Business Strategy and Outlook| Dan Romanoff, CPA |
Amazon dominates its served markets, notably e-commerce and cloud services. It benefits from numerous competitive advantages and has emerged as the clear e-commerce leader thanks to its size and scale, which yield an unmatched selection of low-priced goods for consumers. The secular drift toward e-commerce continues unabated with the company continuing to grind out market share gains despite its size. Prime ties Amazon’s e-commerce efforts together and provides a steady stream of high-margin recurring revenue from customers who purchase more frequently from Amazon’s properties. In return, consumers get one-day shipping on millions of items, exclusive video content, and other services; this results in a powerful virtuous circle where customers and sellers attract one another. Kindle and other devices further bolster the ecosystem by helping attract new customers while making the value proposition irresistible in retaining existing customers. Through Amazon Web Services, Amazon is also a clear leader in public cloud services.
The firm’s advertising business is already large and continues to scale, offering an attractive option for marketers looking to access a vast audience with a variety of proprietary data points about those very consumers. AWS, advertising, and subscriptions are growing faster than e-commerce with the exception of the 2020 spike in online shopping. We expect these three areas to be the main growth drivers over the next five years. This is critical, as each of these segments drives higher margins than the corporate average, which in turn should allow operating profit and EPS to outgrow revenue as margins continue to expand.
From a retail perspective, we expect continued innovation to help drive further share gains. We also look for continued penetration into categories such as groceries and luxury goods, which have not previously translated into the same level of success as other retail categories. We see technology advancements in AWS and a bigger push to service enterprise customers as helping to maintain the company’s lead there. Overall, we expect strong revenue and free cash flow growth for years to come.