Business

Amazon is a strong contender for future growth

Patrick Robins

Wednesday, October 03, 2012    

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WITHIN the last couple of years, advances in technology have been moving quite rapidly, and as such, the competition within this sector has been fierce. The online retail industry is one sector that has seen significant growth over recent years. One such company that has a dominant presence in the market is Amazon.com Inc.

Amazon is a Fortune 500 e-commerce company based in Seattle, Washington. The company was founded by Jeff Bezos in 1994 and was launched in 1995. They were one of the first large companies to sell goods over the Internet. Amazon started as an online retailer of books but quickly diversified into other areas such as electronics, software, video games, clothing etc., eventually becoming the largest online retailer.

Amazon went public in May 1997 and trades on the NASDAQ stock exchange under the ticker AMZN. At the time, the company reported annual sales of US$16 million for 1996. At the end of 2011, the company reported sales of US$48 billion, which represents a compound annual growth rate (CAGR) of 31.4 per cent for the last ten years.

Adding to its revenue growth was Amazon's entrance into the lucrative tablet computer market in 2007. The company invented and released their first tablet computer called the "Kindle". The release of the Kindle signalled the company's transition into a new stage. The Kindle was created mainly as a device for reading, specifically targeted towards avid readers. Over the years, the Kindle tablet commanded a significant portion of the market share, due to an agreement between Amazon and publishers, whereby Amazon would purchase e-books at a particular price and later sell at a reduced price. This was a great strategy used mainly to attract buyers to its Kindle tablet which proved to be very positive for the company in those early years.

Newcomers to the tablet market such as Apple Inc's "iPad", Google Inc's "Nexus 7" and Samsung Electronics Co Limtid's "Galaxy Tab" created the platform for who would become the innovator, leader and game-changer in the lucrative and dynamic tablet market. The introduction of Apple's iPad in 2010 was the beginning of the end for Amazon's Kindle dominance.

Apple sold over 300,000 iPads on its first day. When compared to the Kindle, this was a far more superior and versatile device as it provides colour and full video and audio, the Kindle could only display black and white text. Later that year, Samsung made its debut into the market and, unlike the iPad, had more technological capabilities. Again, this proved to be disastrous for the Kindle.

Although there have been other players entering into the market, the abovementioned companies still dominate the top positions. Amazon's newest tablet, the "Kindle Fire" which was released in the third quarter of 2011, increased sales by 14 per cent. This however was not substantial enough to impact the company's market position. At the end of 2011, the iPad dominated the market followed by the Galaxy Tab and then the Kindle.

As the company releases its newest innovation, the "Kindle Fire HD" with improved appearance and technical capabilities, its aim is to gain competitiveness against other tablet rivals and recover its once dominant position. The demand for tablets has been growing steadily this year as consumers are enticed by the price and ease of portability. There has been relentless investment by Amazon in such digital initiatives as the Kindle e-reader and its cloud computing business infrastructure, as well as in physical warehouses to improve delivery speed and efficiency.

For many years Amazon has always reported huge sales revenue but little profit. A growth story ever since its inception in 1994, its profits have purposely been either minimal or nonexistent due in part to its acquisitions, spending on research and development, and focusing on lower profit margins in return for higher sales volume and market share gains.

The company reported second quarter results in July 2012 which showed net income of US$7 million, or one cent a share, on sales of US$12.8 billion. Analysts estimated the company would earn 2 cents a share, down from 41 cents a share, on revenue of US$12.8 billion. Even though the results did not match expectations for earnings per share, the company was able to increase revenue 29.16 per cent from US$9.91 billion a year earlier. Much of Amazon's growth in recent years has been driven by international inflows. Its sales outside North America were 44 per cent of its revenue in 2011.

Though the company has been increasing revenue, the sluggish world economy has been restraining growth a bit. There are also reports that Amazon has been struggling in a few key international markets, particularly China. In recent quarters, Amazon has been cautious about its prospects.

Despite the prevailing economic conditions, it is projected that Amazon will continue to grow approximately 30 per cent per year over the next ten years. Since the beginning of 2012, the company's share price has appreciated 29 per cent. The online retailing business is the path to growth in the 21st century and Amazon is poised to continue benefitting from its strategic position.

Patrick Robins is a Wealth Advisor at Stocks & Securities Limited and can be contacted via probins@sslinvest.com

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