Dear investors,
This is the second part of Amazon’s due diligence. The due diligence is divided into 3 articles. In case you missed the first post, you can find it here: Who Will Stop Amazon? Amazon Due Diligence [1/3]
In no case, this information provides a buy or sell recommendation. The content is merely informative and it reflects my personal opinion. Investors should perform their due diligence and analysis before making investment decisions.
The Buddhist Investor is a platform, which mainly has an educational purpose. Whether you’re a novel investor or an experienced one, my goal is to help make better investment decisions and become a successful long-term investor.
Having said that, let’s continue then with the analysis of Amazon!
Amazon Subscription Services
Amazon Prime: A Timeline from 2005 to 2020
When we think about any subscription services that Amazon offers, we think about Amazon Prime. It took Amazon 13 years to reach its first 100 million subscribers to Prime, the company’s benefits-loaded membership program. It took just 3 years to add its next 100 million, as founder Jeff Bezos revealed in his final letter to shareholders as Amazon’s CEO.
2005
Amazon launched its Prime subscription in the U.S for $79 per year.
2006
Amazon moved forward and launched Fulfilled by Amazon (FBA). This service allows sellers to have a store on Amazon and ship their products for a fee. These products then become eligible for Amazon Prime, increasing the assortment and selection available to customers.
2011
Amazon included Prime Video in subscriptions, which meant 5,000 movies and series for every subscriber.
2014
The company decided to increase its subscription service in the U.S from $79 to $99 per year. This was a great year for Prime, not only because there were many new services added but also because the first price increase proved its service profitability and pricing power.
That same year Amazon Prime Pantry is launched, offering customers the ability to buy essential supermarket products (toilet paper, drinks, creams) for a meager fee and regularly. Also in 2014, Amazon Music was launched with the Prime subscription, giving access to a catalog of 60M songs, on a par with the best streaming services.
Amazon photos are also launched, a service that offers high-resolution photo storage with Amazon's own subscription. Finally, Amazon launches; Amazon Now, a stand-alone app offering free two-hour delivery and one-hour delivery for $7.99 in select areas.
2015
Amazon created Amazon Prime Day to celebrate the company's 20th anniversary. Prime Day offered Prime members exclusive deals on a wide range of products for 24 hours. The Prime Day event is so successful it becomes an annual tradition.
2016
Amazon announced same-day delivery expanded to 27 metro areas.
Amazon introduced Prime Reading. Prime Reading includes a rotating selection of more than 1,000 books and magazines that Prime members can read for free.
2017
Amazon partnered with Chase on the launch of Amazon Prime Rewards Visa Signature Card. The credit card is offered exclusively to Prime members and offers 5% back at Amazon (and now Whole Foods) among other benefits.
Amazon launched Prime Wardrobe, a service that allows you to try on clothes, jewelry, or similar in a period of 7 days before having to pay.
That same year, Amazon launched Amazon Key, a smart lock that allows opening the home from the Smartphone to trusted people (seeing through an integrated camera), open the door from your own Smartphone, or with a personal code. In addition to this, it allows Prime members to receive Amazon packages in their garage, house, without needing a key, simply through the APP.
Also in 2017, Amazon acquired Whole Foods and began offering exclusive Prime benefits.
2018
Amazon announced another price increase for Prime from $99 to $119 —the current price — an increase of $40 since its launch in 2005.
2019
Amazon expanded Prime Free One Day to members with no minimum purchase amount on more than ten million products.
Amazon offered Amazon Fresh as a free benefit of Prime. Prime members in select cities can shop for groceries, everyday essentials, and more with Amazon Fresh. Amazon Fresh is available exclusively to Amazon Prime members by invitation only.
Amazon also launched Amazon Day. Amazon Prime members could then order throughout the week and select FREE Amazon Day Delivery to get all their items in fewer boxes on a single day, rather than separate boxes on multiple days.
Lastly, Amazon extended additional discounts to Amazon Prime Members on Subscribe and Save orders. Prime members could then unlock 20% savings on subscriptions on items like diapers and baby food when they received 5 or more products in one auto-delivery to one address.
2020
Amazon Prime Gaming was launched, a service built into the Prime subscription that provides free games, exclusive gaming content, and a free Twitch subscription.
