MORGAN            STANLEY              RESEARCH                                                                           ...
MORGAN          STANLEY   RESEARCH                                                                                        ...
MORGAN          STANLEY   RESEARCH                                                  July 13, 2009                         ...
MORGAN          STANLEY     RESEARCH                                                                                      ...
MORGAN          STANLEY      RESEARCH                                                                     July 13, 2009   ...
MORGAN             STANLEY      RESEARCH                                                                                  ...
MORGAN              STANLEY               RESEARCH                                                                        ...
MORGAN           STANLEY             RESEARCH                                                                             ...
MORGAN          STANLEY   RESEARCH                                                                       July 13, 2009    ...
MORGAN          STANLEY   RESEARCH                                                                                        ...
MORGAN              STANLEY   RESEARCH                                                                                    ...
MORGAN           STANLEY                                                    RESEARCH                                      ...
MORGAN           STANLEY                        RESEARCH                                                                  ...
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  1. 1. MORGAN STANLEY RESEARCH NORTH AMERICA Morgan Stanley & Co. Incorporated Mary Meeker Mary.Meeker@morganstanley.com +1 (1)212 761 8042 Scott Devitt Scott.Devitt@morganstanley.com +1 (1)212 761 3365 Collis H. G. Boyce July 13, 2009 Collis.Boyce@morganstanley.com +1 (1)212 761 6578Stock Rating Amazon.comOverweightIndustry View Deep Dive into Risks and theAttractive Water is Fine…Reiterate Key Ratios and Statistics Overweight Reuters: AMZN.O Bloomberg: AMZN US Internet & Consumer Software / United States of America Shr price, close (Jul 10, 2009) $77.63 Mkt cap, curr (mm) $33,924 The digital transitions (PC + mobile) challenged our 52-Week Range $91.75-34.68 thesis on Amazon.com. Concerns about the digital media transition and potential erosion of Amazon.com’s Fiscal Year ending 12/08 12/09e 12/10e 12/11e core Media (Books / Music / Video / Games) business ModelWare EPS ($) 1.41 1.58 2.06 2.72 have been around for years. We had not been that P/E 36.5 49.1 37.7 28.5 Unless otherwise noted, all metrics are based on Morgan Stanley ModelWare concerned owing to our optimism that Amazon.com framework (please see explanation later in this note). e = Morgan Stanley Research estimates would continue to gain share of both physical + digital media sales. However, the raging success in recent quarters of Apple and its 40MM+ mobile wireless device (iTouch + iPhone) users + its uber powerful iTunes digital media distribution channel (75MM users) led us to revisit our thesis. We do deep dives into drivers, categories, and share. Our analysis focuses on: 1) Amazon.com’s past / present / future revenue drivers; 2) market + market share dynamics by business line (books, music, video, games, consumer electronics and computer hardware); and 3) recent growth drivers like Prime, international expansion, flat panel TV, Kindle, mobile applications, web services, private label, and advertising. Our positive conviction has risen after our analysis. We expect Amazon.com to continue to be a share gainer in the share gainer industries (online + mobile commerce). The structured and methodical build-out of Morgan Stanley does and seeks to do business with its platform - which took almost a decade to fully companies covered in Morgan Stanley Research. As blossom - has positioned Amazon.com to meaningfully a result, investors should be aware that the firm may increase its market share in multiple areas. Estimates have a conflict of interest that could affect the may prove conservative, especially for 2011 and beyond, objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a as revenue mix shifts to faster growing EGM (electronics single factor in making their investment decision. + general merchandise) businesses, away from media. Customers of Morgan Stanley in the US can receive We believe investors with a 1- to 5-year time horizon can independent, third-party research on companies significantly outperform the S&P 500 by owning covered in Morgan Stanley Research, at no cost to Amazon.com shares despite the move up from the them, where such research is available. Customers can access this independent research at bottom in November. We reiterate our $95 base case www.morganstanley.com/equityresearch or can call DCF value with an upside bias. 1-800-624-2063 to request a copy of this research. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.
