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 intro 2H18 and 2019. We have seen tea leaves around the broader cross-selling opportunity on the Whole Foods front over the past six months with the latest 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” 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 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 potentially health care in 2019, with advertising as another 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 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. We maintain our Highly Attractive rating and $1,850 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 2018 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 for 2018 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.
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 names for FY18 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 $1,850 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).