Why India Will Be Such a Big Boost for Amazon

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If there is one company that the millennials and growth investors alike both love dearly, Amazon.com Inc. (NASDAQ: AMZN) would be at the top of the list. Jeff Bezos has been able to deliver massive growth and take on many industries, and he’s been able to do it without ever promising Wall Street analysts that the company would generate massive profits in the near term.

International markets can be challenging for foreign companies, but there is a fresh view out from Merrill Lynch that Amazon is gaining a stronger and larger foothold in India. The firm’s Justin Post has been examining Amazon’s biggest new opportunities over the next 5 to 10 years. After noting how online groceries could be a hit, Post also points out that Amazon’s opportunity ahead in India could get more visibility with investors.

Post also wrote some of the opportunities in an overlap with the Merrill Lynch India Internet team. As far as what to expect from Amazon’s investment in India, the report said:

India is a potentially large eCommerce opportunity where competitive dynamics and market share is still in flux. Amazon has suggested that India could become its second largest market and plans to invest $5 billion in its India business. While there is no stated timeframe for the spend, the investment underscores the importance of India for Amazon. India revenue is small today, but the investment is financially relevant as the Amazon could be losing $500 million to $1 billion a year. Longer-term, by 2025 (we) estimate Amazon India could generate $81 volume in gross merchandize volume (~20% of total international gross merchandize volume) and $2.2 billion in operating profit.

The Merrill Lynch report also pointed out that the share has been shifting in Amazon’s favor. They see Flipkart as having the largest market share in India at 43%. On its heels, they see Amazon having 28% market share, followed by Snapdeal’s 12% market share. They said:

Amazon’s heavy investment in India and changes in regulations which may be impacting price competition have helped Amazon gain share in 2016. Some recent press reports indicate that Amazon’s India sales may have been greater than Flipkart’s sales in July 2016 (ex-Myntra and Jabong M&A, Flipkart still bigger overall). Looking forward, we assume Amazon’s m/s goes from 28% in 2016 to 38% in 2020.

With this in mind, Amazon is considered Merrill Lynch’s top 5-year Internet mega cap stock pick. The firm does have a Buy rating and $860.00 price objective — about $90.00 higher than the most recent closing price.

Merrill lynch also points out that Alphabet Inc. (NASDAQ: GOOGL) and Facebook Inc. (NASDAQ: FB) continue to deliver impressive results, Amazon’s eCommerce category is still earliest in its penetration curve. Merrill Lynch also sees Amazon gaining more share in the category than any of its peers — 60% of incremental US eCommerce sales in 2016.

Additional growth drivers for Amazon were counted as B2B, SaaS, groceries, logistics, India and autos. Merrill lynch’s investment rationale included the following positive note:

We think Amazon’s focus on the customers and the buyer experience is right for the Internet, and we consider Amazon a transformational company. We think Amazon is well positioned to capitalize on the global growth of eCommerce and other secular trends such as cloud computing, online advertising, connected devices, and mobile commerce.

Amazon.com shares were last seen trading down 1.4% at $760.86, or -1.4%. Its 52-week range is $474.00 to $790.79 and its consensus analyst price target is $870.33.

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24/7 Wall St. tracks the CIA World Factbook for its key economic and demographic data. That shows India ranked second in population with 1.251 billion people (July, 2015). It also tracks India’s 2015 GDP as being $7.965 trillion on a purchasing power parity basis, which ranks it as being the fourth largest GDP globally of any individual nation. Grabbing market share there would seem to bring lots of opportunity, particularly of that GDP per capita can increase. They also pointed out GDP growth of 7.3% in 2015, 7.2% in 2014, and 6.6% in 2013.