November 21st, 2019 Ashley Clements, Latin American...
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School of Business Investment Program November 21st, 2019 Ashley Clements, Latin American Economist Maddy Goodman, Chief Operating Officer
November 21st, 2019 Ashley Clements, Latin American ...sb.cofc.edu/academics/specialty-programs/investment... · other includes advertisements \爀猀氀漀眀椀渀最 最爀漀眀琀栀
Ashley Clements, Latin American EconomistMaddy Goodman, Chief Operating Officer
School of BusinessInvestment Program
Table of ContentsAmazon
Investment Thesis
Company Overview
Revenue Breakdown Financial Highlights
Company Strategy
Leadership
Monte Carlo and Portfolio VaR
Valuation
Price History
SWOT Analysis
Competitive Landscape Recommendation
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AmazonInvestment Thesis
1
Power Brand
Customer Integration
Long-Term Mindset
Presenter
Presentation Notes
Ashley and Maddy Power brand – house hold name Customer integration – amazon is trying to enter and capitalize on every segment on their customer’s lives. Primarily through prime memberships of course. Long term mindset investing in new technologies constantly such as cloud services, healthcare, and now even grocery. They are in it for the long haul and world domination. Amazon is innovative, but they are also persistent. If they can do it, and do it better, then they will Not a normal value play where we pick it up at a cheap price, pyles calls it GARP—but they still have a long term mindset which aligns with our philosophy
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2
Company OverviewAmazon
Presenter
Presentation Notes
Ashley and Maddy Vendor central amazon branded material and items that they bought to resell. You can tell which items are vendor central partners because there’s usually a blurb in the description that says “ships from and sold by amazon”. Amazon seller central third party they can ship the item themselves or use the fulfilment by amazon. https://ignitevisibility.com/amazon-vendor-central-vs-seller-central/ Subscription services prime membership fee and any revenue from streaming services. AWS – think of IBM; most profitable segment Ads - The ad division’s fat profit margin — analysts estimate it could be as large as 75 percent — is a big reason why Amazon posted its largest quarterly profit ever in the third quarter
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Revenue Breakdown Amazon
3
Online Stores49%
Third-Party Seller Services
19%
Amazon Web Services
13%
Physcial Stores7%
Subscription Services
7%
Other 5%
Presenter
Presentation Notes
other includes advertisements slowing growth lots of profitability 3rd party and advertising high margin didn’t hit profit until 2015 2016 From Q2 earnings: Physical stores, which includes Whole Foods, remained roughly flat at $4.3 billion in sales, but the company said it would have grown over 5% if it included home delivery and in-store pick-up orders, both booked under online sales instead.
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Revenue Breakdown
Geographic Revenue Breakdown
Amazon
32
United States69%
Rest of World11%
Germany8%
United Kingdom6%
Japan6%
Presenter
Presentation Notes
Maddy A no-deal Brexit would end that free movement of goods, meaning Amazon sellers with goods stored in UK warehouses would not be able to ship them freely to customers in other EU countries. Only negative affect brexit will have is less immigrant labour in facilities and will have to built more fulfillment centers in the EU and UK. Indian market: captured about 30% of the Indian ecommerce market, and is poised to grow that 23% annually until 2027 The potential shift in Alibaba’s strategy follows Alibaba’s disappointments at some of its large e-commerce bets such as online retailers Snapdeal and Paytm Mall, which have widely lagged behind the e-commerce market dominated by Flipkart and Amazon.
