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The coronavirus pandemic has accelerated e-commerce sales and slowed sales for brick-and-mortar retailers – two trends that benefit Amazon. But the pandemic has also forced competitors to bolster their own offerings. Anthony Okolie talks with Anita Bruinsma, Consumer Discretionary Analyst, TD Asset Management, about the bear and bull case for the e-commerce giant Amazon.
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- Well, Amazon has been on a roll this year, helping the NASDAQ reach record highs. Anita, you're here to give us a bull and bear case for Amazon. Let's start off with the bull case.
- So the first bull point for Amazon is that it still has more opportunities in its e-commerce business. But before I get to that, I thought it would be helpful to frame up how it is that Amazon makes money. So it makes money from two key businesses. One, of course, is the e-commerce business. And the second is cloud computing, or AWS.
Now, the bulk of its revenue comes from the commerce business. But actually, last year, about 2/3 of its earnings came from the cloud computing business. So it's important that we understand that framework.
So let's start with the e-commerce side. It'll come as no surprise to you or anyone that e-commerce has been growing rapidly over the past few years. And in the US, it's been growing at about 16% per year. And this has really shown no signs of slowing. And of course, COVID has given it even more of a boost. So we think e-commerce could grow between 18% and 20% in the US over the next year or two.
So even if Amazon doesn't take market share, its market is growing at a very attractive pace. And this is a growth rate that a lot of companies would be really happy to have. But I do think that Amazon will continue to take market share and therefore can grow even a bit faster than that. And that's because Amazon is so big.
In e-commerce, being big is a real competitive advantage. For example, on the logistics side, so Amazon's been spending 25 years building out its logistics network, its warehouses, distribution centers. And it's been improving shipping times, as you know, for customers continuously. And customers love that. And it's very, very hard for other online retailers to compete with that kind of shipping ability.
Now, the second area where it has opportunities is in cloud computing, which is its AWS segment that I mentioned earlier. Cloud computing is actually growing at a faster pace than e-commerce. And the infrastructure segment of the cloud computing market, which is where Amazon mainly operates, could grow about 25% to 30% per year in the coming year. So, again, a very attractive growth rate.
And like in e-commerce, Amazon is also dominant in the cloud computing infrastructure space. It has more servers than anyone else. It is located all over the world. And it's established a very strong reputation. And when a company or an enterprise is looking to put its data on the cloud, it looks for this kind of reliability and trust factor. So there is significant growth still available in cloud computing. And certainly, it's going to continue to drive Amazon's earnings and cash flows.
- What about growth opportunities in other segments?
- Yeah. So even if these two segments were to start slowing, Amazon has been developing other businesses that can drive its growth, for example, digital advertising. Digital advertising is a very profitable business. And it's a really small part of Amazon's overall earnings at this point, but it's growing quickly.
And then it also has opportunities in that big logistics network that I just talked about. And it can be a competitor to the likes of UPS and FedEx. And then, of course, it is also in other markets. For example, it's in India, which is the second most populous country in the world. And so it has more opportunities as well in India. So Amazon does have a pretty diverse range of growth opportunities.
- OK, so we've heard the bull case. Now let's hear the bear case for Amazon.
- OK. So the first thing to think about on the bear side for Amazon is regulations. So being large in Amazon's businesses, as I've just said, is very beneficial. But the flip side to that is it also is a lightning rod for politicians and regulators because it's so dominant in its businesses and because it owns so much of this consumer data.
So there are really two areas of regulation that we need to think about. One is on the personal consumer data side that I just talked about. So any regulation or legislation that would limit how companies can collect that data or how they can use that data would certainly make that data less valuable. And it's certainly a topic that's been getting a lot of attention in North America and in Europe as well.
The second area of regulation to think about is antitrust. And antitrust has to do with competitive issues. And again, because Amazon so dominant in its businesses, it has been a target for antitrust issues. And the concern here is that they may be forced to break up their businesses.
And that's a problem because some of the businesses have really good synergies. And so it's possible that when you separate those businesses, the parts are worth less than the whole. So regulation on antitrust and personal data is something to watch with Amazon.
- And what about valuation? Because recently, we've seen Amazon stock increase quite a bit this year.
- Yes. Amazon is absolutely a very expensive stock at this time. The stock is trading at a price-to-earnings ratio of about 85 times next year's earnings. And to put that in perspective, the S&P 500, the broader index, trades at about 20 times next year's earnings. And Amazon itself was trading between 40 and 50 times prior to COVID-19, and now at 85 times. Yes, it is very expensive, and due to that massive run-up that we've seen so far this year as a result of COVID-19.
