OPINION: Amazon not unscathed, but a clear winner of lockdown economy
JOHANNESBURG - Amazon was one of the world’s first online retailers. It was founded by Jeff Bezos in 1994 and started out as a small online marketplace for books.
The business grew rapidly and soon numerous other goods such as electronics, music, videotapes, apparel and toys were also being sold. Today, the company generates more than $800 million (R14 billion) in revenue each day and more than 45 percent of all online sales in the US occur on the e-commerce behemoth’s platform.
Amazon listed on the Nasdaq exchange in 1997. Incredibly, an initial investment would have increased in value by more than 1 500 times.
The e-commerce industry has been posting double-digit annual growth long before the pandemic accelerated the adoption of digital shopping.
Online retail accounts for a fifth of global retail. This figure could double over the next five years, fuelled in part by millennials’ preference for online purchases. Amazon’s global online retail market share is 10 percent, yet only a quarter of its revenue comes from outside North America. Significant opportunity exists to expand its global operations, leading to sustained sales growth.
In response to the spike in demand due to Covid-19, Amazon hired more than 175 000 additional employees over the past quarter. Amazon is a clear winner of the lockdown economy, but not unscathed by it.
Its most recent net quarterly sales grew 26 percent year-on-year, while earnings declined 29 percent. Expenditure related to the pandemic will continue to put pressure on bottom-line earnings over the coming months.
Amazon intends to spend about $4bn (its entire quarterly operating profit) in the next quarter on Covid-19- related safety precautions.
Meanwhile, Amazon Web Services (AWS) is purring along. The cloud services business is the largest cloud infrastructure platform in the world. It was initially intended to serve its own internal computing needs, but now provides services that account for 12 percent of revenue and more than half of operating profit.
Most companies adhere stringently to its core business. This excludes Amazon. Amazon’s secret weapon is its willingness to exploit significant opportunities in whatever sector it
identifies them. Admittedly the approach has resulted in failures such as its disastrous smartphone launch attempt.
However, when this strategy succeeds, it tends to pay off on a large scale for Amazon. It is very possible that one or more of its current ventures into health care, global logistics, drone delivery and diagnostic-testing could become handsomely cash-generative over the next 10 years.
Although profit margins will temporarily be depressed, Amazon enjoys established consumer trust, brand recognition and sound long-term structural demand growth.
Amazon dominates the online retail landscape in the US and has a track-record of innovation.
Frans Preis, CFA, is a portfolio manager at VEGA Asset Management based in Pretoria. Amazon shares are held on behalf of clients.