Amazon Stock: More Protected Than Most Think (NASDAQ: AMZN)

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Amazon (NASDAQ:NASDAQ: AMZN) is currently in an interesting position due to its multiple segments with different futures. Investors are worried about the company’s core retail segment as rising gasoline prices and inflation weigh on profit margins. However, the secondary segments of the business are should thrive in the periods to come. AWS continues to be an industry leader in the cloud market and stands to benefit greatly from exponential industry growth and increasing demand.

Prime Video and Music are also emerging as major threats in their respective industries and could be on track to overtake the leader in each industry. Since these segments are likely to support the fundamentals of the company in a market downturn, as well as the current price at which the stock is trading, investors may want to consider getting into the stock.

Retail Industry Likely to Struggle Due to Rising Costs and Falling Demand

The biggest issue for many investors is the future of Amazon’s core retail segment, and rightly so. The company has seen greatly inflated demand during the pandemic due to consumers buying from home at a much higher scale. From 2019 to 2021, Amazon increased its revenue by 67%. During the same period, his main subscribers in the United States fell from 124 million to about 149 million. This trend is expected to continue through the end of 2022, with the number of primary subscribers in the United States expected to reach approximately 153 million consumers.

Amazon Prime subscribers, 2017-2022

Amazon Prime subscribers, 2017-2022 (Statist)

However, the demise of COVID-19 is now leading to the demise of e-commerce and less demand for Amazon’s retail services. In a recent Mastercard SpendingPulse report, e-commerce transactions saw a decline of 1.8% compared to 2021. In contrast, in-store sales increased by 10% over the same period. This report hurt e-commerce stocks heavily, including Amazon. This slowdown and the return to in-person shopping has caused Amazon to know its slowest revenue growth since the dot com crash of 2001 and are scaring investors even more.

Along with falling demand, Amazon’s retail segment is seeing much higher costs. Rising gasoline prices are hurting the already low margins of retail businesses. Recently, national gas prices reached around $5 per gallon and diesel prices reached around $5.81 per gallon. Since most of Amazon’s shipments are made by massive trucks with very low fuel consumption, the considerably higher cost of diesel is detrimental to Amazon’s business, as shipping costs are one of the factors most important to the company’s margins.

Due to these increased costs, Amazon has notified its third-party sellers that it will be implementing a 5% fuel and inflation surcharge to combat the effects of this price increase. These costs will likely be passed on to the consumer and result in lower volumes on Amazon. Therefore, investor concerns about Amazon’s retail segment are likely justified. This means that the company will have to rely on its secondary segments to support activity during periods of market downturn.

AWS will continue to lead the industry and capitalize on exponential growth

AWS is seen by investors as one of the strengths of Amazon’s future. AWS is currently the largest cloud service provider with a 33% market share while only accounting for 14% of Amazon’s total revenue. This likely means AWS has room to grow in total Amazon sales, as well as in the industry. In the most of the company recent earnings report, AWS thrived as retail struggled. The segment grew 36.5% year-on-year and beat analysts’ forecasts for revenue and operating income. The segment’s operating margin also increased from 29.8% to 35.3%. All of this has helped AWS generate $67.1 billion in sales over the past 12 months and continue to grow as cloud services experience increased demand.

1Q22 AWS Segment Results

AWS Segment Results (Report on 1Q22 results)

The reason behind AWS the massive growth is due to the growing demand for cloud services and the exponential growth of the industry. Over the past few years, the cloud industry has seen steady growth of approximately 34% per year. With this growth rate, we can foresee how big the cloud services industry could be in the coming years. Starting with the current industry size of approximately $178 billion and a 34% growth rate that declines by 15% each year, the cloud industry could be worth around $545 billion in 2026.

For a conservative estimate, let’s say that Amazon loses some market share from Microsoft (MSFT), Google (GOOG)(GOOGL) and other smaller competitors and would only hold a 25% market share. This would value AWS at around $136 billion compared to the $59 billion it is currently worth. Therefore, AWS will likely continue to thrive despite future issues with the retail segment. It could give Amazon a competitive edge over other popular retailers and become an attractive choice as an investment.

Cloud Industry Growth Projections

Cloud Industry Growth Projections (Created by author)

Prime Video and Music grow to overtake industry leaders

Prime Video is quickly becoming one of the biggest names in streaming, primarily due to the previously mentioned surge in prime subscribers. This has resulted in a steady increase in Prime Video’s market share and far surpasses its competitors. Currently, Prime Video market share of the streaming industry is 19% and growing. Conversely, Netflix (NFLX) is currently at 23% but is down. With the number of prime subscribers in the United States expected to reach 168.3 million by 2025, Prime Video could surpass Netflix as the best streaming service. This would further help support the company during a market downturn as the retail segment struggles.

Streaming services market share

Streaming services market share (JustWatch.com)

Amazon Music and Audible are also growing in popularity and could become home to many popular podcasts in the near future. Currently, Amazon Music’s market share is the third largest in the industry at 13%. That’s behind Apple (AAPL) at 15% and Spotify (SPOT) at 31%. However, each music streaming service has almost identical libraries. This means that the only separating factors on each platform are proprietary podcast talent. Amazon may consider signing exclusive podcast talent as the podcast market has grown significantly in previous periods. Over the past three years, the podcast listener base has increased by more than 40%51% of consumers who started listening to podcasts in the last two years.

Basic statistics of podcast listeners

Basic statistics of podcast listeners (Nielson)

Other podcast companies like Spotify have captured this growing market by signing exclusive deals with many podcast talents, such as call her daddy and The Joe Rogan Experience. Now Amazon may have its chance to secure an exclusive deal with top podcast talent by signing higher ground by Barack and Michelle Obama. The The Obamas consider quitting Spotify and are now seeking a new deal worth tens of millions of dollars. Two of the most likely landing spots for the podcast are Amazon and iHeartMedia (IHRT).

However, iHeartMedia may not have enough money to make this deal. The company currently has about $280 million in cash, meaning a deal worth tens of millions of dollars could put the company in a tough financial spot. However, Amazon has over $66 billion in cash. Therefore, a deal worth tens of millions of dollars would not represent a huge expense for the company while making its platforms much more popular among competitors and further supporting the company in a downturn.

Evaluation

Amazon’s stock price is down more than 35% year-to-date, leading many investors to believe the stock is a bargain. By multiplying FY22 analyst consensus estimates by the average multiples for EV/Revenue, EV/EBITDA and P/S of Amazon and its competitors, a fair value of $148.79 can be calculated after adjusting for the company’s cash and debt. This gives the stock an implied rise of around 40.08%. For analysts, the 12-month average price target is currently at $178.56giving an implied increase of 68.21%.

Average multiples of AMZN and competitors
Relative valuation of AMZN

Relative rating for AMZN

What does this mean for investors?

Investors fear for Amazon’s future due to falling demand and rising spending for its core retail business. However, secondary segments of the business will likely support overall business in the event of a market downturn. AWS continues to lead the cloud services industry and will benefit greatly from the growing demand and exponential growth in the industry. Prime Video is on track to overtake Netflix as the top streaming service in terms of market share due to increased prime subscriptions.

Additionally, Amazon Music and Audible are among the top platforms in the audio industry and could solidify themselves among the strongest players by signing exclusive podcast talent. With all of this in mind, the idea of ​​being greedy when others are scared, and the current price the stock is trading at, I think it is appropriate to apply a buy rating at this time.

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