Amazon was, is, and will always be a company that puts the customer first. By dialling in on fostering exceptional customer experiences and value, the company kickstarted a never-ending virtuous cycle that started from the very first customer and continues to benefit every customer to this very day.
Amazon is a global technology conglomerate that generates revenues from six major areas - Online Stores, AWS, Third-Party Selling Services ("3PSS"), Subscriptions, Physical Stores, and Other (mainly advertising). The company has over 200 million Prime subscribers, almost 500 million square feet of real estate to drive its operations, and it is hungry for more.
Amazon has one of the widest moats across its main offerings - ecommerce, cloud computing, and advertising. The virtuous cycle that begins and ends with the customer is the source of high switching costs, powerful network effects, cost advantages, high barriers to entry, and a reputable brand name.
Amazon faces potential risks with Jeff Bezos stepping down as CEO, antitrust concerns posing a perpetual threat, Microsoft Azure gaining ground in the cloud market, margin pressure from growth investments, and competition from incumbents across many saturated markets.
Secular industry tailwinds and competitive advantages in ecommerce, cloud computing, and advertising will buoy Amazon’s financial and competitive position throughout this decade at a minimum.
Growth and reinvestment opportunities are vast, laying the groundwork for a long growth runway.
Key Company Metrics
A set of metrics we constantly keep updated to monitor the investment thesis.
One of the most profound concepts fostered by Amazon is the idea of a "virtuous cycle" focused on the customer. At Amazon, every move begins and ends with the customer in mind.
The result is exceptional customer experience, which leads to more traffic and product reviews, attracting more sellers, thus contributing to a greater selection across all product categories. The result? Improved customer experience, which kicks off the virtuous cycle all over again.
The virtuous cycle inherently explains the impact of a network effect - by uniquely focusing mainly on the customer, sellers experience more interest and sales in their products as customers return to Amazon.com for their shopping. As the customer base grows, so do sellers and their product selection, and vice versa.
AWS is the most widely known and used cloud platform in the world, and Amazon's advertising segment is gaining ground at a rapid pace. AWS and both sponsored and non-sponsored advertising benefit from network effects.
The former benefits from a vast user base of some of the largest enterprises in the world, increasing the likelihood that other organizations searching for a cloud platform will choose AWS.
Additionally, AWS improves as more users initiate usage of the platform, collecting data from many customers to create a more effective suite of cloud services and innovate in and around the AWS ecosystem to provide an ever-growing number of services to meet organizational needs.
Currently, AWS offers over 200 fully featured services across the ecosystem, the most depth and breadth of services out of any of the major three cloud providers (i.e., AWS, Azure, GCP). The latter benefits from network effects in two distinct ways - companies using sponsored advertising benefit from the large (and growing) Amazon customer base to drive sales, and those on non-sponsored advertising solutions benefit from a combination of data-driven programmatic advertising and popular Amazon media platforms, which are flush with users.
Stemming from the aforementioned network effects are cost advantages, high barriers to entry, and the benefit of a global and highly reputable brand name. In other words, these moat characteristics are all interconnected - Amazon wins because it can offer products at a lower price than almost any company in the world, which gives it its scale, a deterrent of competition in and of itself.
According to Evercore, over 80% of Amazon customers in their survey are either "very satisfied" or "extremely satisfied" with Amazon, alluding to the fact that the company puts the customer first.
This is an unattainable feat for virtually any company in the universe. We believe these factors contribute to the reputable brand name of Amazon, which in turn helps drive adoption of other services, like AWS and advertising.
Although it may seem that products and services sold on Amazon.com have low switching costs given the plethora of other ecommerce websites and streaming services available to consumers, we believe consumers face high switching costs when considering the power of the selection-price-convenience trifecta. For the roughly 200 million Prime customers around the world, there is virtually no viable alternative that offers the variety of products for the low prices and free express shipping on millions of items.
