March 13, 2020 - 9:44pm EST by
2020 2021
Price: 1,785.00 EPS 28.73 0
Shares Out. (in M): 505 P/E 62.12 0
Market Cap (in $M): 901,425 P/FCF 25.12 0
Net Debt (in $M): 23,414 EBIT 0 0
TEV (in $M): 924,839 TEV/EBIT 0 0

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Executive Summary

The worldwide virus outbreak will accelerate the adoption of Amazon’s services. The market’s recent indiscriminate selling has created a great entry point to own one of the world’s best companies. Although Amazon is one of the most widely known companies with a big market cap, its gigantic total addressable market, and current penetration levels show that there’s still plenty of room for growth. A previous case study from SARS and the recent development in China under lockdown foretell how lifestyle will be altered by the unfortunate COVID-19 pandemic and pace of migration to cloud computing and e-commerce will further accelerate.


Business Overview

Since everyone is most likely very familiar of this company, I do not want to spend too much time on this. Amazon is the dominant player in both e-commerce and the infrastructure cloud services (IaaS). It also has a very profitable advertising business that sells ads space to third-party sellers on the Amazon website. Retail sales from North America accounts for 60% of the revenue. International retail sales and AWS make up about 26% and 14% of the company’s revenue respectively. Japan, Germany, and the United Kingdom are Amazon’s biggest international markets making up over 60% of Amazon’s total international revenues.


There is still a long growth runway for Amazon’s retail and AWS businesses.

In e-commerce, Amazon’s top markets still are way behind China in terms of E-commerce penetration. The U.S., Japan, and Germany contribute over 70% of Amazon’s revenues but the e-commerce penetration is only at less than one-third of China’s.


Total Retail Market(B)

E-commerce Penetration(B)


















22.3% based on 2019 figures)


On cloud computing, based on Gartner’s 2020 forecast, worldwide total cloud service will grow 17% and IaaS will grow 25% this year. Total cloud revenue worldwide is estimated to be 266B this year, representing only 14.3% of the total software spending, indicating that we are only at the early-adopter phase of the growth cycle.


When Gartner made this forecast on Jan 15, 2020, it obviously did not foresee the impact of the COVID-19 virus. I believe the virus outbreak will further accelerate the adoption in both e-commerce and cloud computing.


Behavior changes during an outbreak

China during the SARS epidemic

According to the South China Post, “the Sars epidemic of 2002 and 2003 became a ‘watershed moment’ for Alibaba Group Holding”. ( consumer-facing Taobao was launched during the SARS outbreak and has been growing ever since. JD was an offline operation back then and pivoted to e-commerce because of SARS. New habits take time to form.


China during the COVID-19 pandemic

Alibaba CEO Daniel Zhang during his ’19 Q4 conference call also mentioned China’s e-commerce experienced tremendous growth after SARS.  He firmly believes this time there will be again “a change of behavior among consumers and enterprises.” China was far behind in SaaS adoption before the virus but COVID-19 forced everyone to look for remote solutions. Regular schoolteachers had to learn how to do teleclass on the fly with Zoom – they found out Zoom had the best broadcasting quality among the competition. Demand for grocery delivery services such as Alibaba’s Freshippo skyrocketed. Tencent, Alibaba, and ByteDance rolled out their enterprise communication tools similar to Slack(Slack isn’t available in China). I also strongly believe both JD and BABA are strong buys here.


The world will follow a similar development like China

It’s very clear that this virus has become a pandemic. It’s only a matter of time before many countries see the infected reach at least in the thousands if not more. Italy has fallen and the rest of Europe will fall soon. We already see infection counts reach alarming numbers in Amazon’s biggest international markets -- Germany, Japan, and the U.K. The U.S., once ramps up its virus testing capacity, will have to drastically raise its infection numbers too. Even without a draconian restriction on citizens’ movement imposed by the governments, businesses have already canceled business trips and moved events fully online. People are voluntarily staying at home to reduce their own infection risks. Working and shopping behaviors will have to drastically change during this period of health care. If it took an authoritarian China 40-50 days to contain the virus, I believe it will take western democratic countries at least that much time, if not longer, to quell the virus spread. Depends on who you believe, it takes about 30-60 days of repetition for the new behavior to stick. When we come out of this crisis, I believe a lot of people will be wired in a different way.


E-commerce acceleration

While we are unlikely to see mature e-commerce categories such as e-books and electronics to pick up shares further, underpenetrated categories will greatly benefit from this crisis. Grocery is a big category that’s very likely to take off. Grocery Dive said U.S. online grocery sales in 2019 grew 15% but still its share is only at 6.3%. ( All the big retailers like Amazon and Walmart that have the resources to invest in the online/omnichannel strategy will further take market share from local and regional weak players that lags in terms of technology. Consumers in this environment prefer delivery or curbside pick-up that minimize person-to-person contact. Retailers without such capacities will lose many customers who might not look back after this is over. In the U.S., Amazon Prime continues to increase its free one-day and same-day deliveries. Amazon Fresh, which previously cost 14.99, is now a free benefit for Prime members. Grocery delivery orders more than doubled in Q4, indicating good momentum even before the spread of COVID-19. If people have to stay at home and watch the paint dry, Amazon’s delivery speed becomes a big differentiating factor.

