Thursday, December 1 2022

Key points

  • Amazon continues to grow even after 27 years in business

  • Amazon Web Services (AWS) is driving earnings, with revenue growing 33% to $19.75 billion in its latest quarter

  • More than 1.9 million third-party small business sellers account for 58% of sales on Amazon

Amazon (NASDAQ: AMZN) has become a commerce juggernaut for retailers and tech apps. Amazon is a paragon of the network effect because its ecosystem often encourages the same customer to use several services simultaneously without a second thought. Amazon is the #1 best shopping site, the 5th beauty destination among Gen-Zs, and the 2nd most trusted brand in America according to Piper Sandler’s Generation Z and Morning Consult survey. Brand awareness and service quality have become ingrained in the daily habits of consumers around the world. It’s hard to imagine that a company that makes over half a trillion dollars in annual sales started out of a garage selling books online in 1994. Amazon is taking advantage of the massive economies of scale and the dominance that gives them a halo effect when entering new industries or introducing new product benefits. It has over 300 million active customers and over 100 million Amazon Prime members. Stocks have gone from single digits to over $3,000 per share over the past 27 years. A 30-to-1 stock split made stocks more accessible to retail investors. Here’s a breakdown of the many moving parts of the Amazon juggernaut.

Pioneer of e-commerce and virtualization

It is a fact that Amazon is one of the early pioneers of e-commerce and at one point had a 49% market share in the e-commerce industry. They have become so massive that it is difficult to keep up with the innovations and the many services they provide. Amazon segments its operations into three segments which are North America, International and Amazon Web Services (AWS). AWS is driving earnings as it continues to grow at a double-digit rate, responsible for most of the company’s earnings. AWS enables businesses to operate in the cloud without the need for on-premises investments in hardware and software. This results in asset light trades for a fee. It’s comparable to eating a well-prepared meal at a restaurant for one price instead of manually buying all the ingredients, cooking them, serving them, and washing the dishes afterwards. It’s cheaper, tastier and more effective. AWS also provides every type of business application under the sun. AWS is the market leader in virtualization platforms with Microsoft’s Azure (NASDAQ: MSFT) in second place.

The Amazon effect

Amazon has a history of disrupting and dominating market categories once they decide to enter. The mere rumor of Amazon’s interest in entering a market or industry causes competitors’ stocks to plummet immediately. Much like how Walmart (NYSE:WMT) is criticized for devastating small local retailers when they enter a strategic location for one of their huge supermarkets, Amazon has an even more disturbing reputation for trampling on incumbent businesses. . They are seen as the great disruptor evidenced by their Kindle, Fire TV and tablet e-readers, and the Alexa and Echo smart speakers to name a few examples. On the other hand, companies that do business with Amazon often see their stock prices skyrocket immediately. Such was the case on August 22, 2022, when shares of Peloton (NASDAQ: PTON) soared 15% when they announced the launch of their Peloton store selling their fitness equipment and gear on Amazon.

Revenge of the Little Guys

However, the irony here is that unlike big warehouse clubs like Costco (NYSE: COST) or big retailers like Target (NYSE: TGT) and Walmart, Amazon gets 58% of all sales through its third-party sellers. Like eBay (NASDAQ:EBAY) and Etsy (NASDAQ:ETSY), Amazon empowers the little guy. Third-party sellers account for more than half of all units sold in Amazon stores. Third-party sellers are made up of more than 1.9 million small and medium businesses on Amazon. This is largely due to its innovative Fulfillment By Amazon (FBA) program which will warehouse and ship products on behalf of third-party sellers for a fee. Third-party sales are growing 52% per year, compared to 25% for first-party sales. Independent third-party sellers increased sales by 55% from April 25, 2020 to January 15, 2021. Big box stores are moms’ and dads’ nightmare, but Amazon is “business America’s nightmare,” as Bloomberg.

