Share Prices & Company Research


22 July 2021

Uncharted Waters: Where does Amazon’s future lie?

Both the river and the company are the culmination of much larger networks working and growing together, creating in two very different global forces.

What is Amazon? Ask that question on the street and expect to hear the word ‘Prime’ uttered in the next few breaths. With over 200 million Prime customers, Amazon benefits from a steady revenue stream and fierce influence in suppressing costs. While Prime members spend four times more than their non-Prime counterparts – a disparity that has only grown over the pandemic. Since members receive a range of benefits, it comes as no surprise that subscription service revenues have compounded at 21% per year since 2018.

Amazon invests in its Prime offering, bundling free, next day delivery with a video streaming and production service already notching three Golden Globes and two Oscars. Beefed up spending on content to US$11bn in 2020, a 41% increase comparable to that of Netflix, combined with ownership of Twitch, a dominant player in the video game livestream market, adds a powerful media empire to the company’s repertoire. Subscribers have voted with their eyes by increasing streaming hours by 70% year-on-year, although the jury is still out on whether this can be sustained post-pandemic.

Ask the same question in a company boardroom, however, and prepare for an excited babble of technical jargon from an otherwise quiet chief information officer. Amazon Web Services (AWS), the company’s cloud computing arm, offers storage, which has been associated with a 30% cost saving, and an extensive product range which increases software development speed. AWS’s built in ‘Chime’ communication tools, desktop hosting and flexible pay structures position it to benefit from out-of-office work, as well as being promoted as an enabler of remote specialist assistance and telemedicine. Already the market leader in an industry that requires scale for profit and boasting a capacity six times that of the next 12 competitors, Amazon’s most profitable unit has ample space to grow.

When exploring Amazon’s future expansion, it may come as a surprise to some that the company is entering the healthcare space. In 2018, Amazon bought PillPack, a company that sorts medication into packets and delivers them monthly to a patient’s door. This could be used to further strengthen Prime’s value proposition by bringing Amazon’s established brand of consistency and speed to become the face of convenient medicine, while making use of its existing logistics networks. In face of an ageing developed world – the share of the US population over 65 is estimated to reach 17.9% in 2025, up from 12.4% in 2000 – Amazon is setting the stage to tap into the wealthy Generation X who are less technophobic than their baby boomer predecessors.

Prime customers could also receive enhanced care as their purchasing patterns help to inform healthcare decisions and perhaps offer preventative solutions. Another foray into healthcare is AWS’s Transcribe Medical, a software designed to transcribe appointments for doctors which, paired with telemedicine tools, will shorten appointments, a useful proposition when Amazon charges by volume of transcriptions.

A tolerance of failure is ingrained in Amazon’s corporate culture. It is no surprise, then, to see the company wade into the autonomous vehicle race as others bow out, having acquired Zoox, a self-driving vehicle developer, as well as a stake in Aurora which recently purchased Uber’s self-driving division. While Zoox’s mainstay will be ride hailing, Amazon executives no doubt have their eyes on a greater prize: automated delivery. Analysts at Morgan Stanley have estimated efficiency gains from such a feat would be US$20bn annually for Amazon.

It should be noted that fully autonomous driving has been a notoriously difficult problem to crack. Zoox was sold to tide it through financial difficulty and Uber would not sell an autonomous division on the verge of a breakthrough at a loss. The current regime has a pace of development needing years of testing, city-by-city, but none can deny Amazon’s knack for rewriting the rules and changing the game.

Now, to pull back from the realm of online emporiums, cloud computing and autonomous vehicles to something closer to home, something free of abstract technology: groceries. Yet Amazon is disrupting the established order here as well having purchased Whole Foods, launching Amazon Fresh and opening Amazon Go stores with digital price tags, smart trolleys and ‘just walk out’ technology. After a slow start, US online grocery sales grew 54% in 2020, with 68% of new ecommerce grocery shoppers announcing their plans to continue after the pandemic. Although grocery revenues have shrunk slightly for Amazon since 2018, the division is still in its infancy and now covers both premium and low-cost markets. These also represent fewer cyclical revenues, a concern of its main businesses.

All this belies the simple fact that Amazon’s core businesses still have room to grow and innovate, a fact not lost on the company. In 2020 alone, Amazon invested US$40bn in property, plant and equipment to improve the reach, quality, and timing of its service. This contrasts to UK high street chain store outlets with 9,877 net closures in 2020, which is only part explained by the pandemic since that number is only 30% higher than in 2019. Meanwhile, in the online space, Amazon has expanded its clothing range and upgraded its shopping experience with offerings ranging from free messaging to stylists, ‘try before you buy’, and virtual rooms decorated entirely with purchasable items. This expansion is not limited to the online space, or the developed world either. Amazon’s push into India is defined by its local shops programme and already boasts 50,000 offline and local retailers, with a target to reach one million by 2025.

Like water as a river flows downhill, the company is constantly gaining momentum. As Amazon continues to expand into new and emerging sectors, its standing in the global ecommerce space is growing.

Please note that investments and income arising from them can fall as well as rise in value. This communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned.
Uncharted Waters: Where does Amazon’s future lie?
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