…Impressive demand trends continue, as does spending
Units fulfilled by Amazon are growing much faster than commerce revenue, up by over 40% again in the second quarter. We think that Prime membership growth continues to drive FBA (fulfillment by Amazon) participation and that expanded selection from FBA is reinforcing the benefits of Prime, which fuels further adoption.
Subscription revenue growth, a proxy for Prime adoption, grew by over 50% again in the second quarter. This is a slight acceleration from the first quarter. Management confirms this was driven primarily by Prime membership growth.
Usage of core AWS services is accelerating. Revenue growth has decelerated somewhat on price reductions, but the second quarter was a record quarter for expansion of the revenue base up $439 million quarter over quarter to a $16 billion run-rate. PPE acquisition under capital lease (a proxy for AWS investment) was up 71% year over year.
Potential returns in primary spending areas are tangible and supported to investors
Major investment areas for Amazon are (1) expansion of the fulfillment network, (2) AWS capacity and (3) driving Prime memberships, including Video.
We think investors have become very comfortable with the company’s continued investments because of the track record of management, consistency of share gain and massive untapped opportunity in retail and cloud computing services.
Amazon has never been valued on near-term profit and likely won’t be until investors can see a limit on growth opportunities. Until then, we think revenue growth and share gain will matter more than profitability.
We do not expect Amazon will generate meaningful profits anytime soon. The company should be managed for profits until growth opportunities become more limited or more risky, in our view.
We apply a 30 times P/E to commerce and 35 times to Amazon Web Services earnings to our estimates for 2022, which we think the stock will trade at by 2021. This implies a $2,010 stock in three and a half years. We apply a discount rate of 20% per year to get to out $1,275 target by mid-2018.
So what you think my WSB fags?
Submitted August 12, 2017 at 08:40PM by germandar