amzn

EQUITY RESEARCH RBC Capital Markets, LLC Dylan Haber (AVP)

Mark S.F. Mahaney (415) 633-8527
[email protected]
(Analyst)
(415) 633-8608 Zachary Schwartzman
[email protected]
(Associate)
Jim Shaughnessy (Analyst) (415) 633-8651
[email protected]
(415) 633-8560
[email protected]

December 20, 2017 Sector: Internet

Amazon.com, Inc. Outperform

Expecting a Full Sleigh of Alexas This Holiday NASDAQ: AMZN; USD 1,177.62

Our view: Following our third annual Alexa survey, we are more impressed Price Target USD 1,200.00
with the traction of these devices and more convinced of their potential
L-T term impact. With tens of millions of users and 20K+ skills, we see WHAT'S INSIDE
Alexa’s value prop as becoming increasingly powerful as awareness and
ownership ramp. We think AMZN could see $10-$11B in Alexa-related Rev Rating/Risk Change Price Target Change
by 2020. In-Depth Report Est. Change
Preview News Analysis
Key points:
Update #1: Our Third Alexa Survey Results Show Continued Increases in Scenario Analysis*
Awareness, Ownership, Satisfaction and Engagement - Our third survey
on Amazon Alexa devices found a steady increase in brand awareness Downside Current Price Upside
and in adoption/ownership over the last 9 months. We have seen Scenario Price Target Scenario
awareness rise from 77% to 89% and ownership tick 2-pts higher to
15%. Satisfaction levels appear relatively high, with 67% of Alexa owners 700.00 1,177.62 1,200.00 1,400.00
describing themselves as “Extremely” or “Very Satisfied”, an increase from 41% 2% 19%
62%. Finally, nearly 60% of Alexa owners report using the device on a daily
basis - a 6-pt increase since March – with 15% saying they use their Alexa *Implied Total Returns 494.0 Market Cap (MM): 581,744
devices to place orders with Amazon. With this survey, we have even more 0.00 Yield: 0.0%
conviction about the potential for Alexa – a product/service that has the Key Statistics
potential to materially increase the frequency and intensity of Amazon’s 374.6 Avg. Daily Volume: 3,529,011
relationship with its customers. Shares O/S (MM):
Dividend:
Update #2: Other Evidence of Alexa Traction- Our tracking of Alexa Float (MM):
product reviews and Alexa Skills provides more evidence that the Alexa
ecosystem is gaining in popularity. Specifically, we looked at the top RBC Estimates
Electronics sellers on Amazon.com this week and 6 of the top ten items
are Echo devices, with three of the remaining top ten being Amazon Alexa- FY Dec 2016A 2017E 2018E 2019E
enabled devices. So Alexa is in 9 of the top 10 Electronics best sellers on 177.0 225.2 267.7
Amazon. Amazon is executing a successful device strategy but the bigger Revenue 136.0
opportunity is to spread Alexa across as many devices, from as many 19.0 25.7 34.0
OEMs, as possible. EBITDA, Adj 15.4 15.13
4.07 8.17 77.8x
Update #3: Alexa Could Generate $10-11B in Total Revenue by 2020 –We EPS, Rpt Diluted 4.90
updated our thinking around Alexa’s potential financial impact. Our initial NM NM Q4
analysis in March suggested Alexa could generate $10B in Revenue by P/Rpt EPS NM 43.7A
2020. Based on recent analysis, as well as company statements, we have 59.6E
increased confidence in our 2020 conclusion and see scenarios where Revenue Q1 Q2 Q3 71.0E
Alexa could generate north of $10B. What’s the biggest change in our 2016 29.1A 30.4A 32.7A
thinking? We increased the 2020 installed base by 50%+ (196MM vs. 2017 35.7A 38.0A 43.7A 4.5A
128MM), though lowered the blended ASP by nearly 40% (from $84 to 2018 48.2E 50.8E 55.1E 5.8E
$52). We see the potential financial tailwind as at least three-fold – 1) EBITDA, Adj 8.3E
Device Sales; 2) Incremental Voice Driven Shopping Sales; & 3) Platform 2016 3.5A 4.0A 3.5A
Revenues. Our base case now calls for $10-11B in Total Revenue by 2020. 2017 4.3A 4.5A 4.4A
This $10-11B total is comprised of roughly $5B in device sales and $5-6B 2018 5.5E 5.8E 6.1E
in incremental e-commerce revenue. In terms of Platform revenues, nice
things happen when you have a 100M+ installed base, which we believe EBITDA, Adj: 'Economic' EBITDA which excludes stock based
Alexa can reach by 2019.
compensation
All values in USD unless otherwise noted.