At a cost of around $100 per year, Prime customers break even rather quickly considering the amount of shopping they do on the platform. According to Evercore research, Prime customers spend 2 - 3 times more money per month and shop twice as frequently as non-Prime customers. Additionally, more than 75% of Prime customers purchase products 2 - 3 times per month on Amazon.
We believe this consumer behaviour and the extremely attractive price point of a Prime membership for the value it offers (i.e., free one-day and two-day shipping, Prime video, unlimited music streaming, and Amazon Prime Reading) brings to light the strength of the trifecta and how unattractive single-store direct-to-consumer alternatives appear to be in comparison regarding price, selection, and convenience. Why shop anywhere else when you've got Amazon carrying most, if not all, of your favourite products?
AWS and Amazon Advertising should not be left out of the "switching costs" conversation. AWS customers may be reluctant to leave due to tangible and intangible costs as they relate to the following decision factors:
AWS provides the most services out of any cloud provider, making it rather unlikely that there is much benefit in a customer switching cloud providers.
Cloud functionality may be similar, but not quite the same between providers. It may cost lots of time and money to recalibrate processes, databases, and functionalities between cloud providers.
Cloud operations are massive - it is unlikely internal organizational teams will be able to learn another cloud platform and its uses quickly enough to avoid business and operational interruptions.
Amazon Advertising customers looking to leave the platform would also face enormous direct and indirect costs. For one, sponsored ads are hosted on the largest ecommerce website on the planet - what better place to advertise your product than a website where hundreds of millions of visitors are already shopping for products?
Further, Amazon's non-sponsored advertising and demand-side platform ("DSP") programmatic advertising could provide a more compelling offering than other DSPs, such as The Trade Desk, given Amazon's reach across proprietary sites and apps on top of third-party exchanges where many DSPs solely operate.
Advertisers on Amazon leverage the unimaginable power of Amazon consumer data to place effective and relevant ads across many platforms - we believe most advertisers would face internal backlash and reluctance towards cutting off Amazon's advertising services.
Amazon is the best-positioned e-commerce platform, in our view. The company keeps swallowing up distribution and fulfillment centre space around the world. The company has a massive footprint and not many other retailers will be able to compete. In fact, we think Amazon will continue to reign as king in the market it created a bulletproof moat in. The company also has a massive lead in market share - over 40% of total e-commerce sales are fulfilled through Amazon. In stark contrast, Walmart, Amazon's main e-commerce competitor, holds less than 10% of the market. We believe this displays Amazon's role in the market as the consumer's top pick for online shopping.
Advertising Services is the fastest-growing segment at Amazon. Roughly 90% of Amazon's ad revenues are derived from e-commerce channel advertising, a niche Amazon had carved out for itself using its own e-commerce platform. We believe e-commerce is a strong secular trend, and advertisers will find value in placing ads on Amazon as advertisers look away from traditional media (i.e., print, magazines, TV, etc.) to areas where more eyeballs can be captured. Amazon is one such place as e-commerce penetration increases.
JPMorgan estimates that only 15% of workloads around the world are in the cloud, a far reach from where it can (and should) be. There are many advantages to shifting from on-premises locations onto the cloud - lower IT costs, almost infinite computing power, faster deployment, implementation, and scalability. In a decade when 5G, the Internet of Things, edge computing, and growing data consumption will change how the world looks today, it should come with no surprise that outsourced cloud adoption is expected to accelerate exponentially. AWS benefits from first-mover advantage and the breadth and depth of its 200+ services provided on the platform. It controls almost 60% of the infrastructure-as-a-service ("IaaS") and platform-as-a-service ("PaaS") combined market, ahead of Microsoft Azure and Google Cloud Platform at 34% and 8% market share, respectively. Although Microsoft leverages its reputation among the corporate community to provide organizations with a full and convenient IaaS, PaaS, and software-as-a-service ("SaaS") suite of services to capture 50% of the overall cloud market share, Amazon leads where it matters most - IaaS and PaaS, which will both experience growth of over 25% through 2024 while SaaS grows at about half the CAGR. We believe AWS will maintain its lead and continue to capture a significant portion of the growing TAM for the following reasons:
AWS has significantly more services, features within those services, and the deepest functionality within those services than any other cloud provider.