  2. 2. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comRisk-Reward Snapshot: Amazon.com (AMZN, $78, OW) Investment ThesisRisk-Reward View: Potential for On-Going Upside Driven by Execution $ 140 FALSE 7/10/2009 2008-FY • eCommerce leader that continues to take market share from offline and $125 (+61%) 120 online competitors • Broad selection / best-in-class 100 $95 (+22% ) customer experience / ease of use $ 77.63 creates superior user experience and 80 drives loyalty • Focus on customer has led toBullCase 60 $60 (-23%) double-digit active customer / seller 40 growth Key Value Drivers 20 • Active customers eclipsed 90MM and 0 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 further customer growth should drive Base Case (Jul-10) Historical Stock Performance Current Stock Price continued revenue growth • Continue revenue per active Upside 71x Upside Assumes EGM businesses remain especially robust as customer expansion driven by Prime Case Case 09e Amazon.com gains more retail share and, to a lesser degree, the and selection $125 EPS company participates in digital distribution upside for of books, Potential Catalysts video and games. Assumes Amazon.com continues to add products and selection and gains related share. Assumes 5-yr. • Faster-than-expected economic revenue CAGR (C08-C13E) of 17% and EBITDA margins expand recovery could spur commerce to 10.4% in C2018E. growth Base 60x Base Assumes Amazon.com continues to benefit from challenging • Additional retail bankruptcies could Case Case 09e economy and Amazon.com’s business continues to significantly continue to shift sales online $95 EPS outperform overall eCommerce. Digital distribution impacts • Growing inventory could force business, but Amazon.com is able to participate in some of the retailers to seek additional channels digital transition. Assumes 5-yr. revenue CAGR (C08-C13E) of 15% and EBITDA margins expand to 9.7% in C2018E. to move product Downside 48x Business slows as digital distribution negatively impacts sales of Key Debates Case Downside media and Amazon.com does not effectively find a way to $60 Case 09e participate in digital Media sales (Music, Video, Books). Assumes • Amazon.com generates 56% of CQ1 EPS 5-yr. revenue CAGR (C08-C13E) of 13% and EBITDA margins revenue from media products and expand to 7.5% in C2018E. faces competitive threat as media sales transition to digital.SWOT Analysis – Amazon.com • Investors value the business based Strengths Weaknesses on free cash flow and capitalize the 1. Brand leadership, low capital costs l 1. Price competition / product mix pressuring free cash float at the same rate as 2. Best-in-class user experience defined by near-term margins operating free cash; if growth slows, selection / convenience / reliability / low prices / 2. High exposure to foreign exchange fluctuations free shipping / powerful recommendation engine FCF flow drops and could have a 3. Seasonality + inventory risk 3. Leader in innovation + one-to-one logistics meaningful impact on the stock Opportunities Threats • Amazon.com benefits from its 1. Continued share gains in overall retail market, in 1. Execution risk in new markets / categories / non-physical presence status in many which eCommerce penetration is still low. products U.S. states giving the company a 2. Continued expansion into international markets 2. Intense competition in both core (retail) + new (both mature + emerging) with selection/Prime markets (digital downloads, eCommerce sales tax collection advantage over 3. Monetization of early-stage initiatives gaining solutions, web services, etc.) traditional retailers that could be more traction, such as Kindle, Amazon Web Services + 3. Legal (e.g., state sales tax issues, international forcefully challenged given the digital downloads (VoD + AmazonMP3) sales tax possibility)Source: Morgan Stanley Research, Michael Porter’s Competitive Strategy. economic climate 2
  3. 3. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comTable of ContentsInvestment Case P.4 Key Debate: Can Amazon.com Grow Through Technology Shifts? P.4 Highlights of Our Deep Dive P.4Amazon.coms Mix Shift and Share Gains Are Supporting Sustainable Growth P.10Secular Trends – Amazon.com As General Merchandise Retailer P.13Seismic Media Consumption Shifts Create Opportunities and Risks for Amazon.com P.15Drill Down on Media Revenue Drivers – Books / Music / Video / Video Games P.20Amazon.com Outperformance Across Segments Could Continue P.29Future Growth Drivers In Depth P.30 Books / Kindle (eBooks) P.30 Music P.36 Video P.38 Amazon Web Services (AWS) P.40 Private Labels P.41 Vertical Search Engine & Ad Platform P.42Revisiting Amazon.com’s Core Strengths P.44 Strong User + Revenue per User Trends P.44 Amazon Prime + Widening Selection P.44 International Prime and Product Category Expansion P.45 Singular Customer Focus P.46Amazon.com Financial Model P.47 3
