Amazon.com, Inc. (NASDAQ: AMZN)

[Pages:5]Large Capitalization Research Initiation of Coverage 06/11/2019

, Inc. (NASDAQ: AMZN)

Juggernaut Begins to Slow

Investment Highlights:

Internet

Hunter Diamond, CFA Xin Zhang, Equity Research Associate research@ 1120 Avenue of the Americas, 4th Floor New York, NY

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? Amazon's prime one-day shipping furthers moat. With the promotion of prime one-day service, Amazon will become the first major company in the United States and soon after internationally, to provide same-day delivery services for their prime members, with Amazon planning to launch delivery drones to deliver packages within months. Amazon's expertise in logistical networks differentiates it from competitors. Same day delivery should not only increase the number of prime members but also solidify the relationship between Amazon and third-party merchants and lead to the company continuing to capture an increasing portion of consumer's wallets.

? Given its size, growth is beginning to slow. Unit growth, which excludes many of the high growth businesses such as AWS and advertising was the lowest in recent history at 10%. This slowing growth is to be expected givenRtehveenlauwe (o$filnarmgiellniounms)bers, however the company is still rapidly growing in its newer segments.

? Regulatory risks are rising. The Federal Trade Commission and the Department of Justice, which enforce antitrust laws in the United States are increasingly following Amazon and possibly rethinking what classifies as a monopolistic structure.

? Valuation is already at a premium. Trading at approximately 4 times sales and 75 times trailing earnings, traditional valuation metrics are not easily applied, and investors largely hold Amazon based on its growth story with the company still a hedge fund favorite holding.

? Succession risk is a major concern. The current CEO Jeff Bezos is close to the average retirement age and has been a core part of Amazon achieving what it has. Additionally, he has not been immune from health issues with kidney stones reported in recent years. As the face and visionary of Amazon, succession risk is a major concern for investors.

Company Description

, Inc. engages in the provision of online retail shopping services. It operates through the following business segments: North America, International, and

Amazon Web Services (AWS).

Key Statistics

Closing Price (As of 06/07/2019) $1,804.03 52 Week Range $1,307-$2,050

Average Daily Volume 4,438,656 Shares Outstanding (M) 492.33 Market Capitalization (B) 873.92 Number of Analysts Covering 52 Enterprise Value/Revenue 3.72x

Revenue($ in billions)

Dec. FY 2017A

2018E 2019E

1Q

35.71A 51.04A 59.70A

2Q

37.96A 52.89A

N/A

3Q

43.74A 56.58A

N/A

4Q

60.45A 72.38A

N/A

FY

177.87A 232.89A N/A

Dec. FY 1Q 2Q 3Q 4Q FY

EPS($)

2017A

2018E

1.48A

3.27A

0.40A

5.07A

0.52A

5.75A

3.74A

6.04A

6.15A 20.15A

2019E 7.09A

N/A N/A N/A N/A

Please see the last page for important disclosures 1120 Avenue of Americas 4th Floor, New York, NY 10036



Investment Thesis

Amazon is the world's largest e-commerce marketplace and cloud computing platform as measured by revenue and market capitalization. Amazon is the largest internet company by revenue in the world and the second largest employer in the United States. Amazon is now also launching a prime one-day home delivery service, currently 100 million items can be delivered to the doorstep of customers within two days. According to a recent report1 U.S. ecommerce revenue is projected to surpass $735 billion by 2023. Mobile conversion rates continue to rise - Mobile sales increased by 55% in 2018, while Forrester predicts that by 2022, smartphone retail sales will reach $175.4 billion, Amazon is uniquely positioned to benefit from this with its strong delivery network and best in class user experience. Customers are placing an increasing importance on convenience: 38% of shoppers now expect merchants to provide same-day delivery service. Additionally, AWS is still in hyper growth with attractive margins, AWS sales increased by 43% and 47% in 2017 and 2018 YoY, still functioning as the company's most significant growth driver. According to its financial report in 1Q19, Amazon EBITDA for the quarter ending March 31, 2019, was $9.274B, a 65.67% increase YoY and Amazon EPS for the quarter ending March 31, 2019, was $7.09, which has been increasing in recent periods, as the company demonstrates the profitability of its business model.

Amazon offers investors the opportunity to invest in one of the most visionary multinational

technology companies in the world, with its

dominance in ecommerce and cloud

computing

Amazon is predominantly known for its e-commerce platform, however, in considering the increased competition facing Amazon in e-commerce including Walmart recently announcing the launch of deliveries directly to customer's homes, we believe it will be more difficult to continue to grow this segment at the higher rates seen historically but believe segment growth will still outpace the market growth. Therefore, we believe that Amazon will have to continue to look for new opportunities in large markets outside of e-commerce, by disrupting players in these industries to sustain its sales growth such as pharmacies, supermarkets, etc. Amazon has numerous competitors including Facebook, Apple, Costco, Alibaba, Google, Microsoft, Netflix, UPS, and Walmart, each competing in various segments with Amazon. Given the lucrative markets Amazon operates within, we expect continued intense competition.

