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Web 3.0 & Amazon (Part 5)

Posted on Friday, Dec 14th 2007

Conclusion

We have reviewed Amazon’s strategy in the upcoming Web 3.0 world over the last few days.

Amazon has been focusing on enhancing its technology, introducing new categories of products and services (recently introduced, Amazon MP3 and Grocery), increasing depth of selection in each category, opening new markets (UK, Germany, Japan), offering better shopping tools and services, promotions (free shipping), new products (Kindle) to drive business growth. Amazon launched Fulfillment in beta on the amazon.co.uk, amazon.de and amazon.co.jp websites, giving small and medium-sized businesses access to Amazon’s fulfillment, customer service, and underlying website technology. It has also been toying with business model adjustments via initiatives like the Amazon Marketplace, a direct competition to eBay’s highly profitable business.

Amazon has moved into Apple’s territory with the launch of Amazon MP3, Unbox and Kindle. Amazon is seeking to build momentum with music, video and now digital books, weaving them into its commerce and personalization fabric. Kindle, if it gains adoption, can be a complete game changer in the book business, and if there is one company who can crack the ebooks nut, it would be Amazon.

It seems logical that Amazon would amplify the social layer of its services, going beyond recommendations to create more of a social network among its large user base as another way to create more loyalty to the brand. Over time Apple, Amazon, and others will have similar collections of digital content and pricing parity. Loyalty to a particular brand and user experience will be the crucial success factor.

Amazon provides drop-ship and logistics support, which has caused it to become the online platform for many large B2C retailers in different verticals. Amazon Merchants@, has been doing very well in the Holiday Season. According to Scot Wingo, CEO of ChannelAdvisor, a shift from eBay’s large powersellers to Amazon Merchants@ has been noticed recently. This is a very significant development, and alarming for eBay. My guess is, many of the eBay powersellers have grown to a size that their logistics challenge has become significant. To scale, they are moving to Amazon, and availing of their fulfillment services.

Amazon has a strategy of maintaining high level of inventory in hand in order to avoid high prices and order cancellations. Amazon can thus ship a large number of a particular product if there is a strong demand for it in a very short time, which leads to high customer satisfaction.

Amazon expects Net Sales in 2007 to be between $14.263 billion and $14.613 billion, or to grow between 33% and 36% compared with 2006. Operating income in 2007 is expected to be between $605 million and $675 million, or grow between 56% and 74% compared with 2006. Analysts expect the Company to earn $18.2 billion in revenues in 2008 and margins are expected to improve with development costs coming down and the Company moving into retailing of high margin products like Kindle and other lifestyle products.

Amazon was ranked as the number one visited retail site on Cyber Monday. US unique visitors to Amazon could easily surpass 65 million in December 2007 – a 15% increase over 2006 but revenues generated could show more than double growth rate because of an anticipated acceleration of revenue per user towards the end of the year driven by purchase of Kindle, Toys, Games & Gaming Consoles, Lifestyle products and Consumer Electronics.

I think Amazon has a wonderful year ahead, where we would see the Company move into newer, higher margin verticals, gain momentum on the marketplace business (also higher margin), enter new markets, expand the depth of its offerings, improve technology and fine tune the Kindle strategy.

Amazon’s focus on improving the user experience and margin expansion are the right knobs to turn at this juncture. Going forward the Company may look at some interesting acquisitions in online specialty retail (CafePress, Zappos, FigLeaves) and in vertical search (TheFind, Retrevo, Wize).

Amazon is projected to earn EPS of $1.80 – $1.90 in 2008. The stock is currently trading at $91.28 and has potential to move to $115 – $120 in the next 12 months on the back of robust revenue and margin growth.

[Part 1] [Part 2] [Part 3] [Part 4]

This segment is part 5 in the series : Web 3.0 & Amazon
1 2 3 4 5

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Great post, thank you. Wouldn’t you think an acquistion of Zappos would be an expensive proposal for Amazon, with the company closing in on $1B in sales?. Curious as to what you think a fair multiple would be for Amazon to pay, and still have it make sense..

zach Friday, December 14, 2007 at 11:29 AM PT

Hi Zach,

Stay tuned, we have this topic up for discussion in a bit.

Sramana

Sramana Mitra Friday, December 14, 2007 at 1:22 PM PT