How to trade Amazon shares
Thinking of trading Amazon shares? We go through the basics of the company and explain how to analyse Amazon and how to trade Amazon shares.
Understanding Amazon: a brief history
Amazon was founded as an online bookstore in 1994 but it soon diversified into new areas such as music and launched its core third-party selling site. Although ecommerce sales still drive most of Amazon’s net sales, this has fallen over recent years after the company expanded into several new areas. Online commerce accounted for 53% of Amazon’s total net sales in 2018, considerably less than the 67% recorded three years earlier. Meanwhile, Amazon has grown income from new revenue streams including its acquisition of Whole Foods and an entry into the US pharmacy market, its media subscription services through Prime, its cloud computing division Amazon Web Services (AWS) and its online advertising business.
Amazon Net Sale Breakdown
|Store sales (Whole Foods)||0%||7%|
Amazon’s online ecommerce platform is at the heart of the business and now sells a wide variety of products around the world. Although the company sells large amounts of its own products like Alexa smart speakers or Fire tablets, it is increasingly selling a larger proportion of goods from third-party sellers, often small- and medium-sized businesses that use the platform to reach a wider audience at a lower cost.
Believe it or not, Amazon is still a small player in the global retail market and that is predominantly because almost 90% of all retail sales still occur offline, according to Amazon. This has pushed it into brick-and-mortar stores over recent years when most retailers have been building their digital strategies. At the end of 2018 Amazon had a total of 520 physical outlets in North America with another seven overseas. Amazon’s big push into bricks-and-mortar stores was completed in 2017 when it purchased grocer Whole Foods, but it also has ten fully-automated Amazon Go grocery stores. Amazon has realised the benefits of blending online retail with physical stores, such as being able to sell more in-store when people click and collect their items ordered online or sell more goods that people prefer to buy in-store.
Amazon Web Services (AWS) is a hugely important element of Amazon. The cloud-computing division provides other businesses with the IT services they need to work in the digital age and although the unit only accounts for 11% of total net sales it was the single-biggest driver of operating profit in 2018, generating slightly more than the ecommerce unit. According to data from canalys, AWS is by far the largest cloud service provider in the world with almost one-third of the total market, double that of its closest competitor Microsoft Azure, which holds 16.5% of the market. Annual sales growth last year was impressive at over 46% but that was slower than Microsoft, Alphabet's Google Cloud and Alibaba Cloud.
Amazon Prime is the company’s core subscription service that allows customers to benefit from better delivery options and access to its other offerings, including its digital entertainment arm that takes on the likes of Netflix. It also has other separate subscriptions available such as its audiobook service Audible. Amazon does not report the number of subscribers it has on a regular basis but it was widely reported that it surpassed 100 million members in the US alone at the start of 2019, having soared from around 40 million at the start of 2015, according to Statista. The value of annual purchases by Prime subscribers in the US is more than double that of non-Prime members.
Amazon’s online advertising business has attracted a lot of attention in recent years. The company’s many tentacles gives it an almighty platform to push advertisements or suggest products to consumers and net sales in 2018 were five times greater than in 2016, now comfortably over $10 billion per year. Although Google remains the leader in this space because of its monopoly over internet search, Amazon has found an edge with an increasing number of product searches originating on its own site and bypassing search engines. Its other main rivals in advertising are the social media companies that attract marketing dollars from industry, particularly Facebook.
Amazon financial performance
Although Amazon has become a behemoth it is still firmly in growth mode. Amazon’s revenue, profit and cashflow have all substantially increased over recent years but the company is yet to pay a dividend because it is reinvesting those sums to maintain momentum behind its expansion.
Net sales growth in 2018 was the best on record for at least five years and this has been increasingly driven by its non-commerce businesses like AWS, with services revenue now growing at more than twice the rate of its product revenue last year. Pre-tax profit has consistently improved for four straight years and soared to over $11 billion in 2018 from just $3.8 billion the year before.
Operating cashflow has also improved significantly, generating over $30 billion last year. This cashflow generation has been enough to fund Amazon’s ambitious expansion plans and its well-funded nature (also partly helped by the lack of dividend) means it has not had to issue large amounts of equity. This has resulted in particularly strong growth in earnings per share (EPS), which more than trebled year-on-year (YoY) in 2018.
While Amazon’s operations in its core North American market are highly profitable the company has a long way to go overseas. International sales growth has consistently outstripped that delivered in its core market but ultimately Amazon is still losing money abroad. Meanwhile, AWS, which offers much higher margins than selling goods online, has been the main driver of operating profit for the last three years.
Key figures ($ million)
|Pre-tax profit (loss)||506||-111||1,568||3,892||3,806||11,261|
|Net operating cashflow||5,475||6,842||11,920||17,203||18,365||30,723|
|Share price at year-end||396.44||308.52||675.89||749.87||1,169.47||1,478.02|
|Net Sales Breakdown||2013||2014||2015||2016||2017||2018|
|Operating Profit/(Loss) Breakdown||2013||2014||2015||2016||2017||2018|
Amazon key personnel: who manages the ecommerce giant?
