- Amazon has announced an entry into the online payments market.
- The move will create a more holistic e-commerce ecosystem apart from resulting in payment fees for the company.
- The stock continues to trade at extremely premium valuation, making it hard to justify an entry into the stock at its current prices.
Amazon (NASDAQ:AMZN) known globally as the biggest online retailer and also for its AWS cloud service, has today announced an entry into mobile payments space, which has for long been the central driver of revenue growth and profitability at its competitor eBay.
According to a post on Reuters, Amazon will take up a role of managing subscription payments, beginning with start-ups for now. The move to enter into this space is a smart move by the company, though it is baffling why the move came so late, considering the success eBay has had with its payments division, PayPal. The move into online payments could also drive the bottom line at Amazon, something which has been ignored for too long. Let’s take a look at the global online payments market, and what is the size of the opportunity Amazon has in front of it.
Global online payments market growing rapidly
The global online payments market has been in a state of rapid growth for the last few years. The market is expected to grow to $34.8 billion (transaction worth) in 2014 implying an 18% annual growth rate over the last 5 years. These numbers definitely make this market an attractive one to be in. The table below displays the global online payments and growth rate for the period 2010-2014.
Source: Capgemini WPR 2013
Therefore getting into the payments market is an obvious decision, which should have been made a long time ago, considering the huge value of sales happening through amazon.com. According to a report on amazonstrategies.com, Amazon had total gross merchandise value (GMV) of $78.125 billion in 2013. The volume and dollars of sales happening through Amazon’s platform are huge and hence an entry into the online payments space is a case of ‘better late than never’.
Potential revenue from Amazon’s payments system
We now try to estimate the size of revenue which the company can make from this move into online payments.
Amazon performance for 2013
|Amazon GMV||% processed in house||Value of processed payments ($ in millions)||Take rate||Payments fees|
Amazon reported 2013 product revenue $60.9 billion, which we assume to be the entire GMV on its platform. We assume that an in-house payments service will process close to 50% of the payments on amazon.com. This assumption is in line with eBay, where PayPal, its payment division processes close to 55% of the transactions happening through eBay marketplaces. We then arrive at the total payments processed value of $30 billion (50% of GMV), which gives us incremental annual payment revenue of $609 million at a take rate of 2%. PayPal has a take rate of close to 3%.
The move will definitely have financial benefits for the goliath of online retail, though shifting of customers from other payment channels to Amazon’s own service could be a challenge. The move will definitely show-up in the bottom line, something which has been at negligible levels for over a decade now.
While the move into online payments is definitely a financially rewarding one, it also has the benefit of Amazon building a better overall e-commerce ecosystem, which is another benefit for the company. However, given the current valuations of Amazon, price-to-earnings multiple of 523 and a price-to-sales multiple of 1.94, means Amazon continues to trade at highly risky levels and will have to find more ideas to improve their bottom line performance over the coming years. In view of the above risks and current valuation levels, we continue to reiterate our negative long term look on this stock, which is reflected in our current rating of Amazon stock.
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