Disseminated: Dec 20, 2017 17:22ET; Produced: Dec 20, 2017 17:22ET Priced as of prior trading day's market close, EST (unless otherwise noted).

For Required Conflicts Disclosures, see Page 18.

Internet
Amazon.com, Inc.

Target/Upside/Downside Scenarios 30JUL15 - 20DEC17 Investment summary
Exhibit 1: Amazon.com, Inc. UPSIDE Our Outperform rating is based on the following factors:
TARGET 1,400.00
125 Weeks CURRENT 1,200.00 1) Still Significant Secular Growth for Online Retail – We
1,177.62 anticipate that Online will continue to rise by ~100 bps per
1,275 year from the present 11% U.S. Online Penetration level.
1,075 DOWNSIDE 700.00
2) Clear Amazon Market Share Gains and a Path for More
975 of the Same – By our estimate, AMZN already accounts for
875 roughly 20% of U.S. Online Retail Sales, but the company’s
775 strong mobile positioning and infrastructure advantages
675 facilitating next-day and SDD (Same-Day Delivery) should
575 allow Amazon to continue to take share.

475 3) New Revenue Growth Opportunities – Prospects include
consumer staples, apparel, international expansion, Amazon
375 Web Services, digital media offerings, office/industrial
supplies, and advertising. Certain opportunities (e.g., Amazon
80m Web Services) should provide a boost to margins while others
60m (such as international expansion and consumer staples) would
40m likely provide expansionary headwinds.
20m
4) Material Margin Expansion – Margins should be able
2015 2016 2017 Dec 2018 to expand back to the 2003–2010 average 6% level and to
J A S OND J FMAM J J A S O ND J FMAM J J A S ON D long-term levels in the high-single-digit % range. We view
scale, improved vendor terms, the ongoing mix shift to third-
AMZN Rel. S&P 500 COMPOSITE MA 40 weeks party (3P) sales—likely driven by Fulfillment by Amazon (FBA)
and Prime and Amazon Web Services—as likely catalysts for
Source: Bloomberg and RBC Capital Markets estimates for Upside/Downside/Target gross margin expansion. Finally, each of the core opex lines
(Marketing, Technology & Content, Fulfillment, and G&A)
Target price/base case possesses the potential for long-term leverage driven by scale.
Our base case price target of $1,200 is based on a blended
average of EV/Adjusted EBITDA, P/FCF, and GAAP P/E on 5) One of the Best Management Teams on the Internet
our 2019 estimates. We apply a 17x multiple on estimated – We are positive on management given their consistency,
Adjusted EBITDA of $34B, 20x Multiple on 2019E FCF of $31B, operational and strategic track record, focus on innovation and
and 80x Multiple on 2019 GAAP EPS of $15.13. Our price target customer service, and long-term shareholder orientation.
is also supported by a Sum of the Parts analysis where we value
Amazon's 3 segments separately. Our $1,200 PT supports our 6) High Growth and High Quality EPS – Even though AMZN
Outperform rating. has consistently traded at a premium valuation level (average
forward P/E multiple of 35–40x+ since 2007), its sector-leading
Upside scenario forward EPS growth outlook and its high EPS quality (very high
In our upside scenario, Amazon could see higher than FCF conversion) warrant, in our opinion, a considerable market
expected revenue growth rates over the next two years on multiple premium.
stronger than anticipated unit sales growth. CSOI margin could
expand in 2017 due to increased revenue growth coupled with The biggest risks to our Long Thesis remain: (1) Intrinsically
reduced fulfillment and technology & content spend. Based high valuation; (2) “Media Hole” – transition to digital media
on heightened growth, we apply higher EV/Adj. EBITDA, P/FCF could hurt market share; (3) Sales Tax Overhang – imposition
and P/E multiples to our 2019 estimates. Under this scenario, of sales tax across the U.S.; and (4) Omnipresent Competitive
Amazon shares could be worth $1,400. Risk – from Offline retailers, Online competitors and new
business models.
Downside scenario
In our downside scenario, Amazon could see somewhat lower
than expected top-line growth over the next two years on
weaker than anticipated unit sales growth. CSOI margin could
contract due to diminished revenue growth coupled with
increased fulfillment and technology & content spend. Based
on diminished growth, we would apply lower EV/Adj. EBITDA,
P/FCF and P/E multiples to our 2019 estimates. Under this
scenario, Amazon shares could be worth $700.

