By Scott Murphy

Founded in 1994 by Jeff Bezos, Amazon.com is the world’s largest internet department store, and also one of the largest companies based on revenue and stock market capitalization. Originally offering only books through its website, Amazon has expanded both the breadth of products sold through its ecommerce platform and the absolute number of services offered. The products offered range from consumer staple products to Amazon-manufactured electronic devices such as their Kindle and Echo. More than a retailer of consumer goods and electronic items, Amazon has purchased companies including Whole Foods, Ring and Audible as bolt-on businesses to take full advantage of its retail reach and to add to its overall business portfolio. Ultimately, scale and efficiency are what drive Amazon in its pursuit of building out its ecommerce platform to both sell directly to consumers and to serve as the middleman between customers and third-party sellers.

Perhaps the crown jewel of the company’s various businesses is the often overlooked Amazon Web Services (AWS), one of the world’s largest cloud providers. AWS provides the technological backbone for Amazon Marketplace and allows it to continue to drive business with a built-in cost advantage due to the industry-leading AWS platform. Overall, Amazon’s management is committed to what they call the Amazon Flywheel. Flywheel is a strategy that leverages the customer experience in order to drive traffic to the platform and to its armada of third-party resellers. This leads to a lower cost structure allowing Amazon to continually reduce prices. Central to this flywheel concept is membership in Amazon Prime. Costing $119 dollars per year, an annual membership covers free shipping on all goods purchased and provides full access to Amazon Prime Video. In May of 2021, Amazon entered into an agreement to purchase MGM Studios for $8.45 billion largely as a strategy to continue building its content library for Prime Video. It has been estimated that the true value of the Prime membership is over $1,000 per year, giving Amazon greater latitude to continue competitive pricing of its membership to 200+ million subscribers, and at the same time, maintaining a very strong lever for positive cash flow to fund its many business initiatives. Warehouse clubs such as Costco and Sam’s Club have used this model with brutal effectiveness to keep their costs low and offer customers an incredible value for their annual membership.

Valuation has always been our chief concern with Amazon’s shares and has forced us to remain on the sidelines until now. The stock has been stuck in a trading range of $3,000 to $3,250 since August of 2020, so as value investors, we feel our initial entry into the stock will prove to be good timing based on what is expected to be a very strong economy going into 2022. Amazon was able to shine during the Covid-19 economic shutdowns and provided many customers reassurance that the company can deliver, even during the most trying of times. Ultimately, the more you use Amazon, the greater the chance you will continue doing business with the company in order to get value from your Prime membership. And this leads to a greater opportunity for Amazon to capture more and more business from each of its customers due to the value delivered with each transaction.