The Trailblazer at the Head of the Online Retail Revolution

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A SWOT analysis is a look at a company’s strengths, weaknesses, opportunities, and threats, and is a tremendous way to gain a detailed and thorough perspective on a company and its future. As 2013 begins, I would like to pinpoint on the global leader in online retail industry, Amazon.com Incorporated (NASDAQ: AMZN).

The Business:

Warren Buffett once said, “Never invest in a business you can’t understand.” This not only allows the investor to purchase a company with conviction, however also allows them to spot trends blind to unfamiliar eyes. With this in mind, investors in any company should fully understand the business model of the company. Amazon is a leading online retailer offering a broad array of items, with a prominent presence both domestically and internationally. Based on market capitalization, Amazon is valued at $119.91 billion. In the fourth quarter of 2012, Amazon possessed a profit margin of 0.46%.

Strengths:

  • Institutional Vote of Confidence: 67% of shares outstanding are held by institutional investors, representing over $80 billion in investment, displaying the confidence some of largest investors in the world have in the company and its future
  • Relatively Low Volatility: Currently, Amazon withholds a beta ratio of 0.88, representing a company trading with slightly less volatility than the overall market
  • Explosive Revenue Growth: In 2003, Amazon reported revenue of $5.26 billion; in 2012, the company announced revenue of $61.09 billion, representing year over year annual growth of 31.32%, an explosive trend which is anticipated to sustain into the future with projections placing 2017 revenue at $162.69 billion (this growth has been a result of the rapid adoption of the Amazon platform and the growing popularity of online retail both internationally and in the US)
  • Historic Assets Growth: Assets of the company have grown from $2.16 billion in 2003 to $32.55 billion in 2012, a strong trend which is extremely advantageous for the company financially
  • Leading Market Position: Amazon is the leader in the online retail industry both domestically and internationally possessing top market share positions, and with this leading market position comes a greater level of dominance and control the company has over its industry
  • Brand Value & Loyalty: Amazon’s brand value is estimated to be $28.66 billion, and the level of brand loyalty most customers display is incredible; the company’s brand value and loyalty is a major strength of its business model
  • Innovative Business Model: The company possesses virtually unlimited online shelf space, and can offer customers a vast and diverse selection of products through an effective search and retrieval interface, and the shopping experience is personalized by Amazon recommending products based on past purchases and a wide array of reviews that are offered on the site, giving the company a distinct advantage over traditional brick and mortar retail stores
  • Free Cash Flow: In 2013, Amazon is projected to generate $4.9 billion in free cash flow, representing the financial strength and security the company possesses 
  • Net Cash Position: Amazon’s $10 billion debt load is outweighed by its $11 billion position of cash and cash equivalents, resulting in a net cash position of $1.1 billion, or $2.40 per share, a minor financial strength of the company

Weaknesses:

  • Lack of Dividend: At no time in the company’s history has Amazon paid out a dividend, and the company has expressed no plans of doing so in the future, a major downside for long-term investors
  • High Valuation: At the moment, Amazon carries a price to book ratio of 14.71, a price to sales ratio of 1.91, and a price to earnings ratio that is currently negative; all of which indicate a company trading with an extremely high valuation
  • Single Digit Profit Margin: In the fourth quarter of 2012, Amazon possessed a profit margin of only 0.46%, representing a rather substantial weakness in the company’s business model, which leaves little room for unexpected expenditures

Opportunities:

  • Continuation of Shift to Online Retail Platforms: In 2011, only roughly 7% of total US retail sales were estimated to be e-commerce transactions, totaling $202 billion; however, Forrester Research projects this figure rising to 9% by 2016, totaling $327 billion; internationally, as of the end of 2011, the use of the Internet as a purchasing tool only possessed a penetration rate of 33%, compared to the 78% penetration rate in the United States, demonstrating incredible potential for e-commerce platforms
  • Increase in Market Share: Amazon’s market share of both the international and United States online retail markets has increased substantially over the past years, and is anticipated to continue to gain ground into the future, presenting opportunity for the company to fuel revenue growth
  • Kindle Products: Total Kindle products sold have increased from 0.36 million in 2008 to 43.9 million projected for 2013, with projections placing 2019 total Kindle products sold just shy of 100 million, indicating a segment of incredible possible growth
  • Cloud Services: Cloud and other web services accounts for 8.34% of overall business, with revenues derived from the segment increasing from $0.54 billion in 2008 to $3.55 billion projected for 2013, with projections placing 2019 revenue derived from the segment at $17.6 billion; the explosive trend of cloud services presents the opportunity to Amazon to capitalize and derived growth from the segment
  • Acquisitions: Amazon has a long history of successful acquisitions which have allowed the company to add innovative and distinguished services to its portfolio of offerings, and further acquisitions could allow the company to further innovate and capture new customers

Threats:

  • Implementation of Sales Tax Program: One of the main advantages of buying on Amazon.com opposed to purchasing the same item at a brick-and-mortar location is the lack of sales tax, however over the past years a strong push by state governments has occurred which has resulted in many states instating a law implementing a sales tax on items sold on Amazon, threatening business
  • Rapidly Expanding Capital Expenditures: Capital expenditures of the company have grown from $46 million in 2003 to $3.78 billion in 2012, representing growth of 8,117.39%, which substantially outpaced revenue growth over the same time period, threatening the company’s margins

Competitors:

Major publicly traded competitors of Amazon include eBay Incorporated (NASDAQ: EBAY), Mercadolibre Incorporated (NASDAQ: MELI), and Best Buy Company Incorporated (NYSE: BBY). Both eBay and Mercadolibre operate in the Internet retail industry, while Best Buy operates brick-and-mortar locations, however all of these companies compete directly against Amazon. eBay is valued at $71.33 billion, does not pay out a dividend, and carries a price to earnings ratio of 27.67. Mercadolibre is valued at $3.76 billion, pays out a dividend yielding 0.51%, and carries a price to earnings ratio of 40.42. Best Buy is valued at $5.75 billion, pays out a dividend yielding 4.00%, and carries a negative price to earnings ratio.

The Foolish Bottom Line:  

Financially, Amazon could not be stronger. The company possesses explosive revenue growth, a leading market position, and a strong free cash flow position. The major weaknesses of the company include its lack of dividend and premium valuation. Looking forward, the company will experience sustained accelerated growth stemming from the fundamental shift of retail sales to Internet platforms and gains in market share. All in all, Amazon is an incredibly strong company financially that will experienced substantial growth into the future, however shares come at a premium. Amazon earns four out of five stars, and is a buy on any substantial pullback.


makinmoney2424 has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, eBay, and MercadoLibre. The Motley Fool owns shares of Amazon.com, eBay, and MercadoLibre. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure