- This week's 48-hour Prime Day shopping spree was fueled by an increased volume of budget-conscious consumers looking to extend their purchasing power amid soaring inflation.
- The results suggest inflation has encouraged a deal-hunting mindset across consumers who are becoming increasingly sensitive to price changes, which makes favorable trends for Amazon Prime.
- Amazon's unmatched e-commerce leadership, paired with the roll-out of new FBA features like Buy with Prime, is also expected to attract greater 3P adoption and drive higher retail margin accretion.
- Paired with Amazon's prowess in cloud solutions through AWS, the stock continues to exhibit significant upside potential ahead, making it an attractive long-term investment at current levels.
Amazon.com, Inc. (AMZN) Prime Day is one of the year's hottest online shopping events, with Prime members scooping up exclusive discounts on everything from household basics to electronics. With more than 170 million U.S. Amazon Prime members and a total of 200+ million worldwide, Prime Day sales have exceeded even Black Friday sales in recent years, overtaking the latter's historic crown for the "busiest shopping day of the year."
This year's Prime Day - which, by the way, has changed every year since its debut in 2015 - has been strategically placed on July 12-13 to coincide with the back-to-school shopping season, implying Amazon's hopes of maximizing consumer purchase dollars to make up for its core e-commerce business' mediocre performance experienced in the first half of the year.
Recall that Amazon's revenue growth decelerated to single digits in the first quarter - its slowest pace of growth in decades . Amazon also kicked off 2022 with operating losses in its North American e-commerce business and net losses in the consolidated business - something that investors thought the company was way past. The results reflected the impact from both slowing consumption due to inflation, as well as book losses on its investment in electric vehicle ("EV") start-up Rivian ( RIVN ) as market valuations take a toll from volatile macro conditions this year. Similarly muted growth trends are expected for the second quarter, which is due for release later this month, as retail sales declined for the first time this year in May, while equity valuations suffered from the worst first-half performance in more than 40 years.
But Amazon is likely in for a back-half weighted year, as the strategic placement of Prime Day has proven to be a success so far. Despite stubborn inflationary pressures and a weakening macroeconomic outlook, stronger-than-expected Prime Day consumer trends observed this week may offer some reprieve for Amazon in the third quarter. Alongside other catalysts like the introduction of a second Prime Day shopping event in the fourth quarter, and continued ramp up of its advertising business and "Buy with Prime" feature, Amazon is expected to benefit from both restored growth and improved margins before year-end. This is expected to salvage the stock from its beating sustained this year due to the e-commerce arm's lackluster performance in recent periods.
Positive Prime Day Observations
Preliminary data shows e-commerce transactions topped $6 billion on the first day of Prime Day 2022 sales. This marked a new daily online spending record in the U.S. this year, despite mounting concerns of a downturn as inflationary pressures continue to erode consumer purchasing power. Amazon, which does not separately confirm Prime Day sales on a dollar basis, announced that more than 300 million items were sold during this year's 48-hour shopping event, compared to 250 million in the prior year. Consensus estimates for global Prime Day spending this year average $13 billion, representing more than 15% year-on-year growth compared to $11.2 billion last year. And the U.S. - Amazon's core market - is expected to contribute more than 60% in related spending this year.
Strong Consumer Take Rate: While some of the expected growth is going to be driven by price increases and generally smaller discounts this year due to inflation that came in at a record-breaking 9.1% in June, the remainder is likely to be a result of increasingly budget-conscious consumption behavior.
Consumers have already exhibited characteristics of heightened sensitivity to recent price increases - more than three-quarters of shoppers surveyed by Adobe last month indicated they have been searching the web for the best deals and discounts to "maximize their spending power". From consumers' perspective, Prime Day offers an opportunity to save on both big-ticket discretionary purchases, as well as household necessities that are used regularly - this is corroborated by data gathered by e-commerce consulting firm Channel Key, which showed Prime Day sales increased by 12% from the prior year during the first six hours of the event, driven primarily by purchases of health and beauty products, and supplements.
Moderate Vendor Discounts: And from vendors' perspective, Prime Day creates an opportunity to "clear out aging inventory" without giving up too much. Merchants are becoming increasingly focused on driving profitability instead of optimizing sales volume due to rising costs, which is consistent with the moderate discounts observed on Amazon this week compared to past Prime Days. Yet, take rates remain strong as discussed above, with consumers taking advantage of Prime Day deals, albeit moderate, and front-loading purchases of both household staples and discretionary goods in order to safeguard their wallets from increasing living costs.
Jumpstarting Sluggish Prime Sign-Ups: With both vendors and consumers continuing their embrace for Prime Day deals this year, Amazon makes the biggest winner. The inflation-driven surge in deal-hunting this year is not only expected to have driven greater 1P and 3P Prime Day revenues, and improved utilization and margins at Amazon's e-commerce business, but also enlivened sluggish Prime membership sign-ups.