AWS has the strongest reputation and largest network of users among the top three cloud providers. The AWS Partner Network ("APN") is robust and fosters a community of partners that build AWS-derived solutions for sale through the platform. More than 90% of Fortune 100 companies and most of the Fortune 500 companies use the APN.
AWS has the longest track record of operational expertise as the longest serving cloud provider while consistently growing and maintaining the first-place spot in the IaaS / PaaS market.
AWS has the largest network of global cloud infrastructure, playing into the technological trends which can only be enabled with low latency and massive computing power.
Amazon's Prime membership is, quite frankly, one of the best consumer value propositions out there today. The service varies in pricing by country. Using the US Amazon Prime membership as a proxy, the membership only costs $139 per year, or $14.99 per month. Considering all these benefits, anyone interested in a Prime membership for any purpose is likely to find high value in many of the other perks. For example, someone who would like a Prime Video membership can pay a few dollars more each month to gain access to everything else. On the delivery side, the payback period for a year's worth of Prime is extremely short - depending how much one values their time, it could pay off within a few orders. At most, it will pay off after about 14 orders in a year, assuming one-day delivery costs $10 per order, on average. It's easy to rack up more than 14 orders per year. In fact, the average Prime member orders 24 times each year and for an average total of $1,400. Think about it - everyday items, like shampoo or deodorant, and gifts, gadgets and accessories, non-perishable food items, grocery and prescription drugs, over-the-counter drugs and health goods, and plenty more are purchased many times throughout the year. The average Prime member actually saves money and our most value asset, time, and gets everything else - Prime Video, Music, Reading, Photo Storage, etc. - for free.
Amazon is pulling the optionality levers available to the company. Amazon recently closed on its $8.5-billion acquisition of MGM, which opens up a catalogue of over 4,000 movies and 17,000 shows, including James Bond and the Rocky franchises. More important than the existing catalogue is the intellectual property at MGM that will help Amazon beef up its content on Prime Video. Outside of Prime Video, Amazon is dabbling with luxury stores, physical pharmacy, Amazon Go, and plenty of other things we do not yet know about over the next 5 - 10 years.
Amazon established a wide moat across several markets, but its moat does not protect it from all forces - internal or exogenous. We believe the factors presented below represent some of the greatest risk to Amazon's financial, operational, or competitive positions across all time frames:
Amazon operates across many saturated markets and faces competition from well-established incumbents in each area (ex. Streaming - Disney+ and Netflix; Physical Stores - Costco and Walmart; 3PSS - Etsy, eBay). Lack of focus, poor strategic moves, and dilutive mergers or acquisitions in any of its segments may result in lost market share and in more severe cases, a full exit from the segment.
AWS competes mainly against Microsoft Azure, a cloud provider that has been growing faster than AWS and controls the overall cloud market due to its well-known business solutions and integrated IaaS-PaaS-SaaS platform. AWS's lack of a complete suite of SaaS services, consumer industry reluctance of AWS adoption due to competition concerns, and Microsoft's strong corporate relationships could result in Microsoft taking over AWS's controlling position in the IaaS / PaaS market.
Amazon's sheer size raises constant antitrust scrutiny from governments around the world. The timing, severity, and outcome of these investigations are deeply uncertain and could result in Amazon being broken up into several smaller companies and depressed valuations if shareholders see fewer opportunities for growth in the future if this were to occur.
Andy Jassy has taken over Jeff Bezos as CEO, presenting potential risks to the future of the company if the strategic course of the were to diverge dramatically from Bezos's mission.
Amazon is still in growth mode - margin pressure will remain a risk in the short- and long-term.