Company overview - Amazon.com, Inc. offers a range of products and services through its Websites. The Company operates through three segments: North America, International and Amazon Web Services (AWS). The North America segment consists of retail sales of consumer products (including from sellers) and subscriptions through North America-focused Websites, such as www.amazon.com, www.amazon.ca and www.amazon.com.mx. The International segment primarily consists of retail sales of consumer products (including from sellers) and subscriptions through internationally-focused Websites, such as www.amazon.com.au, www.amazon.nl, www.amazon.es and www.amazon.co.uk. The AWS segment consists of sales of compute, storage, database, and other service offerings for start-ups, enterprises, government agencies and academic institutions. The Company's products include merchandise and content that it purchases for resale from vendors and those offered by third-party sellers. It manufactures and sells electronic devices.

AMZN Details
 
Delivered a strong performance in First Quarter of FY 17: Amazon.com Inc (NASDAQ: AMZN) came out with a better than expected performance in the first quarter of FY 17. The company had reported an adjusted revenue growth of 23% on a year over year (yoy) basis to $35.7 billion in the first quarter of FY 17. The North America division sales during the quarter surged over 24% yoy and International sales rose 16% yoy against the comparable period last year. Meanwhile, the shipping expenses, a major cost for Amazon, has increased by 30% (still the slowest in at least six quarters). Net income rose to $724 million in the first quarter of 2017 as compared to $513 million in the prior corresponding period. Better profit margins in the cloud-computing unit with a smaller increase in shipping costs helped Amazon to generate a strong bottom line. Amazon’s operating cash flow reached $17.63 billion during the quarter as compared to $17.27 billion in the fourth quarter of 2016 and $11.56 billion in the first quarter of 2016. Free cash flow reached $10.2 billion during the period from $10.5 billion in fourth quarter of 2016. Meanwhile, AMZN has indicated to have 80 million prime subscribers in the U.S. as of March 31, 2017, which is a growth of 36% from a year earlier (as per Consumer Intelligence Research Partners). 

Amazon’s Sales (Source: Company reports)
 
Booming target market opportunity for AWS: Amazon web services (AWS) division has been growing rapidly; and the division’s sales rose by 43% on a yoy basis during the first quarter driven by rising customer usage despite pricing changes. AWS generated 10% of consolidated revenue and 89% of consolidated operating income during the quarter. Amazon Web Services profit margin also improved to 24.3% in the first quarter, as compared with 23.5% a year earlier. This division reported that the customers had migrated more than 23,000 databases using the AWS Database Migration Service since it became available in 2016. AWS adoption is way ahead of its competitors which rose to 59% from 56%; while its competitor, Microsoft Azure adoption enhanced 26% to 43% (as per RightScale’s 2017 survey). Given the first mover advantage, the target market opportunity for AWS is very attractive with public cloud computing market expected to rise from $67 billion in 2015 to $162 billion in 2020 which is a compound annual growth rate (CAGR) of 19%, as per IDC. Cloud computing spending is also expected to grow at a 4.5 times the rate of IT spending since 2009 and at a rate better than 6 times the rate of IT spending from 2015 through 2020 (as per Gartner).
 

Improving AWS division performance over the last quarters (Source: Company reports)
 
Gearing up to target Australian Market: The US behemoth is now coming to the shores of Australia and will be launching retail services within Australia soon. This has already generated a wave of shock amongst Australian retailers and is likely to trigger a carnival for consumers looking for lower prices and more options. Many Australian retailers (including JB Hi-Fi Ltd, Myer Holdings Ltd, Wesfarmers Ltd, and Metcash Ltd) are thought to be impacted and might lose a good chunk of respective market shares. Amazon is particularly planning to set up a massive warehouse and logistics center that will be its base to shipping everything from local warehouse. It is still noteworthy that given the vast geography that Australia offers with a less dense population, Amazon might take time to setting a profitable distribution network considering operating parameters and costs. As of now, recent media coverage indicates that Amazon is already in talks with about 20% of Australian food and grocery suppliers and is setting pace to give a tough time to retailers such as Coles in the $3 billion online grocery market. A latest survey by an investment bank (UBS) has particularly revealed that the US giant has contacted 23% of packaged food suppliers and 29% of non-food grocery suppliers.
 
