Amazon

In March 2020, Amazon hired 100,000 people due to the increase in demand during the coronavirus and then they created another 75,000 jobs in April 2020 in response to further anticipated demand. The foundation of that demand stems from the already 840,000 workers worldwide.  Amazon also supports almost 4 million jobs globally through various areas including investments made in different industries and businesses utilizing Amazon’s platform to sell their own products. No company over the last decade has created more jobs than Amazon and on top of that, they have an industry leading policy of $15 an hour minimum wage throughout their company; more than double the Federal minimum wage. With all that said, we here at Phull Plate strongly recommend that before any person invests in a company that they, at a bare minimum, read some of the annual reports of the companies they are looking into buying. This is especially helpful when looking at Amazon as a potential investment, not only is Amazon’s financial statements difficult to fully understand, even for veteran accountants, but Jeff Bezos does a phenomenal job of conveying the attitude and goals of management. He walks you through every step along the way and it certainly provides clarity on Amazon’s vision. Below are some of the insights from Bezos’ 1997 letter: “We believe that a fundamental measure of our success will be the shareholder value we create over the long term. This value will be a direct result of our ability to extend and solidify our current market leadership position. The stronger our market leadership, the more powerful our economic model. Market leadership can translate directly to higher revenue, higher profitability, greater capital velocity, and correspondingly stronger returns on invested capital.”

“When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we’ll take the cash flows.” “We will work hard to spend wisely and maintain our lean culture. We understand the importance of continually reinforcing a cost-conscious culture, particularly in a business incurring net losses”

“We will balance our focus on growth with emphasis on long-term profitability and capital management. At this stage, we choose to prioritize growth because we believe that scale is central to achieving the potential of our business model.”

“We will make bold rather than timid investment decisions where we see a sufficient probability of gaining market leadership advantages. Some of these investments will pay off, others will not, and we will have learned another valuable lesson in either case.”

Here is what we understand about the company today, Amazon is gigantic; with a market cap sitting at roughly $1.155 Trillion.  A lot of people would not be wrong for stopping in awe of these numbers while wondering, how could they possibly grow meaningfully more to improve my dollar beyond other possible investments.  However, when you look at the current size of the total global market opportunity that Amazon has to capture, you will quickly see that they have a very long runway to work with and nothing standing in its way, not even a global pandemic. There was a total of about $25 trillion in Retail Sales globally in 2019.  Amazon accounted for roughly 1% of that total global retail sales in 2019.  For as large as Amazon is as a global company and they still only account for about 1% of total global retail sales in 2019, imagine if they even achieved just 10%!  A big reason behind this is the fact that Ecommerce sales in 2019 globally as part of total global retail sales was only 3.5 Trillion, representing about 14% of total global retail sales in 2019, which is an 18% increase from the prior year. This trend is expected to continue to grow at an accelerated rate for the next 5 years almost doubling to over 6.5 Trillion by 2024.  Amazon captured about 38% of Ecommerce sales in the U.S. in 2019, clearly leading the way, however Ecommerce in the U.S. is still also only a small slice of the U.S.  total retail sales, representing about only 10% of all retail sales in the U.S. in 2019.  This is a secular tailwind for Amazon and because of the way they were built, their business model and infrastructure are both more scalable than any other company in the industry.  It is our belief that Amazon will only continue to dominate and take market share year after year on a global scale as more and more of retail revenue shifts from in person to online.

As technology advances, this will allow Amazon to become even more efficient and evolve their processes.  Jeff Bezos is 100% accurate when he states in his letter every year since 1997, that it is still only Day 1. He has also famously said “your margin is my opportunity”.  This is the quintessential attitude that drove Amazon to be the ultimate disruptor of industries.  Through the heavy use of investment in new technologies, over time, Amazon has been able to constantly lower their cost of doing business across various industries. This has allowed them to compete and ultimately gobble up market share faster than its competitors because of their superior pricing and granting their customer ultimate convenience. In 2019, Amazon spent a massive $35.9 Billion on technology and content research and development.  This number consistently goes up year after year (we love that) by dedicating that much money to go with the brains behind their teams, they are ensuring that Amazon will remain ahead of the competition for years to come.  Amazon has several different sources of revenue including but not limited to, Amazon Web Services (cloud computing and infrastructure), online stores, subscription services, advertising services, streaming, etc.  Amazon is still scratching the surface on many of these avenues, yet they are already dominating in so many of them. Amazon is constantly looking to the future and finding ways to improve efficiencies within their infrastructure and business model, setting the tone for not only their industry but also all other companies worldwide. Demonstrated by the following goals set by the company as pointed out in their 2019 annual letter to shareholders:

