Global leaders update: Profiling Amazon

About the author:

Tom Sartor
Author name:
By Tom Sartor
Job title:
Senior Analyst
Date posted:
23 November 2021, 9:00 AM
Sectors Covered:
Junior (Emerging) Resources, Bulk Materials

  • Our Asset Allocation update – Q4 2021 details our recommended 26% exposure to international equities for investors with a Balanced risk profile.
  • Sep-Q results again exceeded expectations across the global leaders, but by a smaller margin and with supply chain issues and inflationary headwinds softening the outlook. Markets have a few reasons to be bumpier into 2022.
  • We further profile Amazon as a dominant online retailer, and note further information is available via our Amazon Company Snapshot.

International exposure in portfolios

The reflationary economic backdrop continues to favour investing in global equities, with central banks prepared to let inflation run for now and governments reticent to tolerate further restrictions. This supports upside to the cyclical ‘rotation’ in global markets, helped by significant pent-up demand.

The key risk to the outlook is a significant slowdown in China, with bespoke lockdowns, supply chain and inflationary issues also potential sources of short-term volatility, and which we advocate investors look-through should volatility pick up.

Profiling Amazon (AMZN-US)

Amazon is a global e-Commerce juggernaut with ~$500bn in turnover and a ~$1.8tn market cap. Its core retail offering provides a platform for both buyers and sellers and is ubiquitous in the consumer psyche. The company also provides web services (e.g cloud computing), storage and database, it distributes content via its own media and gaming platforms, it offers co-branded credit cards and also develops its own consumer products, such as the Kindle.

Bull points: Amazon dominates North America's online retail category. Its operational efficiency, network effect, and a brand built on customer service provide its marketplaces with sustainable competitive advantages that few, if any, traditional retailers can match. The combination of competitive pricing, unparalleled logistics capabilities and high-level customer service makes Amazon an increasingly vital distribution channel for consumer brands.

Retention and expansion of Amazon Prime memberships, which will ultimately result in recurring, high margin revenue, demonstrate the power of the network effect. Amazon enjoys first mover advantage in cloud computing with a clear lead in features and functionality. This capital-intensive industry has strong barriers to entry, offering protection against competitive threats.

Bear points: Amazon is mandated by regulatory concerns in big technology firms, which may hinder international expansion. It may also face difficulties penetrating global markets due to competitive logistic networks. There is a risk that Amazon cannot penetrate its targeted new retail categories such as luxury goods which may be due to improved ecommerce competition from traditional retailers as a result of COVID.

As an enabler of online retail and with a business model that is based on fees derived from online retail transactions, Amazon's business is susceptible to changes in consumer spending. Investment in its fulfilment network (AWS data centres, delivery logistics etc) may weigh on near-term margins.

Market view: Factset consensus notes 47 of 50 analysts covering AMZN rate it a Buy, offering ~9% of capital upside. AMZN may look expensive at face value, but has delivered a 28% 5-year revenue CAGR, helping to drive a corresponding 5-year share price CAGR of 36% explaining its appeal as a key growth stock.

Five-year Amazon performance (Indexed to 1/7/2016)

Growth stocks have had a choppy ride since the onset of the pandemic

Source: Morgans, IRESS

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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