The present and the future of Prime
Prime has long served as the engine driving Amazon’s business, pulling new users in via perks such as streaming video and music and locking them into shopping on Amazon with fast, free shipping. The number of shoppers signing up is accelerating, perhaps especially now as e-commerce surges amid the pandemic and Amazon lures more customers both in the U.S and overseas. The average amount Prime members spend on Amazon also appears to be growing. It’s making Prime more valuable than ever to the company.
Amazon Prime members spend almost twice as much per year at Amazon as non-members. It is the most effective customer loyalty program ever created. Once you have paid the money to join, you will work hard to convince yourself that you are maximizing the benefits of your membership – by buying more from Amazon.
Here’s an interesting thing to consider. You think of Google as the only search engine that matters, but it’s not true in one important sense. Many of us do not do a Google search when we are shopping. We search Amazon and only Amazon. We trust its low prices, wide selection, fast shipping, and generous return policies. Google is your search engine for many things, but Amazon is your search engine when you’re shopping.
The evolution of Prime has been impressive, incorporating new services year after year to make Amazon's subscription indispensable in our lives. Seeing the evolution in subscribers, it seems evident that it has achieved its purpose.
Prime's evolution has taken us to a total of 200M subscribers in 2020, with 153M coming from the U.S. In the United States, we’ve already seen pricing power, since the price for the subscription is substantially higher than in other countries.
Here you have a comparison of subscription costs (in USD) in different countries:
USA: $13 monthly and $119 annually
UK: $11.3 monthly and $111.4 annually
Canada: $9.7 monthly and $95.6 annually
Germany: $9.6 monthly and $82.8 annually
Austria: $9.6 monthly and $82.8 annually
China: $60.6 annually
France: $7.2 monthly and $58.8 annually
Belgium: $7.2 monthly and $58.8 annually
Luxembourg: $7.2 monthly and $58.8 annually
Mexico: $5.0 monthly and $45.2 annually
Japan: $44.7 annually
Italy: $6.0 monthly and $43.2 annually
Spain: $4.8 monthly and $43.2 annually
Netherlands: $3.6 monthly and $43.1 annually
India: $1.8 monthly and $13.7 annually
The first thing we notice is that the disparity between countries is high. It seems that where there is more room for prices to converge is in Europe, as Prime becomes more mature and incorporates higher quality content (as it has done in the U.S).
Also, there is still a long way to go in terms of ARPU. Even in the U.S the price of an Amazon Prime subscription, taking into account everything included (music, video, access to Pharmacy, free shipping, storage), is well below other comparable subscriptions.
In e-commerce, Amazon is the clear dominator with a market share in the United States of more than 50%. Being the clear dominator in a market that will grow at double digits for the next 5 years is undoubtedly very interesting.
Source: Statista
Another important point is that retail is a huge market where Amazon is just scratching the surface but has certainly positioned itself to capture more and more market share as the years go by. Amazon has 9.2% of U.S retail sales, whereas Walmart has 9.5%. To give you a sense of Amazon's traction, in 2019 it only had 6.8%. Although it is clear that COVID has helped it gain traction, over the years it has always been gaining more market share.
Amazon Physical Stores
The supermarket sector is gigantic and today, Amazon's U.S market share in this segment is less than 3% of 2020 sales. Considering that Amazon's penetration in this segment is increasingly higher and that Amazon is learning more and more due to the integration of Whole Foods and the opening of Fresh, Go stores and above all, physical locations.
After launching its first physical Amazon Fresh store in August 2020, Amazon has slowly added a few more stores. Currently, Amazon's U.S. physical stores include 503 Whole Foods Markets, 12 Amazon Fresh grocery stores, 2 Amazon Go Grocery stores, 22 Amazon Go convenience stores, 24 Amazon Books stores, 30 Amazon 4-Star outlets, and 7 Amazon pop-up locations.
Amazon is focusing on the consumer experience. The company is turning the shopping experience into something different with Amazon Dash Cart. It will have a small initial learning curve for the consumer, but it substantially improves the supermarket shopping experience once the concept is understood.
We are talking about a supermarket cart with intelligence to account for every product you put inside automatically. You can leave with the purchase without having to go through the checkout, and you can know how much you have spent at each moment, making the experience much more efficient.
But don’t forget that with Amazon you can buy groceries online too. Therefore Amazon offers an omnichannel experience in which you can buy online and receive same-day delivery for free and you can also place the order and pick it up at the store or simply buy it in the store itself
In addition, Amazon has been focused on generating its own brands, where profitability and margins are higher. See some examples below:
Having the ability to do click & collect or simply order to home delivery and also to sell their own brands, allows stores to generate operational leverage and increase operational margins as order volumes grow.
