructure and marketing efforts.

With expanding middle classes, changing spending patterns, and greater mobile and internet penetration, the e-commerce markets in regions such as Asia-Pacific are projected to grow at a faster pace. A steady share in these fast-growing markets could translate into booming sales revenue for Amazon.

Rising Prime Subscriptions

When it comes to subscription numbers, Amazon remains secretive. However, a recent report indicates that Amazon Prime now has 80 million U.S. members at the end of March 2017, up 38% y-o-y. Going by these figures, 60% of Amazon customers in the U.S. are Prime members, who spend an average of $1,300 per year, compared to about $700 per year for non-member customers. These figures emulate that subscription to its Prime membership has doubled in size in a span of two year, thereby displaying greater customer loyalty and brand preference.

AWS

Amazon’s cloud computing arm, AWS is the undisputed leader in the thriving cloud computing market space. During Q4 2016, AWS dominated the public cloud services market at over 40% share, while the next three players cumulatively held 23% of the market, according to Synergy Research.

AWS is growing at a fast pace, and has the potential to become a significant revenue generator for Amazon, given the growth prospects for the cloud computing market, and its market lead. The worldwide public cloud services market is projected to grow to a total $383.35 billion in 2020, from $209.2 billion in 2016, as per a Gartner report. The revenue generated by AWS has increased by 2.63 times from 2014 to 2016 to touch $12.22 billion, while its contribution to its overall revenue increased from about 5% in 2014 to nearing 10% in the present time.

Innovation

Amazon says that, “big trends are not that hard to spot, but they can be strangely hard for large organizations to embrace. We’re in the middle of an obvious one right now: machine learning and artificial intelligence.”

To that end, Amazon is working on practical applications of these technologies for its autonomous delivery drones, Amazon Go store, and Alexa. It uses machine learning for “demand forecasting, product search ranking, product and deals recommendations, merchandising placements, fraud detection, translations, and much more...and in this way, is quietly but meaningfully improving its core operations.”

During 2016, Amazon ranked 14th on the list of USPTO patent assignees with 1,662 patents, while it was at the fifth spot in terms of percentage increase (46.3%) in patent grants y-o-y. Amazon sets its research and development expense within “technology and content” which increased from $9.27 billion in 2014 to $12.54 billion in 2015 and $16.08 billion during 2016.

Final Word

While Amazon enjoys a strong market leadership in the e-commerce and cloud markets, it hasn't become complacent. In fact, the company under Jeff Bezos is continuously working to solidify its position while moving ahead, innovating and evolving itself. Jeff Bezos believes that for an organization, “Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death.” And “that is why it is always Day 1” at Amazon.

The author has no position in any stocks mentioned. Investors should consider the above information not as a de facto recommendation, but as an idea for further consideration.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.