Amazon Still The King Of Ecommerce

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Nov 23, 2014
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Amazon (AMZN, Financial) has been going from strong to stronger even in the absence of any hyped up news. This speaks a lot of the fundamental strength of the company. It is true that the festive season is fuelling its growth to a great extent but then the festive season is around for all retailers and etailers but the magnitude of growth is not the same for everyone.

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In fact Amazon has shown growth even in the face of certain failures. Let us take a dig at what is making Amazon’s meters tick at such an overwhelming rate and how investors can benefit from the success run of the ecommerce giant.

Amazon’s Drive

Amazon has a lot of critics in the market who have raised questions on the company as an investment bet more likely due to the fact that the company does not feature in the good books of dividend payers. In a way it is good to have debate over a company as this reveals a lot of new aspect about the company, moreover if when everyone becomes an investor in the company the selling pressure looms large on the company’s shares.

A noteworthy part is that the shares of Amazon has risen by almost 9%, to hit the $327 mark in the recent past and that too in the absence of any major news to drive this upswing. Recently Amazon faced a massive nosedive with its major tech initiative of becoming a smartphone maker with the disastrous failure of its Fire Phone, but Amazon has been able to smartly get over the failure and has been making forays into its areas of strength to the tune of doubling up on all its fronts.

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Amazon has also taken the first step towards building a base in the forbidden kingdom for most of the western world China. It would be difficult for Amazon to make inroads in China especially in the presence of Alibaba (BABA, Financial) commonly known as the Amazon of China; however there are certain unique propositions Amazon is offering only in China. Amazon has a huge scope of offering its cloud service in China and moreover Amazon China is offering Chinese customers to import products from outside China, the first of its kind in the history of Amazon and this makes the ecommerce major stand out in competition with Alibaba. Amazon has also cemented its position in India the country with the world’s second largest population and undergoing rapid urbanization.

Amazon’s spirit for a tech marvel did not get downed by the flop show of the fire phone. The Amazon Echo is both an audio system and the company's first effort in the home automation market. It ties your home WiFi system and Bluetooth to a voice response system and (most important) back to Amazon itself, via its Cloud Player music service and the company's Kindle Fire tablet. For Prime customers, who are inclined toward Amazon already, this is priced at a throwaway price of $99.

In Store for Amazon

Christmas time is round the corner. Falling oil prices and rising employment should make this a pretty good Christmas for the retail sector and would further fuel the growth of the online retailer. Wal-Mart (WMT, Financial) has promised to "match" Amazon pricing, but ironically Amazon hasn't promised to cooperate. The prices on Amazon gets changed 40 million times a day, algorithmically, increasing the cost to its competition of their policy, and probably achieving sales on both sides. Amazon has also launched a new and more user friendly website.

Amazon cloud business is also on all time high clocking revenue of $4 billion per year, with 1 million customers and 2 million servers in 11 strategic geographic locations. This adds to the company’s top-line sales. This frees the company from the burden of advertising expense in order to push its bottom line sales and allows improving the margins with reduced sales pressure on its bottom line.

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Amazon is also making rapid inroads into the entertainment segment. Amazon settled its dispute with Hachette on terms that seem to favor the publisher, but actually provide enormous incentives for the publisher to see things Amazon's way. Its $39 Fire Stick, which competes with Google’s (GOOG, Financial) Chromecast. The Fire Stick is said to be delivering more of entertainment programs rather than Amazon advertisement. It has liaised with Netflix (NFLX, Financial) to offer more of real time entertainment and games as well. According to market reports Google’s Chromecast did not make much of an impact on the market however going by Amazon’s declaration the demand for the Fire Stick has outstripped the supply.

Wall Street is also batting for Amazon. A lot of dust had been raised in the recent past about downgrading Amazon from their investment radar. Zacks have upgraded their outlook on Amazon and with the recent 13F filings both hedge funds and mutual funds are increasing their holdings in Amazon’s stock. Even Jim Cramer, who had last month said that he preferred Alibaba over Amazon, is still advising investors to hold on to their positions in Amazon.

Our View

Amazon.com is no fluke and has taken its up move with well meticulated diversification plan. Amazon also has a strong cash flow at hand. Amazon is making healthy margins, and is making inroads into all areas not just on the home turf but internationally. Amazon is competing on one side with Wal-Mart in the retail arena and on the other side with Google in the ever changing tech space. The best part of this competition is that it is not just competing but also achieving considerable success on both sides of the competition. Its sales figures have doubled than its last year number.

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We recommend a strong buy and hold in the company on a long term basis since both ecommerce and cloud businesses are nascent domains and have a long way to go to actually reach a level of success accounting.