Baird Equity Research analysts Colin Sebastian and Rohit Kulkarni take stock of Amazon’s position and come away liking what they see, keeping their Outperform rating on the company.
Taking inventory at Amazon
WIth the completion of our fifth quarterly inventory survey, we note robust Y/Y growth in product selection, FBA adoption, and availability of Prime-eligible SKUs. As such, we expect Amazon.com, Inc. (NASDAQ:AMZN) to continue generating above-market growth rates with key underlying growth drivers from convenience, selection, and competitive pricing. Our positive stock thesis is also based on significant market share opportunities for Amazon in Retail, Technology (AWS); Media (Kindle ecosystem) and Advertising.
Key takeaways from Q1 inventory survey:
1) Amazon is adding item selection at a rapid clip (+24% Y/Y); 2) EGM categories continue to dominate SKU growth, for example Cell Phones/Accessories, Beauty, Pet Supplies, and Industrial & Scientific; 3) 23 million items are now eligible for Prime shipping (+2% Q/Q), or roughly 10% of total; 4) Amazon.com, Inc. (NASDAQ:AMZN)’s App Store now has roughly 177k Android apps – an increase of 21% since Q4 (+165% Y/Y); and 5) Q1 revenue guidance appears relatively conservative.
Plenty of room for Prime expansion
In our survey, still only 10% of all physical items are eligible for Prime shipping – including 25% of media products and just 6% of non-media products. As such, we believe there is a meaningful opportunity for Amazon.com, Inc. (NASDAQ:AMZN) to expand Prime selection – primarily through FBA – which in turn would add more value to the program for subscribers. While the overall split between the number of items sold by Amazon and third-party sellers remained steady, certain categories in our survey seem to have greater FBA adoption – in particular Pet Supplies, Jewelry, Patio/Lawn/Garden and Baby products.
Uptick in first-party inventory in some categories
Our 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, in Q1 there was an uptick in the portion of first-party inventory within specific categories. Overall, Amazon-as-seller SKUs increased 30% Y/Y (+44% in non-media categories) with notable growth in Pet Supplies, Appliances, Home & Kitchen, Grocery, and Clothing & Accessories. We believe these likely represent categories in which Amazon.com, Inc. (NASDAQ:AMZN) is moving to take greater share.
Maintain Outperform rating and $425 price target, which is based on our DCF analysis and a multiple of 30x 2015E free cash flow.