  4. 4. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.com said, Amazon.com shares are priced for continued high ratesInvestment Case of revenue growth, expanding operating margins, and share gains within eCommerce / overall retail, which can makeAfter completing our analysis on Amazon.com, our investors uncomfortable on a short-term basis despite a strongconviction in AMZN shares has increased further and we long-term tailwind behind the company.reiterate our $95 base case value with an upside bias. Webelieve if Amazon.com can successfully manage the digital The raging success of Apple with its 40MM+ mobile wirelesstransition of its Media business, there could be upside to our device (iTouch + iPhone) users + its uber-powerful iTunesexpectations. Currently our base case assumes 15% revenue digital media distribution channel (with 75MM users) led us togrowth and EPS of $2.06 for C2010E, while our upside case revisit our thesis. We come away from our deep dive with anassumes 17% revenue growth and EPS of $2.42, which even higher conviction in Amazon.com as an investment thanrepresents 15% upside to the Street’s $2.10 estimate. we had going in. We believe the combination of more product categories, more Prime customers, and more internationalKey Debate: Can Amazon.com Grow Through penetration will drive Amazon.com’s growth for years.Technology Shifts?Each of Amazon.com’s media (BMV) businesses – Books / • Our model assumes Amazon.com’s EGM revenueMusic / Video / Video Games – is going through two surpasses Media revenue by CQ4:10, up from 42% offundamental technology shifts: 1) distribution shift from offline revenue in CQ1 and 27% in 2005.to online and 2) format shift from physical to digital. The onlyapparent potential rub for on-going powerful growth from • We model EGM revenue growing at strong 26-28% ratesAmazon.com appears to be the transition to digital media. The (or potentially much higher) in 2009-2012E as: 1) online +rapid share gains by the iTunes ecosystem have sharpened offline share gains continue; 2) consumer electronics +our focus on the challenges that these shifts pose. computer hardware (together, 23% of C2008E revenue) benefit from digital transitions; and 3) other EGM productsExhibit 1 (such as toys, home improvement, and apparel, estimatedAmazon.com EGM Could Surpass Media Business at 16% of C2008 revenue) benefit from rising selectionAs Early As CQ4:09, and Likely No Later Than and awareness.CQ4:10 • 100% We estimate annual Media revenue growth in the 2-6% 90% range in 2009-2012E, down from 16-31% over the past % Share of Amazon.com Total Revenue EGM to Surpass Media % 80% four years, owing primarily to: 1) digital share gains in Share of Revenue in CQ4:09 - CQ4:10 70% music, video and books and 2) console cyclicality in 60% 50% games. 40% 30% Highlights of Our Deep Dive 20% Competitive fortress creates sustainable competitive 10% advantage. Over the years, Amazon.com has methodically 0% CQ1:01 CQ1:02 CQ1:03 CQ1:04 CQ1:05 CQ1:06 CQ1:07 CQ1:08 CQ1:09 CQ1:10E CQ1:11E built a business with the sole purpose of providing a trusted EGM Revenue % Share Media Revenue % Share consumer retail experience and being structurally positioned to Media % Share Trendline (y = -0.0001x2 - 0.0038x + 0.8185 R2 = 0.9821) EGM % SHare Trendline (y = 0.0001x2 + 0.0038x + 0.1594 R2 = 0.9791) do so with a low-cost operator model and a unique logisticsSource: Company data, Morgan Stanley Research infrastructure.We continue to believe that consumer Internet companies Three Amazon.com statements over the years stand out,that care most about customers (while supporting representing the mission of the company: 1) to be the world’scompelling increasing-returns business models) will most customer centric company; 2) start with the customer andperform best as investments over the long-term. Minimal work back; and 3) ‘Amazon and done.’ While the mission isswitching costs associated with the Internet make a low-cost simple, what the company has built makes it difficult foroperator, customer-centric model key for success. No competitors to gain an edge, especially now that most ofcompany epitomizes “low-cost operator” and Amazon.com’s infrastructure is in place to reach its goals. As“customer-centric” better than Amazon.com, in our view. That well, Amazon.com sits at just 7% global market share of an 4
