- Amazon sees opportunity in India and is attempting to dominate its competitors. There is long term potential here.
- India will not only see a big increase in online customers but also become a procurement hub for the company.
- Walmart's latest acquisition illustrates how much Amazon is dominating eCommerce at present.
Just when many thought that this company was slowing down, Amazon (NASDAQ:AMZN) produced a very impressive set of second quarter results which put accelerating revenue growth prospects firmly back on the table. North American e-commerce sales growth re-accelerated to 28% in the second quarter which definitely would have raised eyebrows among its competitors. I have always stated that present e-commerce growth trends will probably end up being low compared to what we really will experience in the future. Technology and innovation is changing the way people shop at warp speed and Amazon will most certainly be at the cutting edge of this trend shift.
Gross Income Numbers Continue To Rise
The success of prime day last month along with the increasing amount of third party sellers using the platform illustrates to me that there is plenty of runway for Amazon to thrive, especially in international markets in the next few years. Why? Because more and more, e-commerce is becoming a global operation so it will be the companies with the biggest infrastructure who will ultimately win in this market. Aside from e-commerce, Amazon's AWS division continues to power ahead boasting revenue growth of almost 60% and margins of 30%. If these stats continue, the heavy debt and capital leases the company is racking up in this division will not matter. Gross income which grew to $11.06 billion in Q2 is all that matters. Gross income increased by 38% last quarter whereas revenue increased by 31%. If these stats continue, taking out $1,000 a share is a more certain possibility.
Amazon Is Looking To Dominate In India
India is one market where the potential is huge and Amazon has been investing accordingly. Amazon didn't do well in China but India is a far more open market with less competition than the former. Amazon will use its balance sheet to dominate the likes of cash poor Flipkart & Snapdeal who simply won't be able to compete when rolling out their infrastructure. In fact, Morgan Stanley wrote down their its investment in Flipkart recently citing low funding as the reason for the downgrade. Since the write-down, Flipkart has actually secured funding of $1 billion which has been followed aggressively by Amazon's announcement that a further $2 billion will be invested in the market. Remember that the likes of Alibaba only invest in the Indian market through Amazon's competitors, which is why I see ample runway for Amazon to grow in India. India is the second most populous country in the world but it has had relatively less eCommerce penetration to date. Amazon wants to gain first mover advantage by taking market share off Flipkart through building out more warehouses and distributions networks.
India Will Become A Hub For Procurement & Data
The move into textiles and the investment that is also going into data centers illustrate to me that Amazon is not only going after customers in this region. India will also become a vital source of goods for Amazon that it will be able to sell not just in India but also in international markets. This is where I see the competition being left behind. The sheer volumes involved when dealing with international markets will ensure Amazon will be extremely competitive which is why over time local competitors will find it very difficult to compete. For example, Amazon's North American eCommerce business is booming at present but there are still many middle men involved. Amazon's goal is to source product directly from factories (India will become a prime sourcing market) and then sell those products directly to customers in the west.
Competition Is Losing Market Share
This is why I wasn't surprised to see Walmart investing heavily in this space through its latest acquisition of Jet.com for $3.3 billion. The price tag seems excessively high (for a site that is just over 12 months live) but with Walmart continuing to report negative eCommerce sales growth, something had to give. The growth of prime and third party sellers on the Amazon platform demonstrates the potent recurring income business model Amazon is running. What investors are missing is that Amazon's overseas investments are going to favorably impact its more developed markets. Walmart at this stage is only playing for second place.
To sum up, Amazon's acceleration in its eCommerce business in North America illustrates that its most developed markets are far from being topped out. The company's AWS division continues to thrive and with heavy investments overseas, Amazon stock should go from strength to strength. Remember that profits grew at a faster rate than revenue in Q2 illustrating this company will not slow down anytime soon.