December 20, 2017 Mark S.F. Mahaney, (415) 633-8608; [email protected] 2

Internet
Amazon.com, Inc.

Quick Update On Alexa

Is My Alexa Getting Smarter?

We believe Skills development, Device Proliferation, Feature enhancements and Consumer
Usage are self-reinforcing. In other words, as the installed base increases, functionality
improves, Alexa’s Skills Library grows and more devices are “Alexa-enabled,” we expect to see
a corresponding rise in consumer usage.

Alexa is the brain that controls these devices and the number of skills in the Library has
continued its meteoric rise in 2017. The latest number from Amazon is >25,000 skills on Alexa,
disclosed on the company’s Q3 earnings call (we counted 28K+ after a quick skim through
Amazon’s site). The increase in Alexa skills is significant – the 20,000 skills available on Alexa is
an increase from 10,000 in Q1:17, 3,000 Q3:16 and 135 in Q1:16. A few of the top skill
categories are Finance (Capital One, TD Ameritrade, Opening Bell), Smart Home (Insteon,
Yonomi, Honeywell, SmartThings, GE) Ride Sharing (Uber, Lyft), Music streaming (Pandora,
Spotify), News (Wall Street Journal, BBC, Bloomberg, NBC, NPR) and Food/Drink (Starbucks,
Dominos, Pizza Hut). According to our survey results (discussed below), the top three use cases
for Alexa devices remain playing music (Spotify, Pandora), Checking weather and Setting
timers.

A few new enhancements and announcements worth pointing out this year include, Amazon
Multi-Room Audio - allows users to play the same music (Spotify, Pandora, Sirius, iheartradio)
on different Echo devices in their house - and Voice Calling & Messaging - users can place free
calls or send messages to any landline or mobile number in the U.S., Mexico and Canada. In
late August, the company also announced an integration with Microsoft Cortana whereby
Alexa customers can access Cortana’s business/productivity features (Email, Calendar, etc) and
Cortana customers can leverage Alexa’s skills library, which are more consumer oriented.
Amazon also announced that Alexa can now distinguish between two voices. The value to the
consumer (and to Amazon) increases as the community grows and Alexa gets smarter, both
through increased functionality and more third-party developed skills.

How many devices are there? What are the products and price points?

We don’t have an exact answer but in typical Amazon fashion, we are left with clues to
estimate Alexa’s growth. In the company’s Q3 press release, Bezos said, “…customers have
purchased tens of millions of Alexa-enabled devices, given Echo devices over 100,000 5-star
reviews, and active customers are up more than 5x since this time last year.” Using these
comments and our own analysis, our latest estimate calls for 28MM Alexa customers in 2017
up from 5MM in 2016 (see Exhibit 15 below).

The Amazon Echo was first launched in 2014 as invite only and made publicly available in June
2015. In March of 2016, Amazon announced the launch of the Echo Dot and Amazon Tap. Alexa
is also integrated in the Fire TV, Fire TV Stick, and several Fire Tablets. In addition to these first
generation devices, in 2017 Amazon expanded its product lineup to include the Echo Show,
Echo Spot and Echo Look (invitation only) as well as the second-generation original Echo and
Dot. We’ve included a side-by-side comparison of Amazon’s Alexa products below. Over time,
we think there’s a real possibility Alexa will be standardized across a large number of third-
party connected devices – with automobiles likely a key platform. BMW has noted that Alexa
will be integrated into its automobiles and selected Mini vehicles starting in mid-2018. Ford
has also introduced a line of cars allowing users to sync Alexa devices to remotely unlock or
start vehicles.

December 20, 2017 Mark S.F. Mahaney, (415) 633-8608; [email protected] 3

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Amazon.com, Inc.