  5. 5. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comindustry (eCommerce) that is just 5% of its addressable for the transition to digital from Amazon.com (iPods, flat panelindustry (retail), or an Amazon.com share of total global retail TVs, cables, stereo accessories, etc), providing an offset toof less than 0.4%. Continued growth will be driven by its some potential deterioration in music and video from digitalfirst-class brand name / customer service + broad selection of over time.products that most consumers need, and, increasingly –thanks to mobile devices – a storefront that can be nearly …and International is still early: Amazon.com hasanywhere, anytime. continued to extend its Prime initiatives with launches in Japan in June 2007, Germany and UK in November 2007, and France in October 2008. The growth rate of Amazon.com’s international business is now starting to feel the positive effectsThree areas will be at the core of Amazon.com’s future of Prime initiatives as the international business has nowgrowth: grown faster than the U.S. for two consecutive quarters after eight quarters of the U.S. growing faster than international –1. Gaining a greater percentage of the legacy physical media international accounted for 47% of revenue in CQ1. An businesses as they decline and competitors go bankrupt; additional driver of growth in international markets has been the product category expansion that has occurred over the past2. Continuing to build its digital platform to compete with two years as 16 international product categories were added in well-positioned companies such as Apple for digital 2007 and nine in 2008. dollars; and3. Gaining more share of non-media products, specifically electronics, and increasingly becoming the destination location for all devices that play digital books, music, and video.On the media front, Amazon.com seems very well-positionedin books with Kindle, its eBook platform, and its emerging opendistribution platform. The MP3 market will be more of achallenge, although Amazon.com should continue to gainshare in physical CDs as some competitors go bankrupt andothers reduce shelf space allocation, and if an alternative to theiPhone emerges then Amazon.com’s MP3 product looks muchstronger. Video is at a very early stage and we believeAmazon.com has a good product in Amazon Video on Demandand we expect the company could be much more aggressive inthis area over time as more digital content becomes available.Finally, video games appears to be the segment showing theslowest transition to digital and is a category which appears tobe gaining retail shelf space at the cost of Music and Video.Amazon.com is very focused on the video game segment andrecently announced its entrance into the used game market.We expect the digital transition to occur eventually, but believeit could still be three to five years away.Electronics and General merchandise sales making up thedifference... Amazon.com has become increasingly reliant onnon-media categories for growth and EGM now accounts for42% of revenue with 38% Y/Y revenue growth in CQ1. Thedata suggest customers are purchasing much of the equipment 5
  6. 6. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comExhibit 2Amazon.com Revenue Driver Drill Down – Media (Music / Video / Book / Video Games) Growth Slowing WhileEGM (Consumer Electronics / Computer Hardware / Apparel / Toys...) Growing Rapidly... Amazon.com Estimated Revenue by Segment Mix shift occurring as EGM 100% 2% 3% 3% segment continues to gain share - 19% now at 39% of revenue vs. 27% 80% 27% three years earlier. 10% 39% 11% Media (Books / Music / Video / % of Total Revenue 60% 15% Video Games) = 58% of revenue 14% 13% in C2008 vs. 70% three years 14% earlier. 40% 10% 10% 6% 20% 40% 35% 28% 0% 2001E 2002E 2003E 2004E 2005E 2006E 2007E 2008E Books Music Video Other Media Revenue (Video Games) EGM Revenue Other (Web Services, etc.)Source: Morgan Stanley Research, Company Documents, IDC, Morgan Stanley Enterprise Hardware Team (Katy Huberty), Morgan Stanley Media Team (Ben Swinburne), Veronis Shuler, NielsenVideoscan, Best Buy, Circuit City, Game Stop, Target, Wal-Mart, The Association of American Publishers, NPD Group, The Recording Industry Association of America, The Consumer ElectronicsAssociation, TWICE Market Research.Exhibit 3...Consumer Electronics and Computer Hardware Have Risen to an Estimated 23% of Amazon.com RevenueWhile Music Has Fallen to an Estimated 6% Amazon.com Estimated Revenue by