After completing Baird’s fourth quarterly inventory survey and Marketplace field checks, analysts at the firm have added confidence in their growth expectations and are modestly increasing out-year estimates, driven by strength in Retail (category penetration); Technology (AWS); Media (Kindle ecosystem) and Advertising. They remain constructive on Q4 top picks Amazon.com, Inc. (NASDAQ:AMZN) and Google Inc (NASDAQ:GOOG) on share gains in a mixed retail environment (Comscore +9%). However, with shares up 26% and 24% QTD, respectively, analysts prefer to add to positions on pullbacks.
Key takeaways from Q4 Inventory Survey of Amazon
1) 22 million items are now eligible for Prime shipping (+2% Q/Q)
2) Despite the later start to holiday shopping, we see high levels of “out of stock” present in Home & Kitchen, Electronics, Home Improvement, Appliances, and Health, suggestive of a strong end to the selling season
3) Fastest item-growth categories are Electronics, Cell Phones, Video Games, Industrial & Scientific, and Jewelry
4) Amazon.com, Inc. (NASDAQ:AMZN) App Store now has 145k Android apps – an increase of 20% since Q3 (+120% since Q1).
Plenty of room for Prime expansion
In Baird’s survey, only 11% of all physical items are eligible for Prime shipping – including 25% of media products and just 6% of non-media products. Analysts estimate there are at least 15 million paying Amazon Prime members, and these shoppers typically order 3-4x more units than non-members, with a natural inclination toward buying Prime-eligible products. They see further Prime product availability as creating a virtuous cycle of increasing subscriptions, further category penetration, and greater unit sales velocity.
Uptick in first-party inventory in key categories
The survey indicates that still nearly 90% of products in Amazon.com, Inc. (NASDAQ:AMZN)’s catalog (excluding digital) are listed by third party sellers, including nearly 95% of non-media (long-tail) items.
However, there was a noticeable uptick in Amazon.com, Inc. (NASDAQ:AMZN)’s portion of first-party inventory in specific categories, such as Pet Supplies, Tools & Home Improvement, Appliances, Grocery and Home & Kitchen. Analysts believe these represent categories in which Amazon.com, Inc. (NASDAQ:AMZN) is moving to take greater share.
Analysts maintain an Outperform rating, raising their price target to $425, based on a combination of 30x 2014 FCF estimate and 2x EV/Sales, supported by Baird’s DCF analysis. Analysts note that shares are up 26% QTD (vs. +7% for NASDAQ), and they would be buyers on any meaningful pullbacks.