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Amazonstan

Amazonstan – a small but influential, imaginary, sovereignty with stellar revenue growth, the envy of developed Western economies.

A quixotic dream. The Jeff Bezos headed company has a valuation equivalent of almost $USD1.3 trillion, equal to the GDP of a handful of small African nations (Australia’s GDP is expected to come this year just under $1.5 trillion) and a business which spreads and influences the facets of everyday global life. The Seattle, USA, based company is the world’s largest online retailer and in its own words offers “Earth’s Biggest Selection” of products and services. Millions rely on its services from retailing, cloud computing and online entertainment.

Amazon shares hit record highs up more than 40% from mid-March, and more than likely growth continues in the foreseeable future. It is possible the tech giant is one of the few to emerge from the COVID-19 crisis stronger than ever. For instance, some analysts project Amazon’s online grocery business could produce $70 billion in gross merchandise volume by 2023, up more than 3X from 2019 and recent Covid 19 sales spike.

But last week after posting first quarter results Amazon’s price hit turbulence, dropping almost 10%.

Q1 revenue came in at $USD75.5 billion, up +26% year on year, and beating the high end of guidance. Operating income of $4.0 billion also beat guidance but came in 1% below consensus.

The Amazon share price speed bump was Bezos’s profit guidance for Q2. He guided operating income to zero at the half year. This missed consensus forecasts by $4 billion, all driven by $4 billion of spending related to COVID-19 for increased employee protection and warehouse deep cleaning.

In Bezos’s words, “We expect to spend the entirety of that $4 billion, and perhaps a bit more, on COVID-related expenses getting products to customers and keeping employees safe. This includes investments in personal protective equipment, enhanced cleaning of our facilities, less efficient process paths that better allow for effective social distancing, higher wages for hourly teams, and hundreds of millions to develop our own COVID-19 testing capabilities. There is a lot of uncertainty in the world right now, and the best investment we can make is in the safety and well-being of our hundreds of thousands of employees. I’m confident that our long-term oriented shareowners will understand and embrace our approach, and that in fact they would expect no less.”

So taking a leaf from Bezos playbook this is a good time I think for investors to take a seat and seriously think about adding Amazon to their portfolios. Because contrary to market perception, Amazon is executing well and results are good. The company thinks long term, and historically is prepared to disregard for short-term profits for long-term value creation. Keep in mind but for the Covid 10 spending Amazon would be on track to beat Q2 consensus operating income.

Dallas Mavericks basketball team owner billionaire Mark Cuban, and Amazon shareholder, was reported as saying Amazon’s stock will continue to go “up, up, up, up, up” as more consumers rely on the company.

Some US brokerage houses like Jefferies see Amazon on a path toward $USD 4,000. Amazon was trading this week around $USD 2,320 a share.  Jefferies has a 12-month price target for of $USD 2,800 and a possible $2 trillion valuation by 2023. The central thesis around this valuation is consumer shopping behavior, increasingly and aggressively shifts to online.

In the USA online represents just over 20% of total retail sales and its growing exponentially. Australian online sales mirror this trend. Measured retail store traffic has fallen to almost zero in the US and the primary reason consumers are buying more from Amazon is to avoid physical stores.

Shelter-in-place orders and uncertainty about the safety of brick-and-mortar locations are giving Amazon an advantage over competitors. Jefferies ran a recent survey of U.S. consumers and found that Amazon was the only e-commerce retailer seeing a step up in customer spend from the outbreak. Increased online grocery purchasing via Amazon is also worth watching given that the category represents less than 5% of Amazon’s total retail sales.

Jefferies highlighted the company’s Amazon Web Services and Amazon Advertising businesses as “underappreciated” and key to helping Amazon drive profits to support investment in lower margin initiatives. AWS itself could be worth nearly $1 trillion in three years, it thinks.

President Bezos has the final word on Covid 19 in his letter to shareholders: “Regular testing on a global scale, across all industries, would both help keep people safe and help get the economy back up and running. For this to work, we as a society would need vastly more testing capacity than is currently available. If every person could be tested regularly, it would make a huge difference in how we fight this virus. Those who test positive could be quarantined and cared for, and everyone who tests negative could re-enter the economy with confidence.”

Take note Donald.

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