Amazon Will Become A Company With A Market Value Of More Than 1 Trillion Dollars?

Recently, investment institutions have been forecasting.

This will become a company with a market value of more than 1 trillion dollars. Xiaobian's face is B, but it does see an interesting fact: Amazon's free cash flow has changed dramatically since 2015, from $1 billion 900 million to $7 billion 300 million, and it has been doing pretty well in three aspects, such as electricity providers, cloud computing, digital media and so on. What's the matter? The answers you want are here.

Looking back at Amazon's performance in the past two years, its market value has nearly doubled in the past 18 months to a level of US $360 billion.

Many people attribute it to the market's extreme AWS (Cloud Computing) business. When Amazon first announced its AWS performance in 2015, its share price soared by 14%, which is indeed one of the important valuation factors, but it is not all.

A key problem has been overlooked: Amazon's free cash flow has changed dramatically since 2015, and its free cash flow has increased from $1 billion 900 million to $7 billion 300 million in just a year.

What business logic and business strategy did Amazon do?

Let's take a look at the views of investors.

Even though Amazon's market capitalization has been skyrocketing for a year and a half, analysts at Mark Mahaney believe Amazon's stock still has room for growth.

He is very optimistic about Amazon's growth potential and believes that in the next five years, it will become the first company to have a market value of 1 trillion dollars.

Mahaney presented his views at the recently held Business Insider annual meeting, which is based mainly on the development of Amazon's core business.

Mahaney predicts that Amazon's retail business will grow by 20% every year in the next five years, while AWS cloud business will grow at an annual rate of 40%.

In the latest quarter, Amazon's retail business grew by more than 25%, up from the same period last year, and AWS business grew by 55% year-on-year.

Mahaney thinks that in the next five years, Amazon's earnings per share will reach US $82 in terms of the growth rate of retail sales and the growth rate of AWS 40%. The price of Amazon will reach US $2000 at the 25 times price earnings ratio, which means that the market value of Amazon will reach 1 trillion US dollars.

Mahaney believes that Amazon, as the leader of the North American market, has plenty of market opportunities, and this growth rate is not high.

Such estimates are based only on Amazon's current core retail business and AWS business.

Amazon is constantly investing in other areas to find other pillars of its growth. Therefore, there are other potential sources of income in the next five years. The most likely aspects are: commercial goods, groceries, shipping logistics, artificial intelligence, and virtual reality.

The data from snowballs can partly confirm Mahaney's judgement of Amazon's AWS cloud computing business: according to Amazon's third quarter earnings report, Amazon's AWS business profit margin is rising steadily every quarter.

In terms of IAAS and PAAS, it has actually become a game of a few giants. As the leader of the global cloud computing service, the next ten years will be the harvest of Amazon's cloud computing business.

After entering 2016, Amazon is in every aspect.

The strong momentum on display has also brought great pressure to our opponents.

In the US market, Amazon's Prime membership system has become a powerful weapon.

At present, 49 million 500 thousand American consumers have become Prime members, which is 24% higher than that of 40 million in early 2016. That is to say, 45% of Americans and every American family have Prime members.

Such a situation has brought great pressure to Costco, which has always been praised by the retail industry and defeated WAL-MART's Sam stores.

Costco executives recently expressed their concern about Amazon's Prime membership system in the earnings call conference, because the good market is essentially an enterprise that makes membership fees to make profits, and the rapid growth of Prime membership will inevitably give Costco tremendous pressure.

The most surprising thing is that Amazon can also get mixed up in the payment market.

According to information released by data company ChannelAdvisor, Amazon's payment service Payments now occupies 15% of the US and European markets. It is regarded as the preferred payment method after credit cards by the United States and European people. Following PayPal, it has surpassed Apple's Apple wallet Pay and Google's electronic wallet.

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Amazon has 285 million account holders, and over 23 million of them subscribe to other websites through their accounts.

There is a great possibility that payment services will become the fourth largest business of Amazon.

This is enough to see that Amazon has evolved into a company that can exert enormous competitive pressure on competitors in many business areas, and these competitors are leaders in their respective fields.