Founder, president, chief executive and chairman Jeff Bezos: Bezos founded the company and has remained at the helm ever since. He has sat atop the Forbes World’s Billionaire’s List for two consecutive years. He is the largest individual shareholder in the business with nearly 80 million shares.
Senior vice president and chief financial officer Brian Olsavsky: Olsavsky joined the company in 2002 as CFO of Amazon.com before being promoted to his current position in 2015. He had led the finance part of several areas of the business beforehand, including the global consumer business and acquisitions.
Senior vice president, business development Jeffrey Blackburn: Blackburn joined the business in 1998 when Amazon was launching its new online platform. He has been in his current role since 2006 after holding several vice president roles in different divisions.
CEO of AWS Andrew Jassy: Jassy has led AWS since inception and built the division into the market-leader it is today. He joined Amazon in 1997 and worked in several roles before being handed control over AWS.
CEO Worldwide Consumer Jeffrey Wilke: Wilke joined Amazon in 1999 and has been in his current role since 2016, when he moved from his previous role as senior vice president of consumer business.
What is Amazon’s strategy?
Amazon continues to move into new areas and diversify as a business and although the company operates in several very different areas they are all separate cogs of one big machine. It leverages strengths in one part of the business to aide another, such as building a store network to compliment the growing amount of click and collect being ordered online or enticing more people to subscribe to Prime with its entertainment services, which should help boost online sales. This is defined as a ‘flywheel effect’ where each part of the business helps propel growth in another in what appears to be an endless cycle of growth.
It may be relying less on sales from its core online ecommerce platform but be under no illusion that its importance is waning. For example, its newer and fast-growing advertising business relies on the fact it has so many people using its ecommerce platform, as does its subscription services. In tandem with the full frontal attack on serving consumers in new ways it has also started to capture businesses by supplying cloud computing services through AWS.
The number and value of acquisitions made by Amazon has increased over the last two years, with Whole Foods being the most notable at $13.7 billion. Still, most of its recent acquisitions have been very early stage companies that have raised little money so far. Amazon is one of the most-cited threats in the world of business and touted as a possible new entrant in many major new markets.
While Amazon is delivering strong double digit growth across all areas of its business shareholders are primarily focused on the newer areas of the business like online advertising and where AWS goes with artificial intelligence (AI) – Amazon has made a big push with its Alexa voice assistant, for example, and happily sold as many smart speakers and other Amazon devices at a loss to ensure it penetrates as much of the AI-voice assistant market as possible.
Amazon dividend: what’s the outlook?
Amazon does not pay a dividend and never has because it has chosen to fuel its ongoing and aggressive expansion by reinvesting profits back into the business. Although this pushes the stock off the radar of many income investors the stock has seen its share price appreciate enough to provide a decent return, having outperformed the likes of the S&P 500 over the last four years.
Amazon does have the resources to pay a dividend but it has not given any formal indication as to when investors could see a payout. Many believe the company will only pay one if it can dish out a significant sum and is confident it is sustainable and can be maintained over the long term. While Amazon has grown into a market leader in several different industries it still has a lot of competition from formidable and financially-sound rivals. The acquisition of Whole Foods demonstrates why the company has decided to hold-on to cash rather than give it back to shareholders.
How to analyse Amazon
While a company with so many arms needs thorough analysis by those that are thinking about investing there are three key financial metrics for investors to watch out for every quarter:
Net sales growth: The key figure for Amazon, considering it is still in growth mode, is progress at the top-line. Total net sales growth has accelerated for four consecutive years but there are signs that this is slowing. Investors also need to track the progress of individual business units, such as the rate of growth being delivered by its lower-margin commerce business or that of its higher-margin services unit. The performance of AWS and its online advertising units are being watched particularly by investors at present. Amazon provides quarterly financial guidance for net sales to give investors a benchmark when results are released.
YoY Net Sales Growth
|Total net sales||19.5%||17.7%||29.8%||30.8%||30.9%|
|- of which, AWS||49.4%||69.7%||55.1%||42.9%||46.9%|
Operating profit: Amazon provides financial guidance for quarterly operating profit so it is a key measure to track how well the business has performed compared to its profit targets.
Net income: Amazon’s preferred bottom-line measure is net income, which is also used to calculate the diluted EPS figure. This figure is ultimately used to evaluate its profit performance.
Amazon shares: the basics
Amazon went public in 1997 at $18 per share to give it an initial valuation of $300 million. Amazon shares are traded on the Nasdaq under the ticker ‘AMZN’. The company is a member of a number of indices including the Nasdaq Composite, the Nasdaq 100, the S&P 500 and the S&P 100.
As of May 21, 2019, there was a total of 507 million Amazon shares in issue, including underlying stock-based awards. Shareholders can use this figure to calculate their own stake in the business.
CFD trading Amazon shares
A CFD is a contract in which you agree to exchange the difference in price of Amazon shares from when you opened your position to when you close it. You can buy CFDs to go long or sell them to go short.
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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