Amazon to Leverage its Technology Innovations and Geographic Expansion to Outperform

(The views and opinions are my own, and are entirely derived from publicly available information)

I flew from Houston to Seattle on Monday last week. By the time I arrived Amazon’s campus I was completely famished.  I looked around, found Amazon Go, went into the store, picked up a sandwich and soda, and walked out without going through registers or cashiers. I just picked up what I wanted and walked out! In true Amazon style, this was meant to ensure a convenient customer checkout experience, made possible by Amazon’s “Just Walk Out” (JWO) technology; a means of checkout, without checking out! As I sat down in the office for late lunch, I started wondering what this operational model meant for Amazon’s business. That curiosity led to this article.

 Amazon’s stock, like most stocks in the US, has seen a decline this year, currently trading 35% off its peak. In Q1 2022, Amazon’s physical store sales rose 17% to $4.6 billion, but its online retail sales fell 3% year-over-year, to $51.1 billion. The challenges of online retailers were exacerbated by supply chain constraints. From an earnings standpoint, Amazon had a Q1 net loss of $ 3.8 billion compared to a net income of $8.1 billion in the same quarter last year. The loss was driven by its investment in electric car company, Rivan Automative, where it recorded a pre-tax loss of $7.6 billion.

The drop in online sales in Q1 2022, following a stellar year where Amazon grew revenue by 22% to $469.8 billion, was not peculiar. As consumers return to the store post-pandemic, other e-commerce headline names like Shopify, Etsy, Revolve Group, and Wayfair have seen a decline of 50% or more in stock prices in the first half of the year. This is more than the drop in the overall market. The overall stock market has seen a significant decline this year, led by the tech sector, with the Nasdaq recording its largest-ever January-June percentage drop, down 29.5%.  It is difficult to pick the bottom of a bear market, but whenever the broader market turns around, I’ll be placing my bets on Amazon to outperform, for several reasons. For example, in spite of the decline in online retail sales in Q1 2022, Amazon’s overall net sales, including Amazon Web Services (AWS) its cloud service business unit, rose 7% to $116.4 billion. AWS continues to grow, recording a 37% revenue increase in the first quarter, faster that analysist projected. A combination of Amazon’s continued technological innovations and geographical expansion positions it for further growth. In particular, the on-going growth in AWS, the potential growth in Amazon’s JWO technology, and the international expansion of Amazon’s e-commerce business, are some of the reasons I think Amazon is well positioned to outperform and possibly reach its projected stock price of over $215 per share before the end of next year.

Growth in Amazon Web Services (AWS)

The Q1 2022 enterprise spend on cloud infrastructure services was approximately $53 billion (or $212 billion annualized), and the market continues to grow at 34% per year. According to the synergy group, AWS is currently the clear leader with a market share of 33%, followed by Microsoft Azure with a 22% market share, and Google’s GCP with a market share of 10%.  If you treat AWS as a separate enterprise, Anurag Rana, a Bloomberg analyst, estimates AWS’ value approaching $1.5 trillion to $2 trillion, noting a major challenge from Microsoft as a potential headwind. However, according to Alex Haissi, a Redburn Ltd. Analyst, AWS could be headed to a valuation of $3 trillion, that is nearly three times the current valuation of the entire company, Amazon. AWS leverages its over 200 products to continue its impressive growth. The 37% growth in AWS revenue in Q1 2022, exceeds the broader market’s cloud infrastructure growth rate of 34%. AWS’ most valuable technology, the S3, is valued at $1.5 trillion according to Haissi, and is expected to grow 46% by 2030. Other growth drivers include machine learning using Amazon SageMaker, Amazon EMR for big data processing, AWS Glue for data integration, Amazon Redshift for data warehouse, and Amazon Athena for interactive query service. With the increase of digital adoption and migration of workloads to the cloud by enterprises, Amazon is well positioned to leverage AWS for significant growth in the coming years.

Amazon’s Just Walk Out Technology

Just Walk Out (JWO) is an artificial-intelligence technology that uses sensors, cameras, and proprietary technology that enables shoppers to exit stores without having to wait in line and pay a cashier. Amazon has used the technology in its Amazon Go stores, since the first store in 2016. There are currently over 42 stores in the US and UK. Amazon is also using the technology in its Amazon Fresh stores, and this has the potential to be a game changer in food retail. The potential for most of the technology’s growth is going to come from its adoption by third party retailers. For example, Starbuck is trying out the technology in New York. JWO technology is also being implemented in Whole Foods. As consumers experience the ease of checkout with JWO, the adoption is expected to soar and stick. JWO is the future of checkout, and is a potential growth area for Amazon.

International Geographic Expansion

In 2021 Amazon reported $280 billion in North America sales, making it the dominant technology company in the domestic market. With 59% of its revenue coming from North America, Amazon is more reliant on the domestic market compared to other Big Tech firms. There is potential for Amazon to further grow its revenue through international expansion. As an example, only 4% of total retail sales took place online in India in 2021, making it a ripe candidate for further e-commerce expansion. Walmart, for instance, closed a 2018 $16 billion acquisition of controlling shares in India’s pioneer e-commerce company, Flipkart. However, the move international has not been easy, as evidenced in Amazon’s legal battles with India’s Reliance Retail. This is coming on the heels of Amazon’s quest to close a 2019 $200 million deal with India’s second largest retailer, Future Retail. Antitrust concerns remain a headwind for cross-border expansion, but Amazon has built the capability for international geographic expansion, and as it implements its expansion strategy, the expectation is that a significant portion of Amazon’s future sales would come from international markets, with potential growth in Europe, Asia, Africa, and the Middle East.

Conclusion

I remain strongly bullish on Amazon for the long run given the massive potential from its technology innovations, cloud infrastructure business, JWO technology, and further growth from geographic expansions. Amazon is well positioned, more so than its peers, to grow significantly in the coming months and years. I own Amazon stocks, and would be a buyer as the current bear market begins to turn around.

References

Ciaccia, C. (2022). Amazon web service: the 800 pound gorilla that could be worth more than $3T. Seeking Alpha

Curran, K. P. (2022). eCommerce stocks: Buying a bottom or buyer beware? Seeking Alpha

Duberstein, B. (2022). This could be Amazon's next massive business. Motley Fool

Reno, N.V. (2022). Huge cloud market still growing at 34% per year; Amazon, Microsoft & Google now account for 65% of the total. Synergy

Vanjani, K. (2022). Amazon is fighting to win India’s consumers. It hasn’t been easy. Barron’s