When people start to shop more frequently on Amazon, the Prime membership naturally becomes more appealing. For almost the same price as a Netflix monthly subscription, Prime members get the best delivery service plus a video streaming service, and a music streaming service. Prime membership should be a no-brainer for the cost-conscious consumers who don’t want to pay an additional 20 bucks a month for Netflix + Spotify. Bezos revealed that Prime membership already hit 150 million at the end of 2019, indicating that Prime was already resonating with many customers. I believe the membership count will further increase because of COVID-19. As these non-Prime members convert, they should naturally increase ticket size and order frequency.

Another category which currently has very low e-commerce penetration level but will likely get more traction is healthcare items and drugs. For things like sanitizers, toilet papers, and face masks that could possibly be out of stock, people will check Amazon’s inventory online first before driving to a brick-and-mortar store. Furthermore, older people with chronic diseases will also reduce their trips to the pharmacy and hospitals in fear of infection because COVID-19 is the deadliest to the elderly and people with pre-existing conditions. Amazon’s online pharmacy PillPack should see a surge in interest. Amazon Care, although currently available only to Amazon’s own employees, should also see increased usage, accelerating its development.


Cloud Acceleration

More and more companies will ask their employees to work at home, giving a boost to SaaS providers. Companies are scrambling to find a suite of online tools for working remotely. Internal and client-facing communication tools will see a huge jump in their user base. I already mentioned earlier that Zoom is experiencing a big demand surge. Other companies such as Slack and RingCentral will also benefit. Companies that previously were hesitant to get to the cloud now have no choice but to go along. One might wonder how Amazon the IaaS leader fits into the growth of SaaS usage. The answer is that a lot of these SaaS companies build their software on IaaS. Let’s get back to the example of Zoom. Per its S-1, Zoom services“utilize Amazon Web Services and Microsoft Azure for the hosting of certain critical aspects of our business.” This article lists companies that are on record publicly using AWS and just to pick out a few big SaaS players here: Adobe, Autodesk, Slack, Wix. ( I believe this is a watershed moment for enterprise SaaS companies just as SARS was for China’s e-commerce companies. This category will grow even faster, and AWS will grow together with its SaaS customers.


Latest conference calls from Slack, DocuSign, and Zoom revealed that there has been a big surge in sign-ups of their free entry-level services. As the big wave of new users spend more time play with these apps and gradually get “hooked”, they will convert to paying users down the road. A big portion of SaaS sales with enterprise customers involve in-person visits so the virus will negatively impact deal-closing. Enterprise sales will take a short-term hit while online self-help revenues/sign-ups surge. Once the virus dies down, I expect a surge in enterprise deals. Additionally, it turns out SaaS companies are not the only companies that are big on IaaS. Many other likely winners from consumer behavior change also spend big bucks on AWS. The same article mentioned above list Netflix,Twitter,Spotify,Reddit,Disney,Dow Jones, and FT(people will read more news) as AWS customers.  



This is a rough estimate based on Amazon’s 2019 results and my growth projections. We all know Amazon’s margins are depressed as a result of its overinvestment in its retail division. I assume in a more normal situation that Amazon’s 1P business generate 6% net profit margin, about 2% above Walmart’s. The 177B revenues include Amazon’s worldwide first-party sales and its Prime membership revenues. 3P sales are mainly commissions Amazon from third-party sellers and 20% net margin is a much lower figure than Alibaba’s. Ads sale net margin is roughly in-line with Google’s margin and much lower than FB’s. The multiples assigned each segment are arguably a bit optimistic but are justified given Amazon’s dominant position, the long-term growth projection, the vast TAM, and the accelerated digitalization because of the virus outbreak.



1P sales

3p Sales

Ads Sales







Net Profit Margin





2020 Growth





2020 Profit
















SOTP Valuation: 1530B

This excludes the value of Twitch (a huge e-sports play) and any other equity investments held by Amazon.

Amazon’s current market cap is about roughly 900B, implying a 70% upside.



Untimely order fulfillment: JD and Alibaba had trouble fulfilling orders so it’s possible Amazon will face the same issue. The Chinese e-retailers experienced a supply shock because factories were shut down for a good month when the virus raged in China. Also, Alibaba’s delivery system collapsed because their third-party couriers failed to resume operation (JD’s own delivery team had no such problem.) As the situation in China is now fully under control, the supply chain is already back to 60% capacity and in April we will see China’s manufacturing capacity fully recover. So, Amazon might not have an out-of-stock problem as its Chinese counterparts did. But it remains to be seen how the delivery system in the U.S. will fare under stress. In the scenario of a full China-style lockdown, delivery speed will slow down, and the user experience will deteriorate.


$400 hand-sanitizers. this seriously has to stop. It doesn’t look good on Amazon. At the time of this writing, it seems that the price gouging has stopped and let’s hope it stays this way.


New behaviors do stick. Although I don’t count on every new customer to stick with Amazon after the virus dies down, my thesis will not stand if everyone goes back to their old habits.


Widespread infection among Amazon’s employees and the company is forced to shut down operations.  This is possible although not likely. Amazon’s data centers and warehouses are scattered around the world so virus break at a single location should not affect the whole operation. 




I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Increased e-commerce and cloud computing adoption as a result of the widespread of the COVID-19 virus

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