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Stock Deconstruction

Where will Amazon's share price be in 5 years?

Amazon's [AMZN] share price has rocketed 437% over the past 5 years, easily outpacing the S&P 500's 50% gains. It also makes the share price gains of fellow FAANG stocks Apple [AAPL] (133%) and Facebook [FB] (160%) pale into insignificance. 

But with Q3 results showing a slowdown in earnings growth, what does the next 5 years look like for the eCommerce giant? 

 

 

Looking back at Amazon over the last 5 years 

Over the past 5 years, Amazon’s share price has soared as the eCommerce business’s income went from red to black. Between 2014 and 2018, Amazon's net income has gone from -$241 million to $10.7 billion. 

Year-on-year, income growth has been accelerating. Between 2016 and 2017 Amazon's income growth rate was 27.8%, but jumped by 232.11% between 2017 and 2018.

232.11%

Amazon's income growth rate between 2017 and 2018 - up from 27.8% the year prior

  

Overall revenue has risen sharply, from $88.9 billion in 2014 to $232.89 billion in 2018. Cash flow has almost doubled since 2014, going from $5.9 billion to $19.32 billion.

Yet, Amazon reported Q3 earnings per share of $4.23 in October. This not only missed analyst expectations, but underperformed the previous year's Q3 results by 26.43%. 

Could this be a sign of a maturing business near the end of its growth phase? Traders will want to know what Amazon has in the pipeline to deliver consistent returns.

 

Amazon’s growth drivers for the next 5 years

AWS continues to dominate cloud computing

In the lucrative cloud computing sector, Amazon Web Services (AWS) is the dominant player. In 2018, AWS’s market share stood at 32%, double that of its next nearest rival Microsoft Azure.

AWS is highly profitable, generating 50% of the company's total operating income. Yet, its growth rate is slowing. In Q3, AWS grew 35%, well below the 46% seen in the same quarter last year. Microsoft Azure, on the other hand, grew 59% in Q3. But in a sign that the market is maturing, this was down from the 69% seen the previous quarter. 

While 50%+ growth rates look like they’re a thing of the past, investment bank Cowen is bullish on AWS’s future. Analysts there think AWS will be worth a mammoth $505 billion next year, with growth pegged at a rate of 31% from 2019 to 2024.

$505billion

Estimated valuation of Amazon Web Services in 2020

 

Amazon disrupts $400 billion US healthcare market

Amazon is looking to move in on the $400 billion US pharmacy market. In 2018, it picked up PillPack in a $753 billion acquisition. Pillpack offers quick delivery of prescription drugs throughout the US, and the pick-up signals Amazon's intention to disrupt the US pharmaceutical industry.

$753billion

Valuation of PillPack acquisition

  

The acquisition of Pillpack wasn't Amazon's first foray into the healthcare market. In 2018 it teamed up with Berkshire Hathaway [BRK] and JPMorgan [JPM] in a co-venture to help employees with health costs.

Amazon has also quietly launched its own private-label drugs to compete alongside household names like Tylenol, on its eCommerce platform.

If Amazon can persuade both consumers and healthcare professionals to shop for medical products with them, it could open up a highly lucrative revenue stream by 2024.

 

Food e-commerce becomes more important

Ecommerce represents 10% of all retail sales in the US, with Amazon accounting for half of those.

One increasingly important revenue stream for Amazon is online grocery sales. According to research by Edge, by Ascential, Amazon’s food eCommerce sales will grow from $8 billion to $15 billion by 2024. 

Overall, the online edible grocery market is forecast to grow at a 13% CAGR to be worth $162 billion globally in 2024. Amazon will hope to capitalise through initiatives such as Amazon Fresh, as it looks to fend off competitors like Walmart [WMT].

 

Prime will need new features to grow

Amazon Prime has been a huge growth driver for Amazon's eCommerce business, with people hooked on same-day delivery, giveaways and streaming.

According to estimates from Consumer Intelligence Research Partners (CIRP), Prime membership in the US hit 105 million at the end of June.

While this was up 11% year-on-year, it's well off the 43% growth rate seen in 2016. The problem for Amazon is that its addressable market in the US is shrinking. That means it will need to introduce new features to the service - such as Prime Day - to keep driving growth.

 

Time to buy?

Will Amazon continue to dominate the eCommerce and cloud computing sectors for the next five years? It's difficult to see who could topple its position in both areas, although that's not to say it should get complacent. Shopify [SHOP] has already stolen some of its merchant business and Microsoft [MSFT] has been gaining market share in cloud computing.

 

Market Cap$901.612bn
PE ratio (TTM)80.58
EPS (TTM)22.57
Quarterly Revenue Growth (YoY)23.70%

Amazon share price vitals, Yahoo Finance, 29 November 2019

 

The consensus 12-month price target from the 44 analysts tracking the stock on the Financial Times is $2,190. Hitting this would represent a 20.43% upside on the current share price. 

The global eCommerce market is expected to be worth $18.7 trillion by 2024, up from $11.2 trillion in 2019, according to Juniper Research. If Amazon can maintain its position in both eCommerce and cloud computing, the share price could continue to gain.

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