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An Inside Look At Amazon

Retailers, Distributors and manufacturers are still in the dark about what Amazon is set to do in Australia next year.

One thing that is a certainty, and that when they do launch, it will change the retail landscape considerably.

Recently Investor Business Daily did an analysis of Amazon and where they are going.

The No. 1 online seller posted revenue of US$107 billion last year, 22 years after its founding, hitting the $100 billion mark quicker than any company. Its stock has surged roughly 330% over the past five years — and nearly 200% in the last 10 years vs. just over 60% for the S&P 500.

Little more than 10 years ago, Amazon.com unveiled a service that business customers embraced because it saved them money, letting them pay only for the computing power and storage capacity they used, hosted on computers they didn’t own but accessed via the internet.

This early experiment in cloud computing is now called Amazon Web Services. With more than 1 million users per month, AWS is expected to surpass $13 billion in 2016 sales. That puts it in a similar league in size and growth to all of Amazon in its first 11 years.

In the Australian cloud computing market Amazon Web Services, is already rocking the boat, they are growing their business despite being expensive, and several major Australian retailers are already customers of Amazon Web Services.
AS for Amazon in 2016, revenue will likely come in near $145 billion, and Amazon is reaching into new businesses and new markets such as Australia to keep up the growth.

In his letter to shareholders in April, founder and CEO Jeff Bezos wrote that Amazon — which originally billed itself merely as “the world’s biggest bookstore” — wants to be “an invention machine.” And so, it’s full throttle in such fields as delivery services (including deliveries via drones), computerized warehouses, online video and music services, tablets, personal digital assistants, and no doubt more arenas besides e-commerce and cloud services. Even physical stores are now part of the plan.

“Amazon is doing a marvellous job at becoming a bigger and bigger part of daily lives,” Trip Miller, managing partner of hedge fund Gullane Capital Partners, which holds a position in Amazon, told IBD. “They want to be a one-stop shop for consumers. (They are) making it less likely customers will switch to another service.”

According to Investor Business Daily, winning big new markets such as Australia is by no means assured, and Amazon’s spending on its far-flung initiatives is immense, which already has created earnings disappointments.

But Amazon’s growth record so far speaks for itself. As Bezos put it, 20 years ago he was driving some boxes to the post office and thinking about forklifts. In a letter to shareholders a year later, Bezos wrote that online bookselling, and e-commerce in general, “should prove to be a very large market.” It did.

Investor Business Daily said that with a big jump over the past two years, Amazon.com shares took up residence on the IBD Leader board. Amazon then fell 16% from Oct. 6, its all-time high, though Nov. 14, and it’s off the board, at least for now.

Bezos has said that both Amazon and AWS “were planted as tiny seeds.” Not every seedling will grow into a redwood, but Bezos says the goal for each seedling is annual sales of at least $1 billion.

While Amazon shows a willingness to boldly experiment, some efforts have flopped. The biggest flop might be the Amazon Fire smartphone, now off the market.

Other efforts produced unexpected hits, like the Echo — an in-home, voice-activated digital butler that plays music, reads books and provides traffic and weather, among other things.

Teamed with Alexa, its voice and brains, the Echo smart speaker has grabbed a post position in the race to give the world the best and smartest digital assistant, another battle that pits tech’s giants. It’s still not known whether they will launch the device in Australia due to what has been described as “An accent issue”.

Amazon won’t say, but analysts estimate it’s already sold some 4 million Echo speakers, at prices ranging from about $100 to $200. It’s a product that further cements a user’s attachment to Amazon.

“Amazon is not a simple company; there’s a lot of moving parts,” Synovus Trust’s Morgan said. “I still feel strong about what they are doing.”

Those parts include retail. Amazon reportedly plans to open dozens of small retail storefronts in shopping malls over the next year to showcase its hardware such as the Kindle and Echo.