If you can’t beat them or build them, just buy them

Their dominance and deep pockets have been criticized for stifling competition and if they can’t build it, they will buy it. This is the case of Whole Foods Market for 13.7 billion dollars in 2017, Zappos shoes for 1.2 billion dollars in 2009, Kiva Systems for robotics for 775 million dollars in 2012, pharmacy services online PillPack for $753 million in 2018, video streaming platform Twitch for $970 million. in 2014. It’s the $8.5 billion film and TV production and distribution acquisition of MGM Holdings in 2022 that boosts its content library its Prime Video streaming service as it brings the wars streaming directly to competing platforms owned by Netflix (NASDAQ: NFLX), Walt Disney’s Disney+ (NYSE: DIS), Comcast’s Peacock and NBCUniversal (NASDAQ: CMCSA), Paramount Global (NASDAQ: PARA) and Warner’s HBO Max platform Brothers Discovery (NYSE:WBD). Amazon announced the acquisition of consumer robot company iRobot (NASDAQ:IRBT) in a $1.6 billion all-cash deal in August 2022. It has since been the subject of a scrutiny by members of Congress led by Sen. Elizabeth Warren (D-MA) with anticompetitive practices and confidentiality. infringement concerns.

Slowing down but still growing

Even 27 years after its launch, Amazon continues to grow. Their Q2 2022 earnings report saw revenue rise 7.2% year-over-year (YoY) to $121.23 billion from $119.16 billion according to analyst consensus estimates. . Although they reported a loss (-$0.20) per share, most of it was attributed to the $3.9 billion pretax valuation loss from its non-operating expense investment in the manufacturer. of Rivian electric trucks (NASDAQ: RIVN). Operating profit was $3.317 billion. Revenue from its AWS segment grew 33% to $19.75 billion with an operating margin improvement of 29% from 28.3% a year earlier. Their ad services business grew 18% year-over-year or 21% in constant currency to $8.76 billion. Amazon CEO Andy Jassy commented: “Despite continued inflationary pressures on fuel, energy and transportation costs, we are making progress on the more controllable costs we referenced last quarter, in particular by improving the productivity of our distribution network. We’re also seeing revenue accelerate as we continue to make Prime even better for members, both by investing in faster shipping speeds and adding unique perks like free shipping from Grubhub for a year, Exclusive access to NFL Thursday Night Football games starting September 15. , and the release of the highly anticipated Lord of the Rings: The Rings of Power series on September 2. Amazon expects third-quarter 2022 revenue to be between $125 billion and $130 billion from analyst estimates of $126.58 billion, but expects operating profit to be between zero and 3 .5 billion dollars.

Here's what makes Amazon a behemoth of the sum-of-all-parts business

Here’s what the charts say

Using the rifle charts over a weekly and daily time frame provides an accurate view of the landscape for the AMZN stock. The weekly Rifle chart is formed with a breakdown at $128.39 Fibonacci level (fib). The weekly 5-period moving average (MA) at $122.22 fell through the weekly 200-period MA at $129.81 and recently fell through the 15-period MA at $125.13. Stocks fell below the weekly weak market structure (MSL) buy trigger at $115.19. The weekly stochastic peaked at the 80 band and fell back down. The weekly lower Bollinger Bands (BB) lie at $92.11. The daily Rifle chart resumes a downtrend while the daily 5-period MA flattens to $115.07 while the 15-period MA continues lower to $120.90. The daily BB lower sits at $105.14. The daily stochastic has crossed at the 10 band, but stalls on the make or break, as the moving averages could form an inverted pup distribution or the stochastic may rise with a mini pup. AAttractive pullback levels are at the $101.50 fib, $97.61 fib, $92.97 fib, $89.99 fib, $85.58 and 80 fib, $82.

Challenges behind Prime Day 2

Amazon faces challenges from all sides of its business, not only from its competitors, but also from the macroeconomic environment. So far he has repelled all comers. However, it is not immune to shifts in consumer sentiment. The company has seen a huge surge during the pandemic that has advanced e-commerce adoption by a decade by some estimates. Amazon gained 200,000 new third-party sellers in 2020, up 45%, mostly due to the pandemic. As a global retailer, it is also not immune to currency pressures, which is why they also include constant currency performance figures in their earnings report. The impact of high inflation, a strong US dollar and tightening consumer spending habits will inevitably affect Amazon’s business. This could be the driving force behind the unprecedented move to launch a second Amazon Prime Day called Prime Early Access on October 11.e up to 12e2022. is part of the Entrepreneur Index, which tracks some of the largest publicly traded companies founded and led by entrepreneurs.

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