Amazon: a small hole for the bogeyman of online commerce

The Seattle group faces the reopening of traditional stores. But it can rely on the “cloud”, advertising and entertainment. Check out our full analysis and stock advice on Amazon.

The 27% increase in sales in the second quarter to $113 billion reflects a marked slowdown in the global e-commerce giant’s activity.

In the first quarter, growth was indeed 44%. Despite this drop — which many would be pleased with — net profit rose 48% per quarter to $7.8 billion. With the gradual lifting of more than a year of containment measures that had sparked an explosion in online sales, the question of Amazon’s growth rate is becoming crucial in the eyes of investors. The easing of health restrictions has slowed internet spending as consumers return to traditional stores. A trend that should be confirmed in the third quarter.

For the period from July to September, Amazon expects a sales increase of almost 16% at best. Prospects severely penalizing investors in late July, the action fell 7.5% on the day of this release.

Since the start of the year, the stock has posted very modest gains (+7%) compared to the performance of the S&P 500 index (+20%). Should we capitalize on this underperformance when Amazon’s hunger for conquest seems boundless?

The weight of the cloud

Contrary to what one might think, the world’s largest supermarket today gets most of its profits from the cloud.

Its subsidiary, Amazon Web Services (AWS), rents out storage space to companies for their digital data. This activity represents only 12% of total revenues, but more than half of the group’s operating profit (54% in the second quarter).

And AWS doesn’t know the crisis. Between April and June, the growth rate reached 37%, better than in the first quarter (+32%) and higher than in 2020 (+29%). AWS is Amazon’s true golden goose.

Conversely, its core business, e-commerce, is seeing its margins crumble in the face of rising delivery costs. Because, incarceration or not, Amazon customers remain addicted to free deliveries. More than 200 million worldwide subscribed to the Prime subscription, an annual package that allows them to receive their orders at home without additional transport costs.

Gold in the second quarter, the cost of deliveries rose 27.8% to $17.6 billion. As a result, the e-commerce platform’s operating margin was capped at 4.6% over the period in North America, versus 28.3% for the “cloud”. Highly lucrative, AWS thus makes it possible to fund Amazon’s much less profitable business and serves to offset the huge delivery costs of its ecommerce platform.

Hollywood Boulevard

At the same time, Amazon continues to invest in all directions. To keep its Prime customers, who also have access to Prime Video, the group bought Hollywood studios MGM ($8.5 billion) and acquired sports rights, most notably in France (Roland Garros, Ligue 1 football). By diversifying, Amazon aims to eclipse the leisure and entertainment giants Netflix and Disney+.

For example, the group spent $11 billion on original content in 2020, up from $7.8 billion in 2019. But unlike its competitors, Amazon doesn’t need to be number one in the media to succeed. “If we win a Golden Globe for a TV series, it helps us sell more shoes,” explained Jeff Bezos in 2016. A formidable tool to build customer loyalty.

Amazon is also quietly making a breakthrough in online advertising. While Google and Facebook dominate this market, Amazon takes advantage of its huge database, sourced from its “marketplace”, to entice advertisers looking for targeted messages. Some companies now prefer to focus their ad spend on Amazon over Google’s paid search engine ads. The results are there for Amazon.

In the second quarter, sales of the advertising division exploded 87% to $7.9 billion. According to the eMarketer Institute, Amazon’s online ad revenue is expected to grow by more than 30% in the United States by 2021. Something to be concerned about other heavyweights in the industry.

Investigations and fines

But its success arouses suspicion and Amazon is in the crosshairs of the regulators, who have launched their offensive. The US company is regularly accused of hindering competition in online commerce. Lawsuits for abuse of dominant position are being filed against his platform. Added to this are the recurrent accusations at the level of taxes or social policy.

Amazon has also just been fined €746 million by the National Commission for Data Protection (CNPD), Luxembourg’s watchdog, for a breach of privacy law. The authorization (or not) of the Metro Goldwyn Mayer acquisition will be the first test with the Biden administration, which has never hidden its intentions to crack down on the tech giants.

No dividend in sight

You can’t say Amazon is a cheap title. While the e-tailer has passed $1.6 trillion in market cap, its value is trading more than 63 times net profit expected this year and 49 times projected net profit in 2022. That’s a lot. But this comment could have been made five years ago, which did not prevent the title from delivering a remarkable stock performance (+330% over the period).

This high valuation does not seem to interest the value specialists either. Of the 48 financial analysts following the action, 46 are buying – and no selling.

But the best way to value Amazon is to look at its greatest asset: its growth. The enterprise value (market capitalization plus net debt) is therefore only 3.6 times the expected turnover this year.

A much lower ratio than its “cloud” competitors: Microsoft (11.2 times) and Alphabet (7.1). On the other hand, the shareholder should not hope for a dividend as the company always prefers investments to boost its growth.

Finally, unlike Apple, Alphabet and Microsoft, Amazon has not yet opened the floodgates for share buybacks. The Seattle company was unprofitable for a long time and is now showing colossal profits.

As long as AWS does not weaken, the margins generated by the US giant will remain high. Despite an expected slowdown in growth after Covid, Amazon’s model will remain virtuous. Take advantage of the stock’s fall (-11% since its all-time high on July 13) to buy or strengthen your position.

To buy the Amazon stock. [AMZ] Goal: $4,000.

Profile: speculative.

Next meeting: result of 3and term, October 28.

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