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Leadership
Jeff BezosChief Executive Officer
• Princeton Graduate• Prior to AMZN worked in
PE• Founded AMZN in 1994• Owns Washington Post • Founder of Space Flight
company Blue Origin
Jeffrey BlackburnSenior VP of Business
Development
• Joined AMZN in 1998 • Has been in his position
since 2006 • Various roles within
AMZN• Dartmouth & Stanford
graduate
Brian OlsavskySenior VP and CFO
• Joined AMZN in 2002• Prior position was CFO of
Global Consumer Business for 5 years
• Prior leadership positions in AMZN Finance
• MBA Carnegie Mellon University
Amazon
5
Presenter
Presentation Notes
Ashley Brian Olsvaksy From 2007 to 2010, Mr. Olsavsky was Vice President, Finance for Amazon's North America retail business unit and acquisitions, and from 2002 to 2007 Mr. Olsavsky led the finance departments for Amazon's Worldwide Operations organization. Spent 7 years at Fisher Scientific with finance and business development roles. Jeffrey Blackburn
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Acquisition HistoryAmazon
$1.2B $775M $370M $13.6B $1B
$1.2B
Undisclosed
2009 2012 2015 2017 2018 2019
Presenter
Presentation Notes
Maddy Traditionally, Amazon has been a conservative buyer when it comes to acquisitions. Their tech giant rivals (Apple, Microsoft, etc.) Whole Foods by far largest acquisition The top 10 deals reflect Amazon’s extremely diverse business interests: media and content (LOVEFiLM, Twitch), e-commerce (Souq, Quidsi, Zappos), computing hardware (Annapurna Labs), robotics (Kiva Systems), smart homes (Ring), and healthcare (PillPack). 2019 - made 5 acquisitions this yr; most notably Health Navigator, a start-up known for providing online symptom checking and triage tools to companies that are looking to route patients to the right place; first health-related purchase since PillPack; announced end of october 2018 - ring (AI) acquisition $1.2B (door bell system); streams live video of a home’s doorstep to a phone; opened the door for amazon couriers to leave packages inside customers houses pill pack $1B; confirmed amazon’s entry into the healthcare space; 2017 - whole foods mega acquisition $13.7B; dramatically expanded Amazon’s brick and mortar footprint, as well as giving amazon a much stronger position in grocery delivery that capitalizes on Whole Foods large and loyal customer base 2015 -Annapurna Labs $370M; Israel based semiconductor startup ; acquired for their cloud business , AWS; used to make cloud computing more cost-effective 2012 - kiva systems $775M; robotic fulfillment system manufacturer - no e-commerce competitor has yet been able to rival Amazon’s warehouse automation 2009 - $1.2B Zappos; Amazon’s first acquisition over $1B
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Company Strategy - Healthcare Amazon
7
Strategic Acquisitions
JPMorgan and Berkshire Hathaway Joint Venture
The Healthcare Cloud
Healthcare Logistics Specialist
Presenter
Presentation Notes
Maddy Healthcare Amazon pharmacy ****** Another key component is their move to dominate elsewhere from just online retail. They can use their position to disrupt everything from pharmaceutical supply chain to Medicare management. Graphic Acquisitions PillPack online pharmacy acquisition Healthcare Navigator Joint Venture Details have still been limited surrounding their joint venture, called Haven The venture has been run in almost complete secrecy Appears to be the first steps the ventures goal of overhauling benefits to make them more transparent, better at keeping people healthy, and lowering costs Each company is implementing new systems to see what works best Direct advantage to test new health care techniques with 300M active customers, 100M prime members, and approx 5M sellers - by teaming up with Berkshire and JP they have an additional pool of 1.2M employees ex) JP doesn’t require deductibles, and offers perks like earning money each month by fulfilling certain wellness activities such as keeping blood pressure below a certain target ex) Amazon , where some employees are directly enrolled, the goal is to help employees better understand their health costs and to work better with primary-care doctors Amazon may be using this as a pilot before expanding the strategy beyond the employees Healthcare Cloud Healthcare is seen as a high growth area for cloud sales due to the vast amount of data being produced, and the need for high performance computing to make sense of it AWS offers several solutions for existing healthcare companies, especially in security and compliance cloud solutions for claims management, patient monitoring, electronic medical records, and supply chain management software Genomics - demand for computing power and storage to analyze datasets of gene sequencing Even the potential of Amazon’s disruption is catalyzing change, Many say the market is ripe for disruption Amazon is, without a doubt, one of the driving factors behind the current wave of mega-mergers pursuing vertical integration sweeping across the industry. Amazon could be an attractive partner in some areas (like supply chain) and a formidable partner in others (like care delivery). Strategies to control cost, improve access, and drive reliability in quality and service will position providers to withstand the threat of outside disruption.
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Company Strategy - AWS Amazon
Government Contracts
Private Business Contracts
High Margin Segment
Customer Stickiness
Presenter
Presentation Notes
Government contracts has four segments: federal education, state & local, international In the private sector apple is amazon’s biggest customer, spends 30 million per months on AWS. Other customers include adobe, capital one, and intuit. https://www.ibtimes.com/apple-amazons-biggest-customer-spends-over-30m-month-aws-2787325 Growth in the segment is at 35% 4,000 gov’t agencies private business contracts: goldman sachs, netflix, They charge by volume of usage, features they subscribe to, and services they use. For SaaS contracts, AWS Marketplace bills your customers upfront or by the payment schedule that you define, based on the contract between you and your customer. After that point, they're entitled to use those resources. For example, a customer might purchase a quantity of users who can use your application for a 1-month time period or for 1-year, 2-year, or 3-year time periods AWS’ operating margin was 29% while non-AWS segments have lower margins.