Segment Consumer electronics and 100% 2% 2% 3% computer hardware accounted for 13% 15% 16% an estimated 6% of revenue in 2% 80% 4% 5% C2001E, but rose to an estimated 10% 8% 10% 23% in C2008E. % of Total Revenue 11% 13% 60% 15% Conversely, Music represented an 14% 13% estimated 14% of revenue in 14% 40% 10% 10% 2001E, but declined to an estimated 6% in 2008E. 6% 20% 40% 35% 28% 0% 2001E 2002E 2003E 2004E 2005E 2006E 2007E 2008E Books Music Video Other Media Revenue (Video Games) Consumer Electronics Computer Hardware Other EGM Other (Web Services, etc.)Source: Morgan Stanley Research, Company Documents, IDC, Morgan Stanley Enterprise Hardware Team (Katy Huberty), Morgan Stanley Media Team (Ben Swinburne), Veronis Shuler, NielsenVideoscan, Best Buy, Circuit City, Game Stop, Target, Wal-Mart, The Association of American Publishers, NPD Group, The Recording Industry Association of America, The Consumer ElectronicsAssociation, TWICE Market Research. 6
  7. 7. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comExhibit 4Amazon.com Revenue Drilldown Indicates Importance of Books and EGM…This Is Good News C2001E C2002E C2003E C2004E C2005E C2006E C2007E C2008E C2009E C2010E C2011E C2012E Com m entsAm azon.com Total Revenue ($MM) $3,122 $3,933 $5,264 $6,921 $8,490 $10,711 $14,836 $19,166 $21,968 $25,057 $28,725 $33,501 While revenue grow th rates may slow over next few years ow ing to law of large Y/Y Growth -- 26% 34% 31% 23% 26% 39% 29% 15% 14% 15% 17% num bers, recession + physical to digital m edia transition, a few years out, revenue Q/Q Growth -- -- -- -- -- -- -- -- -- -- -- -- grow th could re-accelerate ow ing to EGM m ix shift + on-going online share gains. Media Revenue ($MM) $2,456 $3,099 $4,049 $5,102 $5,931 $7,066 $9,243 $11,083 $11,694 $12,154 $12,406 $13,022 Faster grow ing EGM business m ay be larger than stronghold BMV business w ithin Y/Y Growth -- 26% 31% 26% 16% 19% 31% 20% 6% 4% 2% 5% 5 quarters. % Share of Total 79 79 77 74 70 66 62 58 53 49 43 39 Books $1,249 $1,429 $1,908 $2,452 $2,946 $3,342 $4,443 $5,328 $5,611 $6,006 $6,330 $6,605 Could becom e industry leader (surpassing Barnes & Noble) by 2010E, future Y/Y Growth -- 14% 34% 28% 20% 13% 33% 20% 5% 7% 5% 4% grow th likely im pacted by law of large numbers + rising digital com petition. % Share of Media Revenue 51 46 47 48 50 47 48 48 48 49 51 51 % Share of Total Revenue 40 36 36 35 35 31 30 28 26 24 22 20 Core Books Revenue $1,249 $1,429 $1,908 $2,452 $2,946 $3,342 $4,439 $5,261 $5,343 $5,525 $5,593 $5,653 Core business grow th slow ing, but Kindle + Kindle app devices (iPhone) should Y/Y Growth -- 14% 34% 28% 20% 13% 33% 18% 2% 3% 1% 1% help offset. Kindle Book Revenue $0 $0 $0 $0 $0 $0 $3 $68 $268 $481 $737 $952 Leading m arket w ith Kindle store / hardw are...competing devices / stores m ay Y/Y Growth -- -- -- -- -- -- -- -- 297% 79% 53% 29% lim it Kindle hardw are grow th. Kindle Units (Cumulative) 0 0 0 0 0 0 75 560 1,500 2,350 3,326 4,251 Purpose-built Kindle has created a new m arket for e-books. Y/Y Growth -- -- -- -- -- -- -- -- 168% 57% 42% 28% Tie Ratio 0 0 0 0 0 0 3 14 22 16 12 8 Non- Kindle Application Units (Cumulative) 0 0 0 0 0 0 0 0 800 1,200 1,800 2,610 Believe consumer interest in dow nloading books from Kindle store on a rising Y/Y Growth -- -- -- -- -- -- -- -- -- 50% 50% 45% num ber of devices (Apple, iPhone / tablet) w ill be high. Tie Ratio 0 0 0 0 0 0 0 0 5 8 16 20 Music $427 $508 $639 $788 $891 $994 $1,176 $1,204 $1,157 $1,110 $1,088 $1,066 Likely to continue to gain physical share in m arket that is continue to rapidly Y/Y Growth -- 19% 26% 23% 13% 12% 18% 2% -4% -4% -2% -2% m igrate to digital distribution. Likely the business line w ith m ost dow nside risk. % Share of Media Revenue 17 16 16 15 15 14 13 11 10 9 9 8 % Share of Total Revenue 14 13 12 11 10 9 8 6 5 4 4 3 Video $465 $576 $759 $981 $1,150 $1,333 $1,685 $1,974 $2,122 $2,235 $2,337 $2,418 Likely to continue to gain physical (and perhaps digital) share in m arket that w ill Y/Y Growth -- 24% 32% 29% 17% 16% 26% 17% 8% 5% 5% 3% increasingly migrate to digital distribution. Expect near-term Blu-Ray share gains. % Share of Media Revenue 19 19 19 19 19 19 18 18 18 18 19 19 % Share of Total Revenue 15 15 14 14 14 12 11 10 10 9 8 7 Other Media Revenue (Video Games + Softw are) $314 $585 $742 $881 $945 $1,398 $1,939 $2,577 $2,804 $2,802 $2,650 $2,932 Rising shelf space in traditional retailers + slow m ove to digital dow nloads should Y/Y Growth -- 86% 27% 19% 7% 48% 39% 33% 9% 0% -5% 11% m ake it m ore difficult to grow in excess of the m arket over tim e. % Share of