In an attempt to look at the "regional Amazons" such as Sea, MercadoLibre and Jumia, I had to analyze Amazon first with a focus on the retail business.
The problem with retail is that low profits margins. For example, the operating profit margins of Walmart, Costco and Kroger are 3.9%, 3.1% and 2.3% respectively. Chinese online retailer JD.com with a similar business model as Amazon has an operating profit margin of 1.9% while Sea, MercadoLibre and Jumia are all losing money. The operating profit margin of Amazon is 5.24%. Why is Amazon doing better than these other online retailers? The cloud computing business, AWS.
In the past four years, the North America segment revenues grew by 28.0% annually with operating income growing by 49.0%. The average operating margin of the segment was 3.4%.
International revenues grew by 20.5% and the company is still losing money on this front with an average operating loss margin of -3.2%.
Overall, the retail and technology businesses grew by 25.4% with operating profits growth of 64.7%.
AWS revenues in that period grew by 45.2% and operating income by 57.2% with an average operating profit margin of 24.8%.
Unfortunately for us, we will need to value the whole company and not just AWS.
I've used both the discounted owner's earnings (available on the research partnership) to value Amazon and then used Operating PE as an exit multiple to look at possible stock prices in 5 years. Operating PE was used because of the high correlation with price.
The analysis gives us an expected return of 35% per year. Does it mean that Amazon is a good investment?
Not really.
It is a good investment if you're going to hold it forever but in the coming years, anything can happen. A stock with a PE ratio of over 100 is never stable.
There are antitrust probes against the company and one bad news can crash the stock price since market expectations are high on it. Moreover, it is heavily owned by passive funds. We need to use a big margin of safety.
Amazon today is in the same situation that Microsoft was in 2000. It was a great business with a great future, which even looks cheap considering past growth but it had crazy valuations (PE ratio of 80). As the dotcom bubble crashed, Microsoft stock price crashed and we had to wait 16 years to break even on the investment.
I'm not saying that Amazon is a bad investment. Those people who invested in Microsoft in 2000 are making money today even if they had to wait 16 years but those who waited and invested in 2008 are making a fortune.
Read the full analysis and research on my research partnership: https://ishfaaqpeerally.teachable.com/courses/ishfaaq-investment-research-partnership/lectures/24480587