Other Segments
Amazon Ads
When it comes to online retail, all eyes are on Amazon. The company dominates the one-day shipping space and it’s taking in about 60% of general product searches made online. There’s another field where Amazon’s growth has been accelerating over the past few years, and it doesn’t seem to be slowing down.
This segment is one of the biggest surprises, and in my opinion, is one of the most undervalued assets that Amazon currently has.
Advertising revenue is a source of income that is growing at an accelerated rate. In fact, 5 years ago it was non-existent, and now it is doubling every two years:
This evolution makes sense, considering that Amazon is the most powerful platform globally to sell products, so being able to appear in the top positions is undoubtedly something very interesting for products. We are talking about a massive market where Amazon is just scratching the surface.
The growth in recent years has been spectacular. Amazon’s ad revenue is now twice as big as Snap, Twitter, Roku and Pinterest combined, and it’s growing 1.7 times as quickly, according to Loop Capital.
If you compare Amazon to the big ad players such as Google or Facebook, Amazon’s ad business appears to be growing the most. For the Q1 FY2021, the company reported $6.9 billion in “Other” revenue, marking a stunning 77% increase from the year-earlier quarter.
eMarketer said Amazon held a 10.3% share of the U.S. digital-ads market in 2020 (up from 7.8% the previous year), with Google holding 28.9% and Facebook 25.2%. In March 2021, the researcher reported that Amazon’s U.S. share had risen to 10.7%, but that calculation didn’t include Amazon’s first-quarter numbers. eMarketer expects Amazon’s share to continue growing steadily through 2023.
In addition, according to eMarketer, online advertising will account for approximately 64% of total advertising by 2024. This makes sense considering that it is much more direct advertising and reaches the consumer better than traditional media (TV, radio).
Amazon within digital advertising is the greenest, in earlier stages while Google and Facebook are already much more mature advertising platforms.
Winners and losers in the digital-ads business are decided based on the quality of the targeting data they use. Google can gauge buying intent based on what people search for or discuss in emails. Facebook can understand product interest based on what its users socialize about and the sites they visit on the internet. But Amazon’s data on what people actually buy may be the best predictor of future product interest. That’s pure gold to advertisers, and Amazon is sitting on a pile of it.
Amazon Healthcare
In 2019, Amazon Care started as a pilot in Seattle to provide Amazon employees with tele-health services. Since it was well-received, the program was then tested in Washington in September 2020 with great success.
At the beginning of March 2021, Amazon announced that starting this summer, this service would expand its capabilities across the 50 states of the United States.
Amazon Care is offered by the application, which offers the following services:
The possibility to make an appointment
In-person follow-up care (select states only)
Medical examinations
24/7 service team, 365 days a year.
Recipes delivered to your home.
Vaccines.
Virtual consultation.
Within the application itself, you have Care Chat, a chat that allows you to connect with registered nurses to get advice on health problems.
Amazon intends to offer this service to independent companies seeking to provide this service for their employees and families. This segment will take time, and it is necessary to have a long-term mindset, although the potential is certainly high.
Amazon is interested not only in the pharmacy business (B2C business) but also in the B2B segment of medical device distribution, which would save a lot of paperwork and administrative procedures for hospitals.
Related to the pharmacy side, it is clear that Amazon fits into the hybrid physical plus online presence, emphasizing the online side. Selling pharmacy products with the Whole Foods combination allows for 2-hour delivery in the U.S, which is very interesting thanks to Amazon's logistical features.
Amazon Pharmacy came in November 2020 with the idea to offer prescription drugs. It is currently approved in 45 states which represents a 90% coverage of the American population. Amazon Pharmacy has the goal to save 80% on generic and 40% on brand-name drugs for people who do not pay with insurance.
Compare the price you get on Amazon with that of another possible distributor. For any user who does not have insurance, the prices offered by Amazon are the lowest. Potential customers will receive discounts between 40-80% with deliveries of less than 2 days (free shipping).
The Amazon Pharmacy market is gigantic; we are talking about a market that moves more than $350B a year where 2/3 are distributed in retail and 1/3 via mail.