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Company Strategy - PrimeAmazon
9
Presenter
Presentation Notes
https://www.statista.com/statistics/546894/number-of-amazon-prime-paying-members/ Ashley On to the part of Amazon that is more well known and cherished. This is avenue for Amazon to integrate into all customer lives. Retention over 90% for amazon prime its 98% after 2 years. Maddy Alexa – virtual assistant that integrates into ur home; AI tech Prime video -
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Company Strategy - PrimeAmazon
10
U.S. Amazon Prime Members Growth
Growing Customer Base
High Retention Rate
Customer Stickiness
International Growth
Presenter
Presentation Notes
https://www.statista.com/statistics/546894/number-of-amazon-prime-paying-members/ Retention over 90% for amazon prime its 98% after 2 years. When 1/3 of a country is this loyal to a country no one can compete at that level. 47% households 2018 by the end of 2019 they will be in 51% of US households. https://blog.hubspot.com/news-trends/amazon-prime-memberships-us-2019
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Company Strategy – Prime ContentAmazon
Live Stream Sports
Connect Content with Commerce
Leverage with Consumer Data
Presenter
Presentation Notes
Focus on MLB and the super bowl off AWS. You can stream off aws when you use prime video. Their strategy is to have broad offerings to attract new customers, but also look within the prime ecoystem. Now focused on grabbing live stream deals. Also connect commerce to media (thursday night football rights to sell you media and commerce ie jerseys). and they have the data to advertise properly. https://www.cnbc.com/2019/03/08/amazon-prime-video-feature.html Amazon's Prime Video Channels will pull in $1.7 billion of revenue this year, more than double from last year's $700 million
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Company Strategy - Supply Chain & Logistics Amazon
12
Game-Changing Delivery
Warehouse Automation
Increasing Logistics Fleet
Presenter
Presentation Notes
Advanced Supply Chain Practices “Amazon is innovative, but they’re also persistent. If they can do it, and do it better, then they will.” Delivery Guaranteed 2 day shipping, and even 1 day for people in certain areas changed the game for Amazon and was the primary reason for their dominance in online retail As many competitors slowly begin to catch up, Amazon stepped it up even more by offering two-hour delivery for Prime Now members Automation Kiva acquisition; robotic fulfillment system manufacturer - no e-commerce competitor has yet been able to rival Amazon’s warehouse automation; company rebranded as Amazon Robotics Amazon Robotics - can pick and pack without needing any human assistance, enabling Amazon to complete warehouse activities incredibly quickly Amazon has increased its army of warehouse robots at a rate of 15,000 per year since 2015. As of January 2017, Amazon had more than 45,000 warehouse robots and counting. Fleet Amazon started building their logistics fleet a few years ago and it is already impressive in size. In 2013, Amazon handled none of their shipping. Now they handle 26% of it - cutting costs 40 Boeing 767 aircraft (with ten more coming in 2019 and 2020) Over 5,300 ocean freight containers moved in 2018 More than 20,000 Mercedes-Benz sprinter vans (leased over time) 141,000,000 square feet of supply chain facilities 10,000 branded trailers 120 U.S. fulfillment centers 52 Prime Now hubs Push-Pull Strategy Amazon uses a unique supply chain strategy Warehouses are strategically placed and stocked, moving closer and closer to main metropolitan areas and city centers it uses a pure push strategy for the products it stores in its warehouses, forecasting demand for the specific region. For products from third-party sellers,it uses a pure pull strategy, using more of an order-by-order fulfillment mode Things ashley found: amazon air has 21 locations by 2025 they will have 67 planes. They also have a new service called amazon nwo for quick 1 or 2 hour delivery in select locations. https://www.amazon.com/primeinsider/tips/prime-now-qa.html
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Company Strategy Where will Amazon be in 5 years?