And the thing with a stock that trades at such a high valuation is that it's very vulnerable to any sort of bad news. And so if Amazon were to have a hiccup in its story, the stock could see a significant decline. So valuation is something we really need to think about at this point with Amazon.
- Anita, thank you very much for your insights.
- Thank you, Tony.
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- Well, Amazon has been on a roll this year, helping the NASDAQ reach record highs. Anita, you're here to give us a bull and bear case for Amazon. Let's start off with the bull case.
- So the first bull point for Amazon is that it still has more opportunities in its e-commerce business. But before I get to that, I thought it would be helpful to frame up how it is that Amazon makes money. So it makes money from two key businesses. One, of course, is the e-commerce business. And the second is cloud computing, or AWS.
Now, the bulk of its revenue comes from the commerce business. But actually, last year, about 2/3 of its earnings came from the cloud computing business. So it's important that we understand that framework.
So let's start with the e-commerce side. It'll come as no surprise to you or anyone that e-commerce has been growing rapidly over the past few years. And in the US, it's been growing at about 16% per year. And this has really shown no signs of slowing. And of course, COVID has given it even more of a boost. So we think e-commerce could grow between 18% and 20% in the US over the next year or two.
So even if Amazon doesn't take market share, its market is growing at a very attractive pace. And this is a growth rate that a lot of companies would be really happy to have. But I do think that Amazon will continue to take market share and therefore can grow even a bit faster than that. And that's because Amazon is so big.
In e-commerce, being big is a real competitive advantage. For example, on the logistics side, so Amazon's been spending 25 years building out its logistics network, its warehouses, distribution centers. And it's been improving shipping times, as you know, for customers continuously. And customers love that. And it's very, very hard for other online retailers to compete with that kind of shipping ability.
Now, the second area where it has opportunities is in cloud computing, which is its AWS segment that I mentioned earlier. Cloud computing is actually growing at a faster pace than e-commerce. And the infrastructure segment of the cloud computing market, which is where Amazon mainly operates, could grow about 25% to 30% per year in the coming year. So, again, a very attractive growth rate.
And like in e-commerce, Amazon is also dominant in the cloud computing infrastructure space. It has more servers than anyone else. It is located all over the world. And it's established a very strong reputation. And when a company or an enterprise is looking to put its data on the cloud, it looks for this kind of reliability and trust factor. So there is significant growth still available in cloud computing. And certainly, it's going to continue to drive Amazon's earnings and cash flows.
- What about growth opportunities in other segments?
- Yeah. So even if these two segments were to start slowing, Amazon has been developing other businesses that can drive its growth, for example, digital advertising. Digital advertising is a very profitable business. And it's a really small part of Amazon's overall earnings at this point, but it's growing quickly.
And then it also has opportunities in that big logistics network that I just talked about. And it can be a competitor to the likes of UPS and FedEx. And then, of course, it is also in other markets. For example, it's in India, which is the second most populous country in the world. And so it has more opportunities as well in India. So Amazon does have a pretty diverse range of growth opportunities.
- OK, so we've heard the bull case. Now let's hear the bear case for Amazon.
- OK. So the first thing to think about on the bear side for Amazon is regulations. So being large in Amazon's businesses, as I've just said, is very beneficial. But the flip side to that is it also is a lightning rod for politicians and regulators because it's so dominant in its businesses and because it owns so much of this consumer data.
So there are really two areas of regulation that we need to think about. One is on the personal consumer data side that I just talked about. So any regulation or legislation that would limit how companies can collect that data or how they can use that data would certainly make that data less valuable. And it's certainly a topic that's been getting a lot of attention in North America and in Europe as well.
The second area of regulation to think about is antitrust. And antitrust has to do with competitive issues. And again, because Amazon so dominant in its businesses, it has been a target for antitrust issues. And the concern here is that they may be forced to break up their businesses.
And that's a problem because some of the businesses have really good synergies. And so it's possible that when you separate those businesses, the parts are worth less than the whole. So regulation on antitrust and personal data is something to watch with Amazon.
- And what about valuation? Because recently, we've seen Amazon stock increase quite a bit this year.
- Yes. Amazon is absolutely a very expensive stock at this time. The stock is trading at a price-to-earnings ratio of about 85 times next year's earnings. And to put that in perspective, the S&P 500, the broader index, trades at about 20 times next year's earnings. And Amazon itself was trading between 40 and 50 times prior to COVID-19, and now at 85 times. Yes, it is very expensive, and due to that massive run-up that we've seen so far this year as a result of COVID-19.
And the thing with a stock that trades at such a high valuation is that it's very vulnerable to any sort of bad news. And so if Amazon were to have a hiccup in its story, the stock could see a significant decline. So valuation is something we really need to think about at this point with Amazon.
- Anita, thank you very much for your insights.
- Thank you, Tony.
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