Amazon is after a long period transitioning to be a growing free cash flow producing business

Amazon Q1 2019 Earnings Presentation

1

2 See last page for important disclosures

Q1 2019 Fiscal Quarter Results

For the first quarter of 2019, Amazon reported revenue of $59.7 billion versus consensus $59.68 billion and compared to $51.0 billion in Q1 2018. Operating income was $4.4 billion in the first quarter, a large increase from operating income of $1.9 billion in the first quarter of 2018. Net income increased to $3.6 billion in the quarter ($7.09 per diluted share) versus a net income of $1.6 billion ($3.27 per diluted share) in the respective 2018 quarter. Free cash flow increased to $11.8 billion for the trailing twelve months versus a negative free cash flow of $3.0 billion for the twelve months ending March 31, 2018.

Liquidity and Balance Sheet

As of March 31, 2019, Amazon's cash and cash equivalents increased from $21.856 billion in March 2018 to $32.173 billion. Amazon ended the March 2019 quarter with $23.322 in long term debt compared to $24.64 billion the last years' quarter. Amazon had $61.05 billion in property and equipment as of March 31, 2019 compared to $52.33 billion in the March 31, 2018 period. Amazon is not likely to suffer from liquidity issues in the near term given its growing operating cash flows and numerous financing alternatives.

Competitive Advantage

Amazon competes globally with Apple, Facebook, Costco, Target, Home Depot, Uber and many other large companies and startup-ups. The company competes not only within ecommerce but also within advertising and cloud software. Amazon's major competitive advantage is the amount of data is has acquired on consumers and the machine learning and artificial intelligence solutions it has developed as a result, including personalized recommendations. Additionally, the sheer scope of its businesses presents a unique competitive advantage, as well as its strong ability to tap the capital markets as needed.

3 See last page for important disclosures

Key Risk Factors

? Amazon has already secured large market share and faces extreme competition in all its business segments going forward. The law of large numbers is also coming into play, whereby it is increasingly difficult to continue expanding as it has historically.

? Amazon faces intense competition and government regulation internationally. ? There is a major succession risk, when current CEO Jeff Bezos retires or leaves the

company for other reasons. ? The company is heavily dependent on a highly organized fulfillment network and data

centers, any weakness in either can have strong negative consequences. ? The U.S. government is moving toward a major antitrust probe of Amazon, Apple,

Facebook, and Google. The U.S. Federal Trade Commission and the Justice Department enforce antitrust laws in the United States. ? The recent trade war between U.S and China can cause disruption in many of the products sold on Amazon and Amazon's own products including the popular echo and kindle. ? The company is dependent on making strong acquisitions and ensuring their successful integration. ? Amazon could be subject to data breaches and could have its online operations massively disrupted.

4 See last page for important disclosures

Disclosures

Diamond Equity Research, LLC has created and distributed this report. This report is based on information we consider reliable, including the subject of the report, but has not been provided any non-public information. This report does not explicitly or implicitly affirm that the information contained within this document is accurate and/or comprehensive, and as such should not be relied on in such a capacity. All information contained within this report is subject to change without any formal or other notice provided. Diamond Equity Research, LLC is not a FINRA registered broker/dealer or investment adviser and does not provide investment banking services.

This document is not produced in conjunction with a security offering and is not an offering to purchase securities. This report does not consider individual circumstances and does not take into consideration individual investor preferences. Recipients of this report should consult professionals around their situation, including taxation. Statements within this report may constitute forward-looking statements, these statements involve many risk factors and general uncertainties around the business, industry, and macroeconomic environment. Investors need to be aware of the high degree of risk in micro capitalization equities.

A Research Analyst and/or a member of the Analyst's household own debt or equity securities of Inc. Diamond Equity Research, LLC, its subsidiaries, contractors, and employees may change their position in the subject company without notice. Diamond Equity Research, LLC is not a registered broker-dealer and does not conduct investment banking or receive commission sharing revenue arrangements related to the subject company of the report. The price per share and trading volume of subject companies and companies referenced in this report may fluctuate and Diamond Equity Research, LLC is not liable for these inherent market fluctuations. The past performance of this investment is not indicative of future performance, no returns are guaranteed, and a loss of capital may occur. Certain transactions, such as those involving futures, options, and other derivatives, can result in substantial risk and are not suitable for all investors.

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