Disrupting the US healthcare industry
Dominating the cloud computing space
Utilizing autonomous vehicles and drones for delivery
Amazon
Presenter
Presentation Notes
organic and inorganic growth disrupting US pharmacy industry global e-commerce empire dominance in cloud computing by AWS self driving vehicles and drones for delivery - cutting costs They invested. In a self driving vehicle startup (Aurora) at the beginning of the year Autonomous vehicles could cut the costs of delivery Goal is to ship u anything in 30 minutes Prime Air 80% of their deliveries are under 5 lbs
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Competitive Landscape
• HQ: Buenos Aires, Argentina
• Market Cap: $27B• Weaknesses: Reference
Ashley’s Macro Roundtables
• Geographic Net Sales: 60.2% Brazil26.2% Argentina7.6% Mexico6.1% Other
• HQ: Hangzhou, China• Market Cap: $56B• Weaknesses: Major focus
on China• Geographic Net Sales:
72.3% China27.7% International
• HQ: Bentonville, Arkansas• Market Cap: $338B• Weaknesses: Heavy R&D
& little segment diversity• Geographic Net Sales:
65% US6.2% Latam6% UK3.6% Canada 2.1% China 17% Other
Amazon
• HQ: San Jose, CA• Market Cap: $28 B• Weaknesses: Their
strategy is not to lose & low liquidity
• Geographic Net Sales: 40.7% US14.8% Germany13.8% UK11.1% South Korea19.6% Elsewhere
Presenter
Presentation Notes
Alibaba → can’t do this w/o nick. Some controversy in terms of counterfeit although they have been improving Walmart → heavily reliant on retail revenue, not as diverse as amazon. Ebay → fighting to not lose instead of competing to win. Mercado Libre → just that good’ole latam
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SWOT Amazon
S W
TO
Strengths• Wide Customer base • Strong Distribution Channel
Network• Strong Financial performance
Threats• Cost of shipping • Political threats
Opportunities• Strategic acquisitions• Increase in dependent for cloud
computing services
Weaknesses• Overdependence on US • Patent infringement issues
Presenter
Presentation Notes
Amazon serves fours primary customer sets : consumers sellers, developers and enterprises, and content creators. Ashley: SW Maddy : OT Cost of shipping In june 2019 announced they are investing 800 million into logistics Last year cost them 28 billion dollars in shipping. Microsoft Cloud contract pentagon – amazon challenging
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Q3 Earnings Breakdown Amazon
EPS: $4.23 vs. $4.62 Expected
Revenue: $70B vs. $68.8B
Amazon Web Services: $9B vs. $9.1B
Presenter
Presentation Notes
Missed Q3 earnings in October; led to a huge selloff amazon spent over $800M in the last two quarters to expand its one day delivery program Revenue grew 24% for the quarter to $70 billion, showing the heavy investment in free one-day shipping is leading to more purchases. This heavy investment is hurting profitability in the short term, but Amazon is focused on the long-term.
First dip was due to FAANG sell offs. This happened to every major tech company. FAANG is an acronym for the most popular and best performing tech stocks including facebook, amazon, Netflix and alphabet. Lowest point was due another Fang sell off and SEC drama. Amazon refused to disclose how much of its revenue comes from its prime members. The tepid Q1 revenue forecast raised short term concerns about slowing retail growth combined with needed investment. Analyst were worried about short term profitability. But there were long term growth potential elements that analysts locked over. Notably the company’s dominant position in e commerce and how fast growing AWS was. It dropped over a couple analyst bullish view while many upped their price target. Long term player in three markets: advertising, AWS, and e-commerce. The price kept dragging down due to Bezo’s drama with trump and canceling its NYC Headquarters location. Amazon started to recover in the spring of 2019 by just continuing on its path. Moved its Headquarter to Alexandria. Continued to nominate competitors with its 1 day and logistics perfecting. In April amazon beat Q1 estimated due to soaring demand for its cloud and advertising services. Net income more than doubled. Started dropping in May bc amazon was dropping small suppliers with no explanation. Mostly due to low margins, they need economies of scale with their suppliers. Dropped in June due to FANG regulatory hits. But this hit Facebook and Alphabet. Amazon wasn’t direct but sold off sharply. Actually during this same time period, Blackstone invested billions into Amazon warehouses. Amazon continued to do its thang, prime day excitement go the stock to recover. Q2 results. Amazon beat sales forecasts but missed earnings estimates. Show that amazon’s investments (especially one day delivery) into the company are paying off by driving sales growth at the expense of lower profit margins. Some of the numbers were just a couple hundred million off. Still showed major growth especially with AWS and toher category. Regulatory concerns with anti trust officials in the