Tech plays like Inc. are the hottest thing on the market right now, not only because of their seemingly infinite growth potential in a low-growth world, but also perhaps because of the halo of youthful, entrepreneurial success they cast on their owners. Yet despite an ostensibly successful 4QFY2020 ended December, PhilipCapital has maintained a contrarian “neutral” call on Amazon. 

And this has nothing to do with the shock departure of founder Jeff Bezos from the CEO position. “We do not foresee any material impact on Amazon . Rather, we are positive as the move underscores Amazon’s ongoing pivot to its Amazon Web Services (AWS) segment,” notes the research house in a Feb 5 broker’s report. AWS is Amazon’s cloud computing arm. 

AWS is the jewel in the Amazon crown despite its slowing y-o-y growth for ten successive quarters. It accounted for slightly more than one-tenth of Amazon’s 4QFY2020 revenue, up from 6.7% in 2015. It delivered an eye-popping 60% operating profit, with a 28% operating margin that towers over all other business segments. 

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Responsible for these strong results was AWS founder and chief Andy Jassy, who has been with the firm for nearly 25 years. It is he who will become the new CEO of Amazon as Bezos becomes executive chair of the Amazon board. AWS is seen to be a key pillar for Amazon under Jassy’s stewardship. 

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PhilipCapital’s ambivalence towards Amazon, rather, seems to stem more from concerns about slowing growth as post-pandemic normalisation kicks in in 2HFY2021. Y-o-y growth, the brokers fear, could slow from its high base in 2020, when widespread lockdowns were imposed globally. 

Another concern for Amazon is Microsoft’s strengthening cloud offering, which is seen to provide strong competition especially in the infrastructure-as-a-service (IaaS) cloud market. Its IaaS market share grew 11 percentage points vis-a-vis Amazon’s 5 percentage points. But a strong backlog of about US$50 billion ($66.9 billion) - an increase of 68% y-o-y - suggests that AWS’s growth will reach the mid-20% range in the near future. 

On the bright side, stay-home restrictions have contributed to a turnaround for Amazon’s “International” segment, which only turned a profit in 2QFY2020. Continued stay-home notices in the UK and Europe has seen a 57.3% y-o-y increase in revenue. 

“We expect growth to taper off in 2HFY2021 as normalcy returns. Longer-term growth lies in its push into the Indian e-commerce market. Continued investments in its overseas network may keep operating margins low in the 1-2% range,” comments PhilipCapital. 

For now, investors can take comfort in Amazon’s bullish guidance for uninterrupted growth. Guided net sales for 1Q2021 are US$100-106 billion, implying a 33-40% y-o-y increase compared to 26.4% a year ago. Operating income is seen to be US$3-6.5 billion compared to US$4 billion in 2020. 

SEE: Amazon CEO Jeff Bezos to cede role to company's cloud computing unit head

This long-term growth will be driven by the expansion of AWS’s infrastructure in India, Switzerland and Melbourne by 2H2022. Management sees “significant customer momentum” from “new migrations across industries” from established names like JP Morgan Chase, Thomson Reuters, Viacom CBS and Twitter. 

“With ongoing restrictions, we expect stay-at-home demand to continue supporting net sales in its international markets. In its 1Q21 guidance, AMZN has assumed about US$2bn of COVIDrelated costs, lower than the US$4 billion in 4Q20. We believe that as normalcy returns, a further easing of COVID-related costs may lift margins over the next 1-2 years,” note PhilipCapital. 

As of yesterday’s close, Amazon ended 0.56% higher at US$3,331.00.