It is good to be a customer

On Thursday Amazon released their 4th quarter results and 2013 full year results. Amazon grew sales for the last three months of the year from $21.27 billion to $25.59 billion, which is a mind numbing figure for me considering that it is only for 3 months. For the full year they had revenue of $74.4 billion up from $60 billion, growth of 22%. From all those sales they made a net income of $274 million; yes they didn't even break the billion mark.


So before I go further, I would like you to guess what you think their P/E ratio is. Okay for most your guesses you will probably need to times them by 10, before their results they were on a P/E of about 1300 – 1400, and now they are sitting on a P/E of about 680.


So why such a high P/E ratio? The reason is due to the billions that are being spent on R&D and building bigger operational capacity. In the results release Jeff Bezos, the CEO and founder of Amazon said that they are just scratching the surface of what customer surface can be. I think that there long term goal is to be a one stop shop for the consumer, where it is buying goods that will be delivered by a drone to having access to their digital library. This is where all the money is being spent, to have the infrastructure to be able to reach and service the growing online shopping market. Stats that I have found show that the amount of online sales in the US grew by 14.5% in December compared to the previous year and only 5.9% of the retail sale in the US was online! This figure is only going to grow and Amazon are going to be the best positioned to serve those customers.


Part of the Amazon offering is their "Prime Instant Video ", which is basically the equivalent of Netflix, where Amazon are even producing some of their own series. Another is "Amazon Work Space" which is a cloud based service, which is the future of computing. Then there are also rumours of them developing a smart phone, I think that they will struggle to outdo Apple on the smart phone front, but having said that their kindle is the top e-reader out there (I love mine). Amazon also now deliver on a Sunday, very convenient. One of our clients phoned in and told us a storey of him ordering a game for his son on Amazon while in the UK, he had a knock on his hotel room door a couple of hours later and the game was there. This is definitely the future!


Comparing Amazon to the world's biggest retailer, Walmart we see the following. Walmart trades on a P/E of about 14, with a profit margin of 3% and growth rates of 5%. Amazon has margins of only 0.3%, a P/E like I said of about 680 and is growing at +20%. Now comes the kicker, if you add back all the money they are spending on R&D and operational capacity building, their margins are around the 9% mark and their P/E is only around 28. Two observations here, the first is the better margins that can be made by not having "brick and mortar", as Paul says and the second is that a company who is growing at the speed of Amazon, with still plenty of room to grow, is on the cheap side with a 28 multiple.


I really like this company and I think that it will be very hard for a competitor to be able to come and build the infrastructure needed to compete with Amazon. I think that when the dust settles from Amazons spending spree, they will have the system that cannot be matched serving the key consumer segment – online retail.


I will leave you with the words of Bezos, "It's a good time to be an Amazon customer... and have packages delivered to your door even on Sundays"