Coming off a robust Prime Day which we believe will be another “silver bullet growth catalyst” for US retail sales as well as driving Prime membership in 3Q and beyond, we expect Amazon to deliver strong June results next week which should yet again beat Street expectations. Bezos has built a Prime membership of 100 million+ strong which is poised to increase spending another 20%+ this year with a strong trajectory heading into 2H18 and 2019 based on our recent survey work in the field. We have seen tea leaves around the broader cross-selling opportunity on the Whole Foods front over the past six months with the recent 10% discount announcement for Prime members the first major shot across the bow on the integrated consumer sales strategy which could accelerate over the next 12 to 18 months in our opinion. With a major overlap between Whole Foods shoppers and Prime members there is “golden opportunity” in our opinion to use both these distribution channels to catalyze higher grocery (basket sizes) and retail sales among members, while driving non-Prime members that are Whole Foods shoppers into Prime members in the near-term. This is part of the broader consumer flywheel strategy implemented during 2Q that will enable Amazon to become further entrenched in the daily lifestyle and spend cycle of consumers worldwide from its “iron grip” e-commerce engine to grocery stores and health care (PillPack acquisition the first step of a broader strategy) in 2019, with advertising as another trojan horse multi-billion dollar avenue of growth to further monetize the 360-degree view of a Prime member. Prime growth remains the key jewel for Amazon going forward as cross-selling around Whole Foods customers and putting up more walls/barriers around its growing Prime competitive moat is a major ingredient in Amazon’s ability to fend off competition in our opinion. International growth on Prime will also be another key catalyst that we expect to play out in the second half of 2018 and should help further drive better than expected e-commerce retail growth in the year ahead. With stronger than expected North America retail revenue and a healthy Prime growth trajectory for the June quarter, we believe Amazon will have another “beat and raise” special on the horizon when it reports results next week adding to Street optimism heading into 2H. While regulatory and Trump/Beltway worries remain a lingering cloud/overhang over the Amazon story we continue to believe the company is still in the early innings of capitalizing on its unique Prime membership competitive moat. We maintain our Highly Attractive rating and $2,000 price target.
Flywheel effect in full growth mode. We expect considerable strength from Amazon across the board over the coming quarters as our analysis indicates the robust North America retail channel is showing no signs of slowing down in 2H2018 as the Prime membership moat that Bezos & Co. have built is gaining further steam in the field and the Amazon “flywheel effect” is further playing out globally among consumers. While near-term there is a major focus on significant investments around fulfillment, Prime, Echo/Alexa, AWS, and integrating the Whole Foods acquisition into the fold which could depress margins over the next few quarters, we believe this is a smart strategic bet as Amazon has a unique window of opportunity to double down on its consumer and enterprise initiatives over the next year and drive significant growth/cash flow for the coming years as Bezos & Co. further diversifies the Amazon franchise globally with major margin expansion looking ahead into 2019/2020 and beyond.
AWS still in the early innings of a massive secular opportunity. We also believe the AWS enterprise opportunity is still fully under appreciated by many investors as we estimate cloud adoption rates are steadily increasing with a higher rate of comfort among CIOs moving to hybrid cloud environments with our analysis indicating 35% of application workloads will migrate to the public and hybrid cloud by the end of 2018 and 55% by 2022 on the cloud which should be a major benefit and tailwind for AWS going forward. To this point, the landmark JEDI DOD contract with a potential AWS significant cloud win on the horizon over the coming months would be a “major boost in the arm” to Amazon’s cloud ambitions both within the Beltway and enterprise landscape for the next decade.
Sum-of-the-parts valuation; A trillion dollar valuation on the horizon? In our sum-of-the-parts valuation, we believe Amazon is worth between $900 billion to $1 trillion, with the bread and butter consumer piece worth between $600 billion to $650 billion and the AWS/enterprise segment worth between $300 billion to $350 billion. While a trillion-dollar market cap will not happen overnight, we believe the path is now set for this to occur over the next 12 to 18 months as the Bezos strategic path both on the consumer and enterprise fronts are still in the middle innings of playing out and Amazon remains a “green light” name to own at these levels in our opinion. In a nutshell, Amazon is on track to comprise ~50% of all US e-commerce spending by 2019 up from 44% in 2017 based on our analysis and remains one of our favorite secular tech growth as the Amazon consumer growth thesis, coupled by cloud strength on the AWS segment, is the unique “1-2 punch” that should translate into significant earnings power and further multiple expansion over the coming year. Our $2,000 price target reflects stronger e-commerce growth prospects over the coming year, $80+ of earnings power by 2022, and a higher sum-of-the-parts valuation as Amazon further expands its iron tentacles to other pieces of the consumer landscape (e.g. advertising, healthcare-PillPack acquisition) which gives further upside potential to the “bull case scenario” in our opinion over the coming year.