Is Amazon's Future Dependent On the Bricks and Mortar It Worked So Hard To Destroy?

AWS's cloud storage business is becoming Amazon's Windows - if that is a fair comparison - so with Europe drawing a regulatory bead on its ecommerce business - with the US and other regions possibly to follow, growth may have to come from Whole Foods and cashierless Amazon Go stores. Ironies do abound. JL


Jamie Powell reports in FT Alphaville:

In 2019, Amazon Web Services may contribute over half of Amazon's operating profits despite its relatively small size compared to the retail segments — in the first half of this year AWS only contributed 11% to its net sales. With the news  Amazon is considering a 3,000 store roll out of its gee-whizz cashierless stores by 2021, it seems its all-in on the bricks and mortar sales which it once sought to undercut.

Amazon, the world-eating retailer and cloud computing giant has had a pretty decent year. Its shares, which have powered the Nasdaq to record highs, are up 64 per cent year-to-date, at one point taking the company's valuation over $1tn (not that it really matters).

Does it still have room to run?
Well, according to the boffins at Julius Baer, probably not. A discussion in the Long Room drew our attention to a new note about US and Chinese tech stocks, which said (with our emphasis):

Fundamentally, we do not object to Amazon’s high revenue growth potential for all of its business segments. The strongest value driver at this stage is the cloud business delivering ongoing strong growth in the high 40 percentage level. E-commerce also maintains strong growth momentum (US: 30%+ ex WholeFoods, Non-US: around 25%), while margins began to improve considerably in the US helped by the third-party seller business, better growing Prime membership fees (50%+ year-on-year [y/y]) and quickly growing advertisement revenues (more than doubled y/y). While we expect continued strong growth for the e-commerce business, obviously the penetration rate (in the US) is quickly moving up which will lead to a growth slowdown at some point.

From a tactical perspective, we believe that the valuation is by now embedding rather optimistic growth assumptions (even for Amazon). For example, consensus EPS CAGR over 2018E-2022E is 33%, which is only second to Netflix at 37% amid the FANG-BAT group. In combination with historically high valuation multiples, we argue that downward sensitivity on missing expectations is on the rise and therefore keep our Hold rating at this stage.

it's also worth highlighting again how cloud computing is increasingly crucial to Amazon's valuation, as we pointed out in a post back in March.
Julius Baer reckon that in 2019, Amazon Web Services may contribute over half of Amazon's operating profits despite its relatively small size compared to the retail segments — in the first half of this year AWS only contributed 11 per cent to its net sales.

Still, the private bank thinks further growth opportunities may lie in its blossoming food retail business, via Whole Foods, or through a new online pharmacy offering after its $1bn acquisition of PillPack in late June. Yet, as Amazon don't break out Whole Foods from its retail sales, its hard to know how that acquisition is really going. However with the news yesterday Amazon is considering a 3,000 store roll out of its gee-whizz cashierless stores by 2021, it seems its all-in on the bricks and mortar sales which it once sought to undercut.