Hababapa
investment paper
After a two-year bull market, Amazon’s (NASDAQ: AMZN) stocks eventually fell to pre-corona levels. This is largely due to the current bear market that the Federal Reserve is experiencing. Rapidly raise interest rates to fight inflation, making the outlook for all businesses uncertain.
Amazon’s market capitalization exceeds US$1 trillion and analysts expect the company to grow at a rate of 10% to 15% in terms of revenue. The question seems to be: How can an organization of Amazon’s size, growing at this pace, double its investment?
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Cloud and advertising segments
At the moment, both the cloud and advertising segments together contribute about 22% to revenue. It may look like two small businesses compared to the giant Amazon, but it has two important functions.
I believe that both the cloud business and the advertising business can easily grow at 20% to 30% annually.
statista.com
In fact, the cloud business has achieved a CAGR of almost 45% since 2013, and the company has already won orders for the next three to four years.
Both the cloud business and the advertising business have operating margins of 20% to 30%.
Amazon’s most undervalued business segment
The advertising business segment is probably the most undervalued business segment Amazon has. As many advertising companies such as Snapchat (SNAP) and Meta (META) have mentioned before, the advertising industry has lost track of its users, mainly due to new IOS changes, and these companies have cut their budgets. and through addressing slowing revenue growth.
But Amazon is a different story. Not only did the company gain more market share, he managed to grow revenue by double digits. The main reason this happened is that Amazon has a different advertising approach than Meta and Snapchat. Search engine. Instagram, for example, needs to predict what a user might want to buy based on their behavior and show relevant ads, but changes to IOS have made this harder as it can no longer be tracked. Amazon takes the guesswork out of it because customers search for what they want on their own. If someone is interested in buying something on Amazon, when they type it into the search bar, the company already has the data to know what to display, provided by the customer, so the company Ads can be displayed.
Additionally, this type of advertising offers a very high return on investment for shops advertising on Amazon. This is because the ads are really targeted and effective. This allows the company to charge a premium for these ads, especially in this environment where competitors are struggling to deliver efficient ads, thus making even more profit from them. I can do it.
Amazon e-commerce business
At first glance, Amazon’s e-commerce business appears to be capital intensive. This is because the company requires warehouses and huge amounts of reinvestment to operate, and even then the profit margins are very low. However, dig a little deeper and you’ll find that this segment is also quite profitable.
For Amazon, e-commerce businesses can be divided into three categories:
1. Amazon Prime
Billboard.com
Amazon Prime is described by many customers as one of the best offers. This is reflected in the numbers the company has been able to grow this business by double digits each year. 2025.
backlinko.com
Pricing is the main reason for Amazon Prime’s success. The company could probably easily raise the price of their service every year and still get customers, but they don’t. Instead they just raise their prices almost every three years. It must be mentioned that while is a great business for the company’s customers, it is not the same for investors and is still unprofitable.
2. Amazon’s First Party (1P) Business
A first-party business consists of products sold by Amazon. The company has almost 50% market share, but does not make a profit from this category. Personally, I don’t think they are even aiming to make money there, as this segment only attracts customers. 3P) It’s business.
3. Amazon’s Third Party (3P) Business
When someone sells a product through the Amazon site, Amazon receives a portion of the revenue the seller makes in return for using that platform. This is called the take rate, and in the case of Amazon, seven years ago it was 19%, but now it’s over 30%. This means that if he sells anything on Amazon, he will earn less than $70 for every $100 item sold. This take rate may seem a little high, but most of it is spent on advertising. Advertising is an option for sellers, as anyone can simply list an item and pay Amazon a 15% commission on the sale. However, sellers typically choose more features to sell faster, which drives up take rates.
This third-party business is a high-margin, high-growth business, so it primarily benefits the company through commissions and advertising. However, this has not been disclosed by the company as it has decided to group everything into one category.While the prime business is in the red, the third party business is highly profitable and continues to grow.
concern
Since its inception, Amazon has invested heavily in its business and has kept margins low, preventing the company from reaching its full potential. I think at some point all these investments will pay off and the company will finally be able to enjoy high profit margins, but the problem is that no one knows when this will happen. , as long as we remain in this reinvestment phase, we do not believe we will be able to provide market-breaking returns to our shareholders. This means keeping money in stocks for a long time without seeing good returns.
But if you consider yourself a long-term investor, I don’t think such short-term issues matter.
Conclusion
Amazon is going through a tough time as it reinvests most of its profits back into the business to grow, which keeps its margins low. Have. We believe that all the investments Amazon makes will eventually pay off at some point in the near future. If this happens, both margins and profitability will be much higher than they are today, and the stock price will hit new all-time highs.
With all of the above in mind, I can confidently say that I would rate Amazon a BUY at this price.