The key point is that Amazon occupies a market that contains huge commercial "money scenes" - cloud services, and actor brother has reason to believe that Mahaney's prediction may not be a joke.

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But these are just Amazon's commercial performance. What keeps the brother wondering is what kind of logic is the business strategy that has contributed to Amazon's long term unprofitable but well developed business and huge cash flow?

Our regular cognition of enterprise strategy is: is it a company that uses different products to occupy different market segments, or concentrating on one market, making large single products to obtain economies of scale? In other words, is it necessary to cut market segments with high quality and seek high profits or low price to scale economies to make cost effective?

According to the world clothing and shoe net, Amazon's strategy does not choose two at high quality and low price, but provides unlimited choice, top shopper experience and lowest price.

For many people, offering low prices and providing top shoppers' experience is still a contradiction.

Other retailers can't do that. Why can Amazon do that?

The key to this is Bezos, who can spy on one or two in his letter to shareholders in 2015. Amazon has pformed most of the costs associated with shopping experience into fixed costs, such as unlimited commodity selection, personalized recommendation and so on.

In terms of unlimited commodity selection, Amazon has a large part of its support from the third party sales platform.

Now half of Amazon's products are realized through the third party sales platform. This part is not only a cost, but also one of the main source of profits.

So the larger the Amazon, the more expensive the unlimited choice of goods will be.

And when most of the shoppers' experience is fixed cost, with the rapid growth of sales, the cost of unit sales is declining rapidly.

In addition, even in the changing parts, such as the cost of defective products in order fulfillment, when the company is committed to reducing the defective rate, the cost of the company will decrease and shoppers' experience will continue to rise.

When a company can make good use of its huge scale and convert the variable cost into fixed cost, it will create huge cost advantages.

Another interesting business logic of Amazon is to put strategy on the same thing.

In Bezos's view, Amazon knows that consumers will want products with lower prices, which will remain the same 10 years later.

So Amazon wants faster logistics and more choices.

Putting strategy on the same thing, Bezos applied it not only in retail business, but also in Amazon's cloud computing business, AWS.

It is based on this strategy that Amazon continues to invest energy and resources in several key areas to build a number of advantages in the field of cloud computing.

This strategy has made AWS take the lead in the field of cloud computing. Currently, the market share of the top three Microsoft Azure, Google GCE and Ali cloud is not as good as a AWS.

Although Google has such an artificial intelligence level R & D rival, most financial institutions have given Amazon's cloud computing service a growth expectation of bliss.

Finally, Amazon's corporate values differ from that of investment institutions, that is, the future value of enterprises lies in free cash flow rather than profits.

In a letter to shareholders, Bezos said, "why do we not pay attention to earnings per share or earnings growth first, unlike most people?" the answer is very simple: earnings can not be directly converted into cash flow. Stock value is the present value of future cash flows, not just the present value of future profits.

Future earnings are part of the cash flow of each share, but not the only important component.

Operating capital and capital expenditure are also important because they are diluting shares in the future.

In a nutshell, Bezos's answer is, in order to endure the current losses in the long run, to win the market leadership and even the franchise at all costs.

If you want to get the pricing power, there will be no way to make a medium-sized electricity supplier.

On the other hand, if there is no franchise and no market position near monopoly, he will not be able to lower the price to suppliers so as to gain more profit margins.

In his letter of shareholder, he said that he regarded the cost beyond logistics cost as a fixed cost. Without market leadership, he would not be able to dilute this part of the cost as far as possible.

I do not know whether the officials understand the value logic of Amazon, and sum up the four key points: making money in a long way, focusing on the cost dilution of long-term value, forming the scale effect after fixed costs, seeking monopoly and gaining the right to negotiate profits.

Businesses that continue to build commercial value and regularly harvest cash flow are still using technology innovation to tap into the new incremental market as a subverter and attract customers through infrastructure. Do you think investors should choose to believe that Amazon will continue to grow at a high speed or continue to ignore it?

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