- Jeff Bezos new target is to stream live events through his video services. Added value here will gain subscriptions.
- The Company is still meaningfully growing its users. Converting the 300 million users into prime members is Bezos' main goal.
- Operating margins have begun to creep up mainly due to AWS top line growth along with sustained growth in third party sales.
Although I am not long Amazon.com INc. (NSDQ:AMZN) stock at present, I would never consider shorting this stock. Amazon is currently trading at an earnings multiple of over 200 which looks massively overvalued on the surface but is it really? Bears looking to short Amazon now shouldn't overlook the huge competitive advantages this company has at its disposal. For example, advantages such as low prices, a superior customer service and a powerful network protect the downside in this stock to a large degree. The company's low prices stem from its scalable fulfillment model which definitely has a cost advantage over its brick and mortar rivals. This is something that analysts rarely discuss. The more scale Amazon brings to its operations, the bigger the divide will become over its offline rivals with time.
This eventually will lead to even lower prices and when you combine this superior customer service, you are left with a company in a very strong position irrespective of its valuation. These competitive advantages will undoubtedly lead to more traffic on the platform over time which will invariably lead to more third party vendors selling on the website. This is the vision of Jeff Bezos. Anything and everything that the masses want to buy will be available on his platform whether through Amazon's own products or third party sellers. Couple this with the growing e-commerce trend which is why I for one am not interested in shorting this stock. Here are more areas that could keep this stock elevated for many quarters to come.
Amazon Could Become A Potent Force In The "Live TV" Space
In relation to Amazon Prime, I can only see the company going from strength to strength. I love Bezos' vision here. From delivering free food to free delivery to getting big discounts on regular items in its marketplace, Bezos wants to give you the best that Amazon has to offer for a fixed monthly cost. Amazon's latest potential addition will be live sports streaming. It is a good move as nothing beats live events in terms of the potential for signing up new Amazon prime members. Live events have already begun transitioning from cable networks to the web. Furthermore, I believe that long-term rights holders (when they see they are not getting a satisfactory return on investment due to cord cutting) will end up selling to digital companies such as Amazon. I envisage Amazon prime having a fully automated live TV service that will easily be able to compete with traditional cable networks.
Amazon Prime Will Be Able To Provide more Value If Numbers Continue To Rise Meaningfully
This is what a lot of analysts are missing. The bigger Amazon can grow its paying subscriber base, the more value it will be able to offer its subscribers and still grow its margins. Although the company has had now quite a few quarters of growing earnings, I don't expect this to continue. From investing in renewables to power its AWS data centers to now going after rights for live events, this company has always been about investing every dollar of earnings back into the company. The market has always looked favorably on investments (that have been funded from internal cash flows). Amazon is a company where gross margin and revenue growth are paramount. On a trailing twelve-month (TTM) basis, average gross margins stand at 34.4% whereas revenues stand at over $120 billion. Projected revenues are $166 billion for next year (FY 2017) which illustrates that despite its valuation, this company is nowhere near the point of slowing down.
Amazon's Operating Margins Are Expanding
Furthermore, the company's e-commerce segment boasted growth rates of 28% in the second quarter which was a re-acceleration of growth since Q3-2013. Apart from active users growing by 20%, investors should concentrate on the third party units which are growing at an annual 43% clip which is astounding. Third party selling is what Amazon wants due to the higher margins and the absence of product costs. Furthermore, AWS continues to power the company forward. In the second quarter, AWS grew its top line by 58% and its margins by 30%. This is why we are finally seeing an expansion in the company's operating margins (4.2% last quarter). This has to be bullish going forward considering Amazon remains light years above competitors in the infrastructure cloud space.
Also read: AWS Can Do Wonders For Amazon.com Inc. Stock
To sum up, although Amazon stock price may look a bit pricey at present, it has many competitive advantages which protect the downside to a large degree in my opinion. AWS and third party units are powering margins forward along with Amazon prime going from strength to strength. It would take a brave investor to short Amazon stock at these levels.