U.S. https://www.cnbc.com/2019/07/25/amazon-earnings-q2-2019.html Cloud Cam is a camera security system (monitor system) provided by amazon. Some controversy hit the company as news came out that Amazon employees review this footage for algorithm improvement. This has seen been changed and the terms and conditions has been updated. Q3 results late October the worry was the first profit drop since 2017 and slightly lowers revenue guidance. Still just 2 holds and zero sells. ice target were still around 2,200 to 2,350. AWS slowed from 37% to 35% growth, advertising revenue growth accelerated ahead of expectation. Investors had to digest cost of one day shipping. Revenue still grew 24% to 70 billion. Net income dropped 26% from a year ago but was still 2.1 billion. https://www.cnbc.com/2019/10/24/amazon-earnings-q3-2019.html
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Technical AnalysisAmazon
MA(50) crossed below MA(100) in Oct
RSI = 40.33
MACD crossed below signal line 11/13
Presenter
Presentation Notes
MA – sell Rsi – fine MACD - sell Alibaba → can’t do this w/0 nick. Some controversy in terms of counterfeit although they have been improving Walmart → heavily reliant on retail revenue, not as diverse as amazon. Ebay → fighting to not lose instead of competing to win. Mercado Libre
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Impressive FCF Healthy P/S
AmazonFinancial Highlights
Presenter
Presentation Notes
Ashley (*write in notebook the exact ratios) FCF T12M 20.05 billion P/S: better than PE obvi bc .. (high PE does not mean its ridiculously overvalued, just means the shares are more volatile). 3.2 (lower is better). Current Ratio: 1.1 Inventory turnover is around the median for the industry, meaning they have effective inventory management. Through their use of analytics ….yada
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Conservative Estimates• Sales – Conservative• COGS – Expansion of 1
day free shipping; Tariff threat
• SG&A - Consensus• Capital Expenditure –
Consensus• Tax Rate - against
guidance
Source: Proprietary Model
AmazonValuation Overview
20
Presenter
Presentation Notes
Maddy Upside: $1752 price (26% upside) COGS goes up because of amazon prime one day shipping , but revenue also grows significantly Maddy*** Exit Multiple – weighted average based on NYU sterns industry multiples (times % of revenue) Advertising Software Entertainment Online Grocery Distribution
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AmazonAnalyst Recommendations
Presenter
Presentation Notes
Ashley
School of BusinessInvestment Program
Mean Price $2,064.73
Median Price
$1,983.4
Monte Carlo Simulation Portfolio VaR
Excluding AMZN: 1.72%
Including AMZN: 1.86%
22Source: Quant Team
AmazonMonte Carlo & Portfolio VaR
Presenter
Presentation Notes
- Only reason VaR increased was from downsizing the bond fund and putting it in an equity
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AmazonRecommendation
Recommendation: 8 Shares for 7.27%
Presenter
Presentation Notes
Current rice today
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Appendix
AmazonAppendix
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1
Growth at a Reasonable Price
Amazon
Presenter
Presentation Notes
Bezos went from a soft 4 to a hard 10/10
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1
Whole Foods Acquisition
Amazon Fresh
Amazon Go
Amazon First Grocery Store
Company Strategy
Amazon
Presenter
Presentation Notes
Prime members can get exclusive offers now at Whole Foods. This acquisition served as a platform to learn about the business and track buying habits. They want high margin shoppers. Whole foods also has a private brand. Customers can also use amazon now which is free 2 hour delivery of groceries. Amazon Fresh → grocery delivery and now is free for amazon prime members . Available in 2000 cities. This can also be used with whole foods https://www.businessinsider.com/amazon-fresh-vs-prime-pantry Amazon go: More of a convenience store testing model that they continue to expand. Don’t need a prime membership for Amazon go There are 18 go stores and they are expanded in Chicago and Seattle The amazon grocery store will open in California in 2020. It will be an alternative to whole foods. https://www.cnet.com/news/amazon-will-launch-new-grocery-store-as-alternative-to-whole-foods/
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Debt Distribution
Amazon
Presenter
Presentation Notes
Bezos went from a soft 4 to a hard 10/10
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1
Company Strategy - Streaming Wars
Amazon
Presenter
Presentation Notes
https://finance.yahoo.com/news/disney-netflix-amazon-hulu-110653607.html Focus on MLB and the super bowl off AWS. You can stream off aws when you use prime video. Their strategy is to have broad offerings to attract new customers, but also look within the prime ecoystem. Now focused on grabbing live stream deals. Also connect commerce to media (thursday night football rights to sell you media and commerce ie jerseys). and they have the data to advertise properly.