Exhibit 2: Amazon Alexa Devices

Product Date Launched Retail Price '17 Holiday Price Features
Echo June 2015 $99.99 $79.99 "Always-on" Alexa. Ideal for stationary audio speaker with always-on voice assistant and Alexa Skills

Echo Show May 2017 $229.99 $149.99 An Echo, which includes a 7" screen and optimized for visuals

Echo Plus December 2017 $149.99 $149.99 An Echo + equipped with a built-in smart home hub to connect lights, locks, plugs, etc.

Echo Spot December 2017 $129.99 $129.99 Compact Echo and includes a 2.5" screen to see and hear content from Alexa

Echo Dot March 2016 $49.99 $29.99 Smallest and cheapest Alexa device. Hook up to any bluetooth enabled speaker

Echo Look Still in Beta $199.99 $199.99 Focused on personal style (take photos and short videos) Available only by invitation.

Amazon Tap March 2016 $129.99 $79.99 Portable blue-tooth speaker; 9 hrs of streaming music. Not, "always-on"

Fire TV Stick Sep '15 / Feb '16 Starts at $39.99 $34.99 Streaming media with Alexa enabled voice remote. Use voice to find, launch, control content.

Fire Tablets (7", HD 8, HD 10) October 2016 Starts at $49.99 $39.99 Press button on tablet and ask Alexa

Fire TV (4K Ultra HD) October 2017 Starts at $69.99 $54.99 Includes Alexa-enabled remote allowing users to find content and access Alexa skills library

Source: Amazon.com

In short, we think consumers will increasingly want voice-activated access to their digital lives
and it’s our view that Amazon will look to put Alexa into as many devices, gadgets and
appliances as possible regardless of whether Amazon is the manufacturer. Anything requiring
any sort of touch to unlock functionality is at risk of being displaced by Alexa’s always-on
capability. For instance, we’re already seeing a number of consumer devices introduced to the
market integrated with Alexa, such as the Sonos One speaker, Huawei Mate 9 smartphone,
Nucleus Anywhere Intercom, Moto X4 smartphone, Vobot Smart Alarm Clock and Garmin
Speak Navigation, among others.

Another area for growth in adoption will be growing Alexa’s country footprint. Amazon is
moving quickly to increase its international presence. In September 2016, Amazon launched
Alexa in the UK and Germany. In October 2017, Amazon added India and Japan. And, earlier
this month, the company announced it would launch three of its Echo devices (Echo, Echo Dot,
Echo Plus) with Alexa in 80 additional countries. Amazon thinks global, so this expansion effort
is no surprise. By comparison, Google Home is currently available in the US, UK, Canada,
Australia, Germany and France.

Now onto the latest survey results…

December 20, 2017 Mark S.F. Mahaney, (415) 633-8608; [email protected] 4

Internet
Amazon.com, Inc.

Survey Results Say: Alexa, You’re Becoming Popular

Our third survey on Amazon Alexa devices has found a material increase in brand awareness
and in adoption/ownership of these devices. Since March, we have seen awareness of
Alexa/Echo devices among U.S. Internet users rise from 77% to 89%. Likewise, we have
tracked a steady increase in ownership over this short time period, with the % of
respondents saying they own an Alexa device rising from 13% to 15%. Satisfaction levels
appear relatively high, with 67% of Alexa owners describing themselves as “Extremely” or
“Very Satisfied.” Finally, nearly 60% of Alexa owners report using the device on a daily basis,
with 15% saying they use their Alexa devices to place orders with Amazon. With this survey,
we have even more conviction about the potential for Alexa – a product/service that has the
potential to materially increase the frequency and intensity of Amazon’s relationship with
its customers.

We tested awareness around the Echo and other Alexa-enabled devices. We compared these
results to similar Alexa surveys we ran in September 2016 and March 2017. Our results show
that awareness has jumped considerably over the past year. In September 2016, only one-
third of Amazon customers indicated they had heard of an Amazon Echo, Echo Dot or Amazon
Tap. Today, 89% of respondents to our survey noted they had heard of Alexa or one of these
devices, and this was up from 77% in March 2017. Importantly, our initial survey tested
awareness only among Amazon customers, while our last two surveys tested awareness
among all Internet users, suggesting the jump in actual awareness among all Internet users
has been more material than indicated.

Exhibit 3: Have you heard of Alexa, Amazon Echo, Echo Dot or Amazon Tap?