The first Amazon physical bookstore opened last year in Seattle. Amazon has since opened bookstores in San Diego and Portland, Ore., with another one coming in Chicago. The bookstores also sell its hardware, reflecting Amazon’s ongoing drive to reach consumers through a variety of channels.

It’s also pushing deeper into the grocery business, which it entered in 2007 with the launch of the grocery delivery service Amazon Fresh.

“Groceries are a key part of our offerings to customers and we’re playing with very different models to see which works and for what needs,” Amazon CFO Brian Olsavsky said during the company’s Q3 earnings conference call.

Amazon plans to develop convenience stores as well as curb side pickup locations, the Wall Street Journal has reported, citing people familiar with the matter. Amazon apparently will let customers order groceries online and pick them up at a company facility, which could add billions in revenue, says Pacific Crest Securities.

Analysts also expect Amazon to become a force in the shipping business, competing with the likes of FedEx and UPS. The company has announced the purchase of a fleet of trucks to ferry goods between its fulfillment centres. And Amazon has an agreement to lease up to 20 Boeing 767s from Air Transport Services Group to expedite delivery of goods.

“They’re not afraid to invest and go outside the box,” said Christian Magoon, CEO of Amplify Investments, which holds Amazon stock. “And almost all of their initiatives have been very supportive of its core online retail focus.”

Of its many ventures, Amazon Prime which Australians could access this week, might be its biggest success. Launched in 2005, for $79 a year the loyalty program gave users free two-day shipping. The perks have steadily risen. The price, too, has risen, but just once, to $99 in 2014.

Amazon Prime perks now include free access to Amazon streaming videos and commercial free music, free photo storage, free same-day shipping in select regions, exclusives on select offerings and more. Prime members spend on average about $2,500 a year on Amazon, vs. $550 for non-Prime members, according to Morgan Stanley data.

Amazon won’t say how many Prime members it has, but the figure is near 65 million members in the U.S., according to Consumer Intelligence Research Partners.

“Amazon loves to connect with customers in as many ways as possible,” said Amplify’s Magoon, “and in that process they are creating a protective moat.”

These investments come with a cost. Amazon has been far from a profit-making machine. In 2014, in fact, it lost 52 cents a share despite revenue of nearly $89 billion.

For the recent Q3, EPS tripled from the year-earlier quarter to 52 cents, but that missed Wall Street expectations by 26 cents. Amazon shares fell 5% the next day. Its EPS outlook for the current quarter also missed analyst expectations.

In Q3 operating expenses jumped 28% to $32.14 billion, with fulfillment and shipping costs jumping 34% to $4.34 billion as the company focused on improving its shipping times.

It opened 18 product fulfillment centres in the third quarter and will add a total of 26 fulfillments centres this year. The expansion is its biggest in four years, growing warehouse square footage by 30%, vs. a 20% increase in 2015.

Moreover, Amazon says its investments in video content and related marketing expenses will nearly double in the second half of 2016 vs. the year-earlier period.

“So what you’re seeing essentially in the second half of this year is a step-up investment primarily around digital content and the fulfillment centre investment,” said Olsavsky in the conference call. He said Amazon is also adding a lot of resources to Echo, as well as to expansion in India and in Australia.

The investments, says the company, will attract and retain more customers. Analysts at times grumble, but they generally agree.

“Seeing the large opportunities ahead, Amazon has decided to enter another large investment cycle, and strong investment is expected to continue in Q4,” wrote Shebly Seyrafi, an analyst at FBN Securities, in a research note. “We believe that this will better enable the company to produce strong top-line growth.”

Seyrafi rates Amazon stock outperform and has a price target of 875. Some analyst price targets go as high as 1000. Amazon stock rose 2.6% in the stock market today to 780.

“We’ll continue to invest in things that we believe enhance the customer experience, particularly the Prime experience,” Olsavsky said on the Oct. 27 earnings call. “We are honing the businesses that we’re in and making them as efficient (and) as profitable as possible, while also investing very pointedly and very wisely, we believe, in things that will enhance customer experience and create lasting businesses for us down the line.”