Media Revenue 13 19 18 17 16 20 21 23 24 23 21 23 % Share of Total Revenue 10 15 14 13 11 13 13 13 13 11 9 9EGM Revenue ($MM) $594 $747 $1,103 $1,686 $2,329 $3,361 $5,209 $7,541 $9,631 $12,125 $15,344 $19,276 EGM is m ost underpenetrated business segm ent + has significant potential as Y/Y Growth -- 26% 48% 53% 38% 44% 55% 45% 28% 26% 27% 26% Am azon custom ers increasingly take advantage of grow ing non-BMV products. % Share of Total Revenue 19 19 21 24 27 31 35 39 44 48 53 58 Consumer Electronics $134 $200 $312 $473 $668 $991 $1,621 $2,452 $3,155 $3,997 $5,032 $6,289 Rising num ber of consum ers buy their digital players from Am azon ow ing to Y/Y Growth -- 48% 56% 52% 41% 48% 64% 51% 29% 27% 26% 25% selection, price, review s + related product / accessory suggestions. % Share of EGM Revenue 23 27 28 28 29 29 31 33 33 33 33 33 % Share of Total Revenue 4 5 6 7 8 9 11 13 14 16 18 19 Computer Hardw are $60 $74 $136 $239 $401 $661 $1,182 $1,929 $2,545 $3,322 $4,321 $5,579 Ongoing innovation in PC products could lead to on-going strong grow th. Y/Y Growth -- 24% 84% 76% 67% 65% 79% 63% 32% 31% 30% 29% % Share of EGM Revenue 10 10 12 14 17 20 23 26 26 27 28 29 % Share of Total Revenue 2 2 3 3 5 6 8 10 12 13 15 17 Other EGM $400 $473 $655 $974 $1,261 $1,708 $2,406 $3,161 $3,930 $4,806 $5,990 $7,408 Most underpenetrated business line provides significan grow th opportunity as Y/Y Growth -- 18% 38% 49% 29% 35% 41% 31% 24% 22% 25% 24% custom ers, selection + product lines grow . % Share of EGM Revenue 67 63 59 58 54 51 46 42 41 40 39 38 % Share of Total Revenue 13 12 12 14 15 16 16 16 18 19 21 22Other Revenue ($MM) $73 $87 $112 $133 $230 $284 $384 $542 $644 $778 $976 $1,204 Grow th should be driven by third party relationships (Target, Marks and Spencer), Y/Y Growth -- 19% 28% 19% 73% 24% 35% 41% 19% 21% 25% 23% continued expansion of Web Services, and other relationships (Chase credit card % Share of Total Revenue 2 2 2 2 3 3 3 3 3 3 3 4Source: Morgan Stanley Research, Company Documents, IDC, Morgan Stanley Enterprise Hardware Team (Katy Huberty), Morgan Stanley Media Team (Ben Swinburne), Veronis Shuler, Nielsen Videoscan, Best Buy, Circuit City, GameStop, Target, Wal-Mart, The Association of American Publishers, NPD Group, The Recording Industry Association of America, The Consumer Electronics Association, TWICE Market Research.Note: Kindle Application Units include Kindle hardware sales and devices that support Kindle content such as the iPhone. 7
  8. 8. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comExhibit 5Amazon.com Has Just 12% Share In USA Books - its Most Mature Category…and Has Less Share in Other BusinessSegments…Expect Share Gains in All Categories … C2001E C2002E C2003E C2004E C2005E C2006E C2007E C2008E C2009E C2010E Com m entsAm azon.com Total Revenue ($MM) $3,122 $3,933 $5,264 $6,921 $8,490 $10,711 $14,836 $19,166 $21,968 $25,057 Y/Y Growth 13% 26% 34% 31% 23% 26% 39% 29% 15% 14%Am azon.com Year End Active Custom er (MM) 25 31 39 47 55 64 76 88 99 110 Y/Y Growth 25% 26% 27% 19% 17% 16% 19% 16% 12% 11%Revenue Per Average Active Custom er ($) (1) $143 $142 $150 $162 $168 $180 $214 $234 $235 $240 Y/Y Growth -12% -1% 5% 8% 4% 7% 18% 10% 0% 2%USA Book Sales ($MM) $22,000 $22,033 $22,358 $23,006 $24,263 $24,197 $24,960 $24,255 $23,527 $23,763 Could becom e industry leader (surpassing Y/Y Growth 0% 0% 1% 3% 5% 0% 3% -3% -3% 1% Barnes & Noble) by 2010E, future grow th likely Amazon.com USA Book Sales 921 920 1,070 1,244 1,512 1,694 2,226 2,572 2,696 2,871 im pacted by law of large num bers + rising Y/Y Growth -- 0% 16% 16% 22% 12% 31% 16% 5% 7% digital com petition. AMZN % Share of USA 4 4 5 5 6 7 9 11 11 12USA Recorded Music Sales ($MM) 13,741 12,614 11,854 12,345 12,297 11,758 10,372 8,480 6,754 5,850 Likely to continue to gain physical share in Y/Y Growth -4% -8% -6% 4% 0% -4% -12% -18% -20% -13% m arket that is continue to rapidly m igrate to Amazon.com USA Music Sales 315 327 358 400 457 504 589 581 556 531 digital distribution. Likely the business line Y/Y Growth -- 4% 10% 12% 14% 10% 17% -1% -4% -4% w ith m ost dow nside risk. AMZN % Share of USA 2 3 3 3 4 4 6 7 8 9USA Hom e Video Sales ($MM) 11,761 15,415 18,515 19,553 17,988 18,364 17,393 15,358 13,918 12,804 Likely to continue to gain physical (and Y/Y Growth 22% 31% 20% 6% -8% 2% -5% -12% -9% -8% perhaps digital) share in m arket that w ill Amazon.com USA Video Sales 343 371 425 498 590 676 844 953 1,020 1,069 increasingly m igrate to digital distribution. Y/Y Growth -- 8% 15% 17% 19% 14% 25% 13% 7% 5% Expect near-term Blu-Ray share gains. AMZN % Share