The value of the Amazon contract

Hi All,

Amazon currently has 310,000,000 users worldwide. In the US, there are 90,000,000 Amazon Prime Users (with free unlimited 2 day delivery, video and more) and US Amazon Prime has a penetration of circa 63% (so there are another 53,000,000 Non Prime US members), i.e. a total of 143,000,000 US accounts.

The average spend per US user per annum is $1300 for Prime members and $700 for Non Prime members - hence Amazon push for Prime subscriber growth. The key driver to join Prime is the free shipping. The average number of deliveries per annum is circa 36 for US Prime users (i.e smaller basket size, but higher frequency due to it being free) and 12 for US Non Prime users.

When you multiply it out, its circa 3.9 billion US deliveries per year (3.2bn Prime and 600m non Prime).

Amazon US faces outbound shipping fees of $16bn per annum. It charges shipping fees of $9bn. (I.e a net shipping expense of $7.2bn per annum. Despite what some think, payments to Fedex and UPS are about 20% of this - most of the expense is borne by Amazon performing their own local deliveries from their regional fulfillment centres). If Getswift was able to save them 10% of this shipping expense, it would increase Amazon US's profits by $1.6bn USD. (i.e. refer to the previous posts on how GSW will save customers money. Also, I am ignoring the revenue benefits of GSW - i.e. repeat purchases, increased basket size caused by increased customer satisfaction and so on).

If Amazon split these freight expense savings 80/20% with GSW and bank shopping cart (revenue) upside , they will be willing to pay circa $320m USD per annum. Taking out a contingency for non Prime users - even then GSW will earn circa USD $260m in revenue or circa USD 8c / delivery. (NA Williams was 15c/ delivery, so Joel / Bane may have been able to negotiate much better than this - I am just being ultra conservative in the calculations).

I think that the GSW app will be rolled out (at least) for all US Prime members - the freedom from delivery anxiety will be another incentive to join Prime and make Prime customers stickier as other US retailers roll out their own platforms. Geoff Besos is a stickler for consistency and is obsessed with customer experience, so he wont restrict the benefits of the app to a small region / subset of customers. I think it will be for all Prime users, but lets assume US prime users. So Amazon are paying 8c to try and reduce the $4 cost of delivery by 40+c. That is a bet I would make all day long.

If Getswift maintains a lean team (JM has said it will always be lean, i.e. < 100 employees), then EBITDA margins of 60% are likely. Also, although Amazon has multiple independent regions, the platform is the same - it is just an instance of the same database. These leads to economies in resourcing and execution. Ebitda margins of 60% equate to $USD157m / annum. This is circa $200m AUD EBITDA per annum. At an undemanding multiple of 10X (for such a fast growing Saas business), this is $2bn in terms of market cap. With approximately 200m shares on issue (including outstanding options), this is $10 per share.

That is not the end of this. Amazon is growing revenues by 30% per annum, and deliveries will grow also (lets say by 20% - also why I have not bothered to discount the $10 back to today, as I expect this to continue for a long time yet). The above only includes Amazon Prime US users. Including non Prime users increases EBITDA to $AUD234m per annum. Typical value investors will miss out on most of these gains, as the cash will come in in a tsunami in a material step change of transactions. Once the market realises the contracts are legit, this will re-rate massively and this is why investors need to get in early. Both the explosive growth in transactions and the high net margins make this a massive cash generating machine. I think we will also be in the situation of a high payout ratio since the customer acquisition cost is so low and retained earnings are not required to fuel growth. I.e. Both capital growth and dividends.

Also not included in the analysis are the other regions, Amazon UK, Germany, Canada, Mexico, Japan, Australia, China, India, Korea - all of these are really still in their infancy and will take off for a loooong runway of growth.

Further, as I said, Bezsos is a stickler for customer experience. He wont want to have one process for Amazon deliveries and another for his outsourced UPS & Fedex deliveries. He will want the same customer experience for all types of deliveries. This means that Amazon will push for UPS and Fedex to adopt GSW so that Prime users can have the same experience despite the delivery method. This has hidden value for GSW - once adopted by Fedex and UPS for Amazon, they can use GSW for their own deliveries too - so Amazon is impregnating these with GSW and we are getting three customers, not one. I have not included this revenue in the $10 value.

Pity we wont get to see it. GSW is not an unimportant sh**tbox like 1-page. Amazon has entrusted us with their crown jewels, which is their customer experience. Much like KFC telling me the 11 secret herbs and spices or Coca Cola adding an element to their recipe, we will become more and more material to Amazons operations. It will get to the stage where Amazon will buy us out. I dont know when, but I think its reasonable:
- We control Amazons logistics schedule.
- We are a touchpoint with the end customer
- We run on Amazon Web Services
- We run on Amazons suppliers - i.e. UPS and Fedex (Rather than competing directly with UPS on long haul freight, Beszsos can 'supply the supplier' with a critical service and create competitive tension to keep Amazons shipping rates favourable.
- If he buys us, he also has access to our best in class IP and several tier 1 customers to start a data analytics business incorporating machine learning, blockchain, big data and all those hot terms.

So, as I said, be patient! I think Joel may become Australia's youngest self made billionaire. The price went up by $2 on the contract announcement. This implicitly means a 20% chance of execution success- very very low considering what is at stake for Amazon if GSW stuff up as they scale a rollout, not to mention the recent successful integrations with other ecommerce platforms like Woocommerce, Shopify, Xero, Wordpress, and clients like Lion Nathan etc.

Good luck to all holders,
dim81
ps - the stats used here are from statista.com