For a few seconds on Tuesday, Amazon was worth $1 trillion. If it continues to grow as quickly as it has done over the past few months, it will surpass Apple as the world’s largest public company before the year is out.
Amazon has been doing online shopping very well since it started selling books in 1995. However, the excitement about Amazon today is less about its giant ecommerce business, more about cloud computing, advertising and its loyalty programme.
The last of those, Prime memberships, are a real boon for the company. They keep customers shopping on Amazon.com with the guarantee of two-day (or shorter) delivery and encourage them to renew their memberships by providing a slew of benefits, such as the Prime Video film and television streaming service. Increasingly, Prime members, of which there are upwards of 100 million worldwide, provide a lucrative income stream for Amazon. When the company raised the price of a Prime membership from $99 to $129 this year, customers happily absorbed the cost increase (and analysts suggested annual profit would be boosted by $2 billion).
Whole Foods has quickly turned into a Prime membership benefit. Amazon significantly bulked up its grocery business last year with the $13.7 billion purchase of the upmarket grocery chain and wasted no time in developing the business for the benefit of Prime members. Big signs in Whole Foods stores point customers towards Prime-member-only deals. Amazon.com stocks a growing number of Whole Foods products. It remains to be seen what Amazon will do with Pillpack, the prescription drug delivery service it bought this year, but it isn’t a bad bet that it will be morphed into another Prime membership benefit.
In the near term, it is perhaps worth paying greater attention to Amazon Web Services, the company’s cloud computing division, and its rapidly growing advertising business. Amazon Web Services is the market leader in cloud computing, accounting for 31 per cent of the market in the second quarter. Demand for cloud computing is growing rapidly and so, too, is Amazon Web Services’ revenue: $6.1 billion in the second quarter, up from $4.1 billion in the same period last year. Even more impressive is that operating profits at Amazon Web Services are growing faster than revenue — and that the pace appears to be picking up. Operating profit was $1.6 billion in the second quarter this year compared with $916 million a year ago and $718 million a year before that. This means that it grew by 79.3 per cent between the second quarters of 2017 and 2018 as revenue increased by 48.9 per cent.
Of all of Amazon’s many growing business, advertising, where brands pay Amazon to push their products higher up search results on Amazon.com, has provided the biggest surprise. Amazon does not break out advertising sales in its financial reports, but they make up the bulk of “other” sales. These grew to $2.2 billion in the second quarter from $945 million in the same quarter a year ago: growth of 132 per cent.
The ad growth reading prompted upgrades from several Wall Street analysts. Morgan Stanley set the bar highest with a price target of $2,500 (the shares were trading just above the $2,000 mark yesterday).
It should be difficult to recommend a company with a price-to-earnings ratio of 160, whose shares have climbed by 111 per cent in the past 12 months alone to value it at nearly $1 trillion — and it doesn’t even pay a dividend, reinvesting all its earnings in growth. Yet one cannot ignore the success stories outside of Amazon’s ecommerce business and the potential they are showing.
ADVICE Buy
WHY Beneath the company’s huge ecommerce operations, Amazon Web Services and advertising are driving growth
Quiz Clothing
Quiz Clothing is something of a conundrum. While all about it the retail sector is going up in flames, the Glasgow-based fast-fashion business is doing rather well (Miles Costello writes).
What’s the secret? Talk to analysts, such as at Peel Hunt, and they’ll say that Quiz is streets ahead of the opposition in its ability to engage with customers on social media, meaning that they keep coming back for its keenly priced jumpsuits, palazzo trousers and stylish outfits up to size 26. Talk to shareholders and they’ll say that Quiz’s attractions lie in its ability to maintain its margins, a gross 63 per cent and an underlying 10.9 per cent last year.
Talk to the company and it’ll say that its success lies in speed and flexibility. It can test new outfit ideas with customers and have them designed, made and delivered from China in as little as two weeks, putting it at lower risk of being stuck with excess stock. In addition, with the average lease on its shops of only 29 months, it effectively operates a pop-up estate that can expand or contract as needed.
Quiz was founded in 1993 by Tarak Ramzan, who is still chief executive and has two of his sons in senior positions. After a rapid expansion from its initial three shops, and an online business that began in 2005, it now operates more than 300 stores, concessions and partnerships in 20 countries.
In a trading update yesterday, Quiz said that sales had continued to grow, online and in-store, since the end of March (it clocked up a 30 per cent increase in revenues to £116.4 million and a 5 per cent improvement in pre-tax profits to £8.5 million for the previous 12 months). It’s now selling more stock through its own website than on other retailers’ portals and, when others are closing shops, it shut one but opened two new ones, in the Bluewater shopping centre in Kent, and in Oxford. The only minor blip was a £400,000 provision for money owed to it by House of Fraser.
The shares, listed on Aim at 161p in July 2017, dipped 5½p to 162p yesterday. This column recommended holding them in April. They’re not cheap, but that still feels like the right call.
ADVICE Hold
WHY Operates an efficient, flexible model that should offer improving returns