of USA 3 2 2 3 3 4 5 6 7 8USA Video Gam e Sales ($MM) 9,712 10,448 9,972 9,765 10,121 11,915 16,557 19,531 20,117 19,020 Rising shelf space in traditional retailer stores Y/Y Growth 21% 8% -5% -2% 4% 18% 39% 18% 3% -5% + slow m ove to digital dow nloads should Amazon.com USA Video Game Sales 232 377 416 447 485 708 971 1,244 1,347 1,340 m ake it m ore difficult to grow in excess of the Y/Y Growth -- 63% 10% 7% 9% 46% 37% 28% 8% -1% m arket over tim e AMZN % Share of USA 2 4 4 5 5 6 6 6 7 7USA Consum er Com puter Hardw are Sales ($MM) 18,289 17,398 17,523 17,478 18,512 20,129 22,351 22,565 22,238 21,191 Ongoing innovation in PC products could lead Y/Y Growth -- -5% 1% 0% 6% 9% 11% 1% -1% -5% to strong on-going grow th. Amazon.com USA Computer Hardw are Sales 58 68 109 160 248 398 712 1,133 1,494 1,934 Y/Y Growth -- 16% 61% 47% 55% 60% 79% 59% 32% 29% AMZN % Share of USA 0 0 1 1 1 2 3 5 7 9USA Consum er Electronic Sales ($MM) (2) 61,358 63,588 64,813 73,463 82,793 90,920 93,425 97,406 101,947 110,232 Rising num ber of consum ers buy their digital Y/Y Growth -1% 4% 2% 13% 13% 10% 3% 4% 5% 8% players from Am azon ow ing to selection, Amazon.com USA Consumer Electronic Sales 131 182 248 317 414 597 976 1,440 1,852 2,327 price, review s + related product / accessory Y/Y Growth -- 39% 36% 28% 31% 44% 64% 47% 29% 26% suggestions. AMZN % Share of USA 0 0 0 0 1 1 1 1 2 2Source: Morgan Stanley Research, Company Documents, IDC, Morgan Stanley Enterprise Hardware Team (Katy Huberty), Morgan Stanley Media Team (Ben Swinburne), Veronis Shuler, Nielsen Videoscan,Best Buy, Circuit City, Game Stop, Target, Wal-Mart, The Association of American Publishers, NPD Group, The Recording Industry Association of America, The Consumer Electronics Association, TWICE Market Research.Note: (1) Revenue per average active user is calculated by dividing annual revenue by mid-year active customers. (2) USA Consumer Electronic Sales based on TWICE market data less computer hardware sales, music sales, video sales, and video game sales. 8
  9. 9. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comExhibit 6Overarching Trends – Secular + Cyclical Positives Far Outweigh Negatives Secular Cyclical Positive Negative Positive Negative Offline to online shift Consumption of Potential accelerating Weak consumer traditional media share gains from spending Strong online players (music / video / bankruptcies / gaining share from books) shifting to challenges of brick & weaker online players digital, where piracy + mortar retailers Apple iTunes store / EGM (Electronics / iPod dominate music, Possible forex benefit General and likes of YouTube starting CH2:09E Merchandise) growth / Hulu / Netflix lead in outpacing Media video (Books / Music / Video / Video Games) International markets relatively nascent Well positioned mobile players (like Amazon.com) likely to gain shareSource: Morgan Stanley Research 9
  10. 10. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comAmazon.coms Mix Shift and Share Gains Are SupportingSustainable GrowthExhibit 7Good News: Electronics & General Merchandise (EGM) Will Be Increasingly Important to the InvestmentCase…Books / Video / Music to Decline to 22% / 7% / 3% of Amazon.com Estimated Revenue by End of 2012E 45% Over the past five years, electronics and other merchandise % Share of Total Amazon.com Revenue 40% C2008E C2012E has become an increasing Share Share 35% component of product mix due to 28% Amazon.com’s increase in product 30% categories and selection within 25% non-Media product categories. 22% 20% In CQ1, EGM accounted for 42% 15% 10% of Amazon.com’s total revenue vs. 10% 24% in C2004. As growth rates in 6% 7% physical media continue to 5% 3% decline, Amazon.com takes a 0% greater percentage of what remains and positions in digital E E E E E E E E E E E E 01 02 03 04 05 06 07 08 09 10 11 12 media, growth of electronics and 20 20 20 20 20 20 20 20 20 20 20 20 Books Music Video other categories become Books Revenue Share Linear Trendline (y = -0.0159x + 0.411, R2 = 0.9458) increasingly important to the Video Revenue Share Linear Trendline (y = -0.0066x + 0.1618, R2 = 0.9112) Music Revenue Share Linear Trendline (y = -0.0103x + 0.1513, R2 = 0.9759) investment case.Source: Morgan Stanley Research, Company Documents, IDC, Morgan Stanley Enterprise Hardware Team (Katy Huberty), Morgan Stanley Media Team (Ben Swinburne), Veronis Shuler, NielsenVideoscan, Best Buy, Circuit City, Game Stop, Target, Wal-Mart, The Association of American Publishers, NPD Group, The Recording Industry Association of America, The Consumer ElectronicsAssociation, TWICE Market Research. 10
