Morgan Stanley sees 3 big opportunities for Amazon
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Morgan Stanley sees 3 big opportunities for Amazon

According to Morgan Stanley analyst Brian Nowak, Amazon has three big business segments that show the potential for significant gains in the near future. Nowak, writing in a note to investors on Thursday, highlighted the Ecommerce titan’s advertising, credit card, and subscription businesses as top performers that have room to grow – and cautioned investors against focusing on focusing on headline-grabbing areas that have failed to achieve similar success.

Amazon’s share price is up 19% so far this year

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SOURCE: Yahoo Finance

Amazon’s CEO Jeff Bezos has always been open about taking risks on products. He considers high-visibility failures like the Amazon Fire Phone as a necessary part of business, and has stated that a single success (such as the Kindle, or Amazon Prime) can offset the costs of numerous failures. Memorably, Bezos described success in this instance like “hitting a home run”. But, because of the nature of business, you do not just get four runs – you get a thousand. As a result, you should take more risk in business than baseball.

According to Nowak, the next three home runs Bezos scores could be advertising, credit cards, and subscription.

Advertising revenue, he suggested, could grow at as much as 37% annually from 2016 to 2018, making it a $5 billion business. This wouldn’t impact the company’s overall revenues by much, but it could be much more important to profit. In making the claim, Nowak cited Morgan Stanley analysis that suggested 90% of Amazon searches in the U.S. featured a sponsored product, while less than 50% did so internationally. This implies significant room for further growth.

Amazon’s subscription services (Amazon Prime and others) could grow as much as 25% per year between 2016 and 2018. Morgan Stanley’s analysis suggests that Amazon has 65% penetration of U.S. households making $75,000 a year. Once again, this growth will come from Amazon’s international business catching up with its domestic.  

The last area Amazon could outperform is in credit cards. According to Nowak, roughly a quarter of U.S. adults currently have an Amazon branded card.

Disclosure

Dominion holds Amazon in its Global Trends Ecommerce Fund.


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