Penetrating in the UK via Amazon Go and making it big in the US: Amazon.com is gearing up to become a major retailer in the U.K. grocery market. The company has plans of opening checkout-free grocery store, Amazon Go, in the country as the US giant steps up its efforts to crack the $800 billion global market. The group got approval from the UK’s Intellectual Property Office for trademark registration of several Amazon Go slogans. The European Union is said to be reviewing a similar application. Moreover, AMZN is testing three formats for brick-and-mortar groceries on its home turf in Seattle, including drive-thru kiosks and a supermarket location that amalgamates online and in-store shopping. AMZN has opened a futuristic test store in Seattle that has no cashiers or checkouts. Instead, it uses sensors and a smartphone application to top up customers’ ‘virtual shopping carts’ when they remove items from shelves and place them in their bags. When they leave the store, AMZN adds up the costs of the items purchased and charges to shoppers’ accounts. On the other hand, Amazon Business expanded to the UK, provides business customers with the new features like purchase approvals, VAT-exclusive pricing, expanded VAT invoicing, and quantity discounts. Amazon Business, launched in Germany last December, has enrolled more than 50,000 business customers and more than 10,000 sellers, and added a new VAT calculation service that makes it simpler for sellers to provide VAT invoicing to business customers.
 
Betting on Brick-and-Mortar Bookstores: AMZN is planning to open a new brick-and-mortar bookstore in Los Angeles. The company has applied for a building permit very recently. AMZN is now betting big on the physical stores in the United States including book shops and grocery stores. The company wants to build a 5,227-square-foot store at the Westfield Century City mall, according to the city’s record. The main project application has received initial check approval earlier this month but the building permit is still pending. Currently, AMZN operates bookstores in Boston, San Diego, Portland, and Seattle. The company is looking to build additional stores in Chicago, New Jersey, New York City, and Bellevue. Moreover, Amazon Books are a physical extension of Amazon.com, mixing benefits of online and offline shopping. The company’s physical bookstores showcase books chosen based on customer ratings, pre-order and sales numbers. Additionally, AMZN is even considering to enter the multibillion-dollar pharmacy market. The e-commerce giant has started hiring experienced people from the pharmacy space to build a team. According to a health investor, the online retailer’s entry into the pharmacy could create problems for the pharma companies. 

Segment Results for North America (Source: Company reports)
 
Focusing on nascent Indian e-Commerce market: Based on Forrester research, the Indian e-Commerce market is forecasted to reach $64 billion by 2021, growing at a five-year CAGR of 31.2%. Amazon eyed this huge market opportunity in India which was still in nascent stage and entered the country in 2013. As per a report from Internet and Mobile Association of India, India’s online population is expected to reach 450 million - 465 million people by June 2017. Amazon is making heavy investments in the country and has already invested more than $2 billion while planning to invest $3 billion more. Accordingly, AMZN is moving fast in the country and their prime selection rose by 75% since launching the program nine months ago. They also increased the fulfillment capacity for sellers by 26% already this year. Amazon even announced 18 Indian Original TV series, and has recently introduced a Fire TV Stick optimized for Indian customers with integrated voice search in English and local language (Hindi).
 
Positive guidance: For the second quarter of FY 17, AMZN guided the operating income to be in the range of $425 million to $1.075 billion. Net sales are expected to be in the range of $35.3 billion to $37.8 billion. That compares with operating income of $1.3 billion on sales of $30.4 billion in the same period a year ago. Accordingly, the net sales is expected to grow between 16% and 24% compared with the second quarter 2016. This guidance projection includes an unfavorable impact of approximately $720 million or 240 basis points from foreign exchange rates.
 
Recommendation: AMZN stock generated over 30% in this year to date (as of May 25, 2017). Amazon has surpassed its own targets during the first quarter of 2017 while its AWS division’s outlook seems to be very promising. Amazon’s Prime has also benefitted over the past year at the back of Audible Channels, Twitch Prime, Prime Reading, and the like, and is expected to witness further growth. Footprint expansion across the globe is expected to add to value generation. Continued acceleration of US e-commerce growth (as seen in each of the past 3 years) sums up the story quite well and the same is expected for most of the other geographies that Amazon is venturing / expanding into. We give a “Buy” recommendation on the stock at the current price of $ 980.40
 

AMZN Daily Chart (Source: Thomson Reuters)
 

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