New Prime membership sign-ups have slowed in the first half of the year, while renewals also decreased as pandemic-era e-commerce demand cooled with shoppers returning to stores. Inflation has also slowed consumption and deterred shoppers from signing up, while Amazon's decision to increase its annual and monthly Prime membership fee this year has not helped. Amazon had approximately 170 million U.S. Prime members as of June 30th, which is consistent with the tally from six months earlier.
But considering the strength in Prime Day purchases observed this week, the event is likely to have attracted additional sign-ups as consumers want in on the exclusive deals (though it is expected to be slightly offset by the risk of increased account-sharing due to constrained consumer budgets). Amazon's recent addition of exclusive Prime member perks like free GrubHub delivery and enhanced sports coverage on Prime Video are also expected to help with membership retention.
Other Catalysts for Shoring Up Amazon's Non-Cloud Business in 2H
It goes without saying that AWS has been a strong growth driver - both top- and bottom-line - for Amazon in recent years. While Amazon's retail arm (i.e. online stores, physical stores, third-party seller services, subscription services) still accounts for more than three-quarters of the company's consolidated sales, AWS is currently its most profitable and fastest growing business.
As the global leader in the provision of public cloud-computing solutions, AWS has become so successful that many are convinced the unit is alone worth more than Amazon's $1+ trillion market cap. This accordingly underscores the stock's upside potential, especially when additional value from Amazon's e-commerce moat and accelerating advertising business is also considered.
While AWS has been largely credited for driving highly accretive profit margins and cash flows needed to fund growth in Amazon's other businesses, we believe there is still a significant runway for Amazon's non-cloud business to ramp up and make up for the near-term "capital shortfall". In addition to Amazon's increasing prominence in the digital advertising space, new and improved retail features like Buy with Prime and Amazon Logistics are also expected to help shore up value accretion for the company's non-cloud businesses.
1. Advertising Sales
Amazon's ad sales have consistently served strong double-digit growth, with related revenues increasing by 56% in 2021 to $31.2 billion. Our forecasts expect this figure to exceed $50 billion by mid-decade, which is consistent with consensus estimates that Amazon's ad sales could top $100 billion by 2030.
The increasing use of technology has encouraged greater online ad spending in recent years. The global digital advertising market is expected to grow at a CAGR of 21.6% over the next five years, driving an anticipated market value of close to $1 trillion by mid-decade. With online advertising being another one of the decade's key digital trends, Amazon is slated to benefit from an additional way to better monetize the resources it already has - specifically, its vast trove of data on consumer behavior and purchase habits garnered from its retail business.
The e-commerce giant's market share in digital advertising has been growing steadily in recent years, putting pressure on rivals like Google ( GOOG / GOOGL ) and Meta Platforms ( META ). With a trove of information on consumer habits around the world, Amazon has created a platform that is primely fitted for advertisers' needs. Amazon currently sits in third place behind Google and Meta in the race for market share in the increasingly competitive digital advertising scene. The company is slated to expand beyond its current 10% share for the digital ad market in coming years, as it continues to attract advertisers with rising traffic on its core commerce site. Additional value-add services like Prime Video and Amazon Music have also created new ad distribution channels for Amazon to capitalize on growth opportunities ahead within the digital advertising sector.
Despite the near-term risks of a slowdown in ad spending alongside waning consumer sentiment, brands have also continued to "spend heavily on Amazon ads to lure customers" thanks to lower costs, which - paired with strong traffic from Prime Day - have supported higher conversions and returns on ad spending ("ROAS"). According to Forum Brands, an aggregator of Amazon's 3P FBA brands, vendors continue to benefit from strong profit margins despite increasing costs, which should support robust ad spending on Amazon:
Amazon's 3P Vendor Margins (Forum Brands)
2. Buy with Prime
Outside of the near-term softening in consumer sentiment, the biggest risk facing Amazon's retail business right now is losing market share in the long run due to increasing competition. While Amazon remains the market leader in online sales, the increasing availability of e-commerce infrastructure support for digitized omnichannel storefronts (e.g., direct web-based online storefront, marketplace online storefront, app-based storefront) offered by companies like Shopify ( SHOP ), alongside the emergence of other e-commerce marketplaces like Latin America's MercadoLibre ( MELI ), China's Alibaba ( BABA ), and Southeast Asia's Shopee ( SE ) have intensified competition in recent years.
Still, in its core U.S. market, Amazon remains "the most attractive first channel to pursue" for 3P vendors looking to build-out their brand in e-commerce. And Amazon's recent introduction of Buy with Prime is expected to insulate its e-commerce business from material market share loss in the long run.
Buy with Prime will "let merchants sell products they list [on Amazon.com] directly from their websites", while Amazon will take care of payments and fulfilment as part of FBA. Prime members will then be able to check-out from an Amazon-affiliated 3P seller's website using their Prime membership and "receive fast-shipping and other [Prime] benefits." For now, the feature is in the beta phase and offered to merchants on an "invite-only" basis. But as roll-out and ramp continue to work hand-in-hand with Amazon's fulfilment prowess, Buy with Prime will help Amazon better compete against e-commerce infrastructure and turnkey solution providers like Shopify.