  11. 11. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comExhibit 8Amazon.com’s Revenue Growth Increasingly Driven by EGM FX-Neutral Amazon.com Segment Revenue Growth, CQ4:05 - CQ1:09 Since CQ4:05, EGM segment 100% revenue has grown at an average Media EGM of 46% Y/Y on an FX-Neutral 90% basis, compared to 21% for Media 80% segment. FX-Neutral Y/Y Revenue Growth (%) 70% We expect EGM to continue to 60% outperform Media with continued strength in Consumer Electronics 50% and Computer Hardware. 40% 30% 20% 10% 0% CQ4:05 CQ2:06 CQ4:06 CQ2:07 CQ4:07 CQ2:08 CQ4:08Source: Company data, Morgan Stanley ResearchExhibit 9Good News: Amazon.com’s Media Segment’s Share Gains from Brick & Mortar Retailers are AcceleratingAmazon.com Media Segment Y/Y Growth Consistently Outpaces Peer Groups…Amazon.com Is Only Player inLegacy Media Retail to Make Digital Transition …It’s a Technology Platform … 50% Amazon.com Media Segment Benchmark Group - Physical Media Retailers Amazon.com continues to outperform traditional retailers owing to broad selection, high 40% customer satisfaction, and low prices. Revenue Y/Y Growth (%) 30% Growth gap could expand as some retailers close stores, 20% consumers increasingly look for discounts online, and traditional retailers look for additional 10% channels to move inventory. 0% -10% CQ1:02 CQ1:03 CQ1:04 CQ1:05 CQ1:06 CQ1:07 CQ1:08 CQ1:09Note: Benchmark group of physical media retailers include Barnes & Noble, Borders Group, Blockbuster, Netflix and Gamestop.Source: Company data, Morgan Stanley Research, FactSet 11
  12. 12. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comExhibit 10…Which Translate Into Accelerated Market Share Gains in the U.S. Amazon.com U.S. Media Revenue & Market Share, 2001-2008 Traditional retail struggles and difficult economy seems to be $9,000 9% accelerating Amazon.com share Amazon.com USA Media Revenue ($MM) Market Share (% ) 8% $8,000 8% gains. USA Media Segment Revenue ($MM) 7% $7,000 7% Digital transition could expand the gap even further as not all retailers $6,000 6% 5% will be able to participate in digital Market Share (%) $5,349 $5,000 5% $4,631 5% distribution. 4% $4,000 4% $3,581 4% 3% 3% $3,045 $3,000 $2,589 3% $2,269 $1,995 $2,000 $1,810 2% $1,000 1% $0 0% 2001E 2002E 2003E 2004E 2005E 2006E 2007E 2008ESource: Company data, Morgan Stanley ResearchNote: Market share is of total U.S. books, music, video and video games market.Exhibit 11In Declining Music Industry, Amazon.com Benefits From Secular Shift to Online and Digital Distributions andStill Has a Opportunity with Physical Distribution + Physical Media Sales Market $15,000 9% Amazon.com benefits as retailers trim music shelf space due to $13,500 8% industry declines and consumers $40 $183 $504 are force to look online for $12,000 $878 7% products. Amazon.coms Market Share (%) Total USA Music Sales ($MM) $10,500 6% $1,257 Amazon.com has started to $9,000 5% participate in digital distribution $7,500 $1,635 with AmazonMP3, but it is still $14,324 $13,741 4% early stages and competition from $12,614 $6,000 $11,814 $12,162 $11,793 $10,880 iTunes + the likes of Pandora is $4,500 $9,115 3% daunting. $6,845 2% $3,000 $1,500 1% $0 0% 2000 2001E 2002E 2003E 2004E 2005E 2006E 2007E 2008E USA Physical Music Sales USA Digital Music Sales Amazon.coms Share in USA Physical Music Amazon.coms Share in USA Digital MusicSource: Amazon.com, RIAA, Morgan Stanley Research. 12
  13. 13. MORGAN STANLEY RESEARCH July 13, 2009 Amazon.comSecular Trends – Amazon.com as General Merchandise RetailerExhibit 12Secular Trends – Amazon.com Shows Impressive Revenue Growth with 29% 5-Year CAGR Through 2008…Newer EGM Businesses / Initiatives & Media Share Gains to Lesser Degree Driving Incremental Growth 2003 - 2008 Revenue CAGR: 29% New businesses / initiatives $25 $250 driving incremental growth (Category / international expansion - EGM + 3rd party, Revenue by Segment ($B) $20 $200 Revenue Per Customer Prime, Kindle, Web Services, 39% Private Label...). $15 of $150 Total Especially strong EGM growth (47% 5-year revenue CAGR with $10 $100 17% 38% Y/Y CQ1 growth to 42% of of 58% revenue) has masked recent Total $5 of $50 slowdown / challenges in physical 42% Total media businesses with 22% 79% 56% 5-year revenue CAGR with 7% $0 $0 Y/Y CQ1 growth to 56% of 2001 2002 2003 2004 2005 2006 2007 2008 CQ1:09 revenue. Amazon.com Media Revenue Amazon.com EGM Revenue Other Revenue Annual Revenue Per CustomerSource: Company data, Morgan Stanley Research 13

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