“We’ve also committed to reaching 80% renewable energy by 2024 and 100% renewable energy by 2030. (The team is actually pushing to get to 100% by 2025 and has a challenging but credible plan to pull that off.) Globally, Amazon has 86 solar and wind projects that have the capacity to generate over 2,300 MW and deliver more than 6.3 million MWh of energy annually—enough to power more than 580,000 U.S. homes.”

“We are making these significant investments to drive our carbon footprint to zero despite the fact that shopping online is already inherently more carbon efficient than going to the store. Amazon’s sustainability scientists have spent more than three years developing the models, tools, and metrics to measure our carbon footprint. Their detailed analysis has found that shopping online consistently generates less carbon than driving to a store, since a single delivery van trip can take approximately 100 roundtrip car journeys off the road on average. Our scientists developed a model to compare the carbon intensity of ordering Whole Foods Market groceries online versus driving to your nearest Whole Foods Market store. The study found that, averaged across all basket sizes, online grocery deliveries generate 43% lower carbon emissions per item compared to shopping in stores. Smaller basket sizes generate even greater carbon savings.”

“AWS is also inherently more efficient than the traditional in-house data center. That’s primarily due to two things—higher utilization, and the fact that our servers and facilities are more efficient than what most companies can achieve running their own data centers. Typical single-company data centers operate at roughly 18% server utilization. They need that excess capacity to handle large usage spikes. AWS benefits from multitenant usage patterns and operates at far higher server utilization rates. In addition, AWS has been successful in increasing the energy efficiency of its facilities and equipment, for instance by using more efficient evaporative cooling in certain data centers instead of traditional air conditioning. A study by 451 Research found that AWS’s infrastructure is 3.6 times more energy efficient than the median U.S. enterprise data center surveyed. Along with our use of renewable energy, these factors enable AWS to do the same tasks as traditional data centers with an 88% lower carbon footprint. And don’t think we’re not going to get those last 12 points—we’ll make AWS 100% carbon free through more investments in renewable energy projects.”

“Last year, we co-founded The Climate Pledge with Christiana Figueres, the UN’s former climate change chief and founder of Global Optimism, and became the first signatory to the pledge. The pledge commits Amazon to meet the goals of the Paris Agreement 10 years early—and be net zero carbon by 2040. Amazon faces significant challenges in achieving this goal because we don’t just move information around—we have extensive physical infrastructure and deliver more than 10 billion items worldwide a year. And we believe if Amazon can get to net zero carbon ten years early, any company can—and we want to work together with all companies to make it a reality”

Amazon is constantly redefining itself and crushing expectations; planting seeds for future growth is just as important to them as harvesting what they already have grown. There have been plenty of strong companies that have fallen by the wayside, but Jeff Bezos has stuck to his vision, little to no wavering. We genuinely believe in the economic fundamentals that Amazon operates on a day to day basis as they continue to improve on their already industry leading ways. Remember, for long-term growth of money in the stock market, it is necessary to invest in companies that have not only have a place in the future, but also have a hand in shaping that future.

References

https://www.sec.gov/Archives/edgar/data/1018724/000119312513151836/d511111dex991.htm#:~:text=1997%20was%20indeed%20an%20incredible,for%20their%20support%20and%20encouragement.

Disclaimer

I/we are long Amazon. Any assertions made are opinion and we are not receiving any compensation for this post other than ad revenue from WordPress and personal donations. Phullplate.com has no business relationship with any stock mentioned in this article. Phullplate.com is not a registered investment, legal or tax advisor or a broker/dealer. All investment/financial opinions expressed by Phullplate.com are from the personal research and experience of the owners of the site and are intended as educational material. Although, best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors and misprints may occur.


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