And with "trillions of offline retail dollars moving online over the much longer-term", Buy with Prime will also allow Amazon to partake in growth from brands that have deviated from its platform and offset e-commerce market share loss. Buy with Prime is also expected to drive greater Prime membership sign-ups in the long run, as benefits are no longer limited to Amazon's offerings.
Most importantly, we expect Buy with Prime to leave a positive impact on fostering greater 3P FBA adoption in the long run, and support better margin accretion for Amazon's retail business as the new feature ramps up. 3P has been a significant contributor to Amazon's success in e-retail - related revenues generated from fees charged on third-party vendor sales, as well as fulfilment via FBA (i.e. storage and delivery) currently drive higher margins compared to Amazon's 1P sales. According to data disclosed by Forum Brands discussed in earlier sections, Amazon's fee charged on 3P sales range from 8% to 15%, with fulfilment taking another 8% to 23%. With Buy with Prime encouraging greater 3P adoption and fostering greater fulfilment volumes through handling beyond sales made on Amazon.com, the new feature is expected to improve both Amazon's retail top- and bottom-line growth over the longer-term.
3. Amazon Logistics
Despite concerns on underutilization of overbuilt capacity noted by Amazon during the first quarter earnings call, strength exhibited by Amazon's most recent Prime Day sales continue to corroborate that consumer demand for online shopping remains robust despite a looming economic downturn. This means the excess capacity will better prepare Amazon for the upcoming holiday shopping season, which is expected to coincide with Prime Day 2.0, and help avoid costly inefficiencies like half full trucks and insufficient labor experienced last year.
And over the longer-term, Amazon's "post-investment cycle profitability" prospects remain strong and are further bolstered by its unmatched fulfilment capabilities. Fast and free shipping is currently the most enticing e-commerce offer for consumers. More than three-quarters of online shoppers have indicated fast delivery times as a core driver of purchase decisions, while free shipping remains the dominant preference. The trends make favorable tailwinds for Amazon's retail business, supported by fast and free shipping offered by its Prime membership program. The trends are also expected to accelerate FBA adoption, which more than half of Amazon's 3P sellers already leverage, given fast and free shipping times remain a core competitive advantage and success driver in e-commerce.
Greater 3P FBA adoption will also help Amazon extend its catalogue of products covered by Prime's free and fast shipping offer, and reinforce consumer demand, which inadvertently, enhances productivity and utilization of current logistics capacity. Continued ramp-up of new programs like Buy with Prime will also help to absorb the excess fulfilment capacity over the longer-term and drive greater returns on logistics investments for Amazon.
Fundamental and Valuation Analysis
Consistent with our previous fundamental forecast for Amazon, we expect second quarter sales growth to remain muted. Strong AWS revenues will continue to be offset by weaker non-cloud sales due to the near-term cyclical impact on ad spending, declining consumer sentiment amidst rising inflation and dwindling purchasing power - especially on full-price discretionary goods - as well as a tougher PY compare due to shifted timing on Prime Day sales this year.
However, Amazon is expected to benefit from a stronger second half, as corroborated by an inflation-driven deal-hunting mentality that favors third and fourth quarter Prime Day sales, as well as holiday season discounts (e.g., Black Friday and Christmas). The related surge in deal-driven consumption volume is expected to offset the discounts offered, which is expected to remain in moderation compared to prior years due to the weight of rising inventory costs and increased focus on profits for sellers.
Specifically, 2022 revenues are expected to increase by 11% y/y to $521.4 billion. AWS is expected to maintain strong double-digit growth to exceed $75 billion in sales by year-end, while non-cloud revenues are forecast to increase by 9% y/y to $446.3 billion, representing a back-half catch-up.
Amazon Revenue Forecast (Author)
We are maintaining our intrinsic value forecast on Amazon at $1.7 trillion , given the stock's meaningful discount to its internet peers, which does not accurately reflect Amazon's growth prospects across both its cloud and non-cloud business as discussed in earlier sections. Adjusting our previous PT of $3,400 for the recent stock split, we expect near-term upside potential of more than 50%, based on the last traded share price of $110.63 (July 14th), to $170.
Amazon Valuation Analysis (Author) Amazon Valuation Analysis (Author)
*For further details on valuation assumptions applied, please see here .
Conclusion
Amazon's strategic positioning of Prime Day in July and another in Q4 to coincide with back-to-school and holiday shopping needs will continue to help offset some of the slowing consumer sentiment given rising inflation and tightening economic conditions this year. The strategy also underscores Amazon's readiness in minimizing some of the underutilization and deceleration observed in the first half of the year. While these efforts foreshadow management's expectations for near-term headwinds in its consumer business under the current macro climate, it could pair well with Amazon's e-commerce moat to better insulate against the looming downturn compared to rivals.
Continued ramp-up of new features like Buy with Prime in the long run will also foster higher 3P FBA adoption to drive improved margin and bolster profitability in Amazon's e-commerce business. Matched with AWS's unmatched profitability, the stock is slated for greater valuation prospects over the longer-term.
For further details see:
Amazon: Here Is Why Inflation-Driven Deal Hunting Will Benefit Prime