89%

Yes 77%

33%

11%
No 23%

67%

December 20, 2017 0% 20% 40% 60% 80% 100%

Dec-17 Mar-17 Sep-16

Source: RBC Capital Markets Proprietary Survey of Amazon customers n=1,748; n=1645, n=2112

Next, we asked survey respondents who had heard of Alexa whether they owned either an
Amazon Echo, Echo Dot, Amazon Tap or another device enabled with Alexa. While only 4% of
Amazon customers indicated they owned one in September of 2016 and 13% of polled Internet
users owned one of these devices back in March, 15% of polled Internet users own one of
these devices today. This is nearly a 4x jump in 14 months! Recall that Jeff Bezos said active
customers are up more than 5x since the same time last year, which would these survey results
are likely underestimating Alexa’s growth. Below, we show an exhibit that lists the top selling
electronics on Amazon right now and Alexa devices are 9 of the top 10.

Mark S.F. Mahaney, (415) 633-8608; [email protected] 5

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Amazon.com, Inc.

Exhibit 4: Do you own an Echo or any device enabled with Alexa?

Yes, I own a device enabled with Alexa 15%
13%
4%

No, I don't own any of these devices 85%
87%

96%

0% 20% 40% 60% 80% 100% 120%

Dec-17 Mar-17 Sep-16

Source: RBC Capital Markets Proprietary Survey of Amazon customers n=832 (Sept 2016) n=1,748 (March 2017) n=2,112 (Dec 2017)

Next we asked how many Alexa devices Amazon customers own, and the results show that
63% own a single Alexa device, down from 70% in March. Conversely, this means 37% of Alexa
owners now own more than 1 device, up from 30% in March. Our results below imply that the
average number of Alexa devices per household has increased to 1.6 up from 1.4 in 9 months.
As Amazon grows the ecosystem and device proliferation continues, we expect the number of
Alexa devices per household to continue climbing higher.

Exhibit 5: How many Echo or Alexa-enabled devices do you own?

1 63%
70%

2 22%
22%

3 8%
4%

4 4%
1%

5 or more 3%
2%

December 20, 2017 0% 10% 20% 30% 40% 50% 60% 70% 80%

Dec-17 Mar-17

Source: RBC Capital Markets Proprietary Survey of Amazon customers n=230 (March 2017) n=306 (Dec 2017)

We also tested Amazon customer satisfaction levels with their Alexa device. Similar to our
September 2016 and March 2017 surveys, more than 90% of device owners stated they were
“Extremely,” “Very” or “Moderately” Satisfied. Interesting, the % of device owners who said
they were “Extremely” or “Very” Satisfied reached a record high 67%. We view these as
healthy and rising Satisfaction levels, which is a positive for the Alexa ecosystem.

Mark S.F. Mahaney, (415) 633-8608; [email protected] 6

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Amazon.com, Inc.

Exhibit 6: How satisfied are you with your Alexa device?

Extremely Satisfied 27%293%0%

Very Satisfied 32% 38%
36%

Moderately Satisfied 24% 2390%%
Slightly Satisfied
6%77%%
Not at all Satisfied 1%23%%

0% 5% 10% 15% 20% 25% 30% 35% 40%

Dec-17 Mar-17 Sep-16

Source: RBC Capital Markets Proprietary Survey of Amazon customers n=228 (Sept 2016); n=86 (March 2017), n=300 (Dec 2017)

Next, we tested usage. Our results reveal that close to 59% of owners use Alexa at least once
per day, up from 53% in our survey in March. Further, nearly 80% of owners use their Alexas
several days a week, up from 74% in March. Conversely, about 11% of users indicated they use
their device less than once a week, down from 19% in March. These are incrementally positive
results as they show a general trend toward rising usage. As awareness, penetration, and skills
increase, we expect the direction of this chart to tilt toward more overall engagement.

Exhibit 7: How often do you use your Alexa?

All the time (Several times per day) 31%
35%

Often (Once a day) 28%
18%

Occasionally (Once every few days) 20%
21%

Not often (About once a week) 9%
8%

Rarely (Less than once a week) 11%
19%

0% 5% 10% 15% 20% 25% 30% 35% 40%

Dec-17 Mar-17

Source: RBC Capital Markets Proprietary Survey of Amazon customers n= 228 (March 2017) n=306 (Dec 2017)

When we asked