Amazon is already able to reach the retail market and is working on reaching the mail order part, as this is a different market that usually works for chronic ailment drugs on autopilot.
In addition, an important point provided by Amazon Pharmacy is the collection of user data. As an online registry, you have the data of the profile of medicines that certain people consume, so this information is valuable for specific players.
There are currently three Amazon pharmacy services:
Amazon Pharmacy: allows customers to order prescription drugs for home delivery. Orders are delivered in discreet packaging to the customer's preferred address. Medications require a prescription from a licensed health care provider.
PillPack by Amazon Pharmacy: part of Amazon Pharmacy and remains a distinct service for customers taking multiple medications daily for chronic conditions.
Amazon Prime: Offers Prime members access to low prices on many brand names and generic prescription drugs when paying without insurance. It can be used to get discounts of up to 80% on generic drugs and 40% on brand-name drugs at more than 50,000 participating pharmacies nationwide, including Amazon Pharmacy and the PillPack by Amazon Pharmacy service.
As you can see, due to the position that Amazon has, the opportunity in the healthcare sector is enormous.
Gaming and Twitch
Amazon has made several acquisitions related to the gaming industry:
In 2014 Amazon acquired Doublé Helix Games.
Also in 2014, Amazon acquired Twitch for $970 million.
In 2016 it launched a tool: Lumberyard that enables game development.
In 2016, it acquired the online gaming portal "Curse."
In 2018 acquired GameSparks for $10 million.
Of all the acquisitions made, Twitch was such a success, achieving spectacular user and viewing metrics and wild growth.
The future lies in the cloud and subscriptions, as well as in-game purchases. Console and game sales have been flat for a few years or with fragile growth, and it is the subscription, cloud & multiplayer, and in-game purchases that have been growing.
In the future, it is foreseeable that this trend will accelerate with cloud gaming being the clear dominator and console sales declining at high rates, so positioning in this segment will be key to absorb sales in the form of subscription: PlayStation Now, GeForce Now, Stadia.
Gaming distribution has changed a lot but the changes are expected to intensify. The new distribution will start from the cloud from players such as Azure, AWS, or others.
Again, Amazon is well-positioned in the future of the gaming industry.
Music and Video
Recently, Amazon acquired the media company Metro Goldwyn Mayer (MGM) for a total price of 8.45 billion. This transaction represented the second-largest acquisition after the $13.7 billion Whole Foods deal in 2017.
Through the acquisition, Amazon gains access to MGM's extensive library of more than 4,000 films, including notable franchises such as James Bond, Rocky, and Tomb Raider. AMZN also acquires 17,000 television programs, including series (Fargo, The Handmaid's Tale) and shows (Shark Tank, The Voice).
The MGM deal should allow Amazon to create a more compelling Video offering to attract new subscribers for the Prime ecosystem. With 175M users on Prime Video and 200M on Prime, this acquisition will possibly catalyze to create new subscribers.
The acquisition of MGM will allow Amazon to produce more original and exclusive content, helping the giant company to compete more directly with Netflix and Disney.
If we analyze the price paid by Amazon for MGM, it seems expensive. We are talking about 25x EBITDA, which is in the highest range of M&A in the average sector. Also, the current valuations in the market have not helped the price to be “cheap”. However, management focus is always in the long-term, and they know the integration makes sense in the ecosystem that Amazon is trying to create with Prime.
The Amazon Alexa Fund
The Amazon Alexa Fund is Amazon's venture capital fund investing in artificial intelligence, frontier tech, voice, robotics, and digital health across consumers and enterprises. The Alexa Fund provides up to $200 million in venture capital funding to fuel voice technology innovation.
They invest in early- to growth-stage companies globally. Some examples are Aiva (a virtual assistant that connects seniors with their healthcare service), Tonal (artificial intelligence for home fitness), and Zwift (a virtual cycling app).
In addition, it has recently launched another fund that will invest in Indian startups, mostly related to Healthcare fabrics.
Although Amazon is not transparent about this, the intentions of these investments are clear.
In my next and final post, I will cover the following aspects of the business:
Management skin in the game
Amazon Q2 2021 results
Amazon forward estimates
Valuation
Business risks
Make sure you don’t miss it!
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The Buddhist Investor
Disclosure: This information reflects my personal opinion and is merely informative. Therefore it should not serve as a basis for an investment recommendation. Investors must perform a previous due diligence analysis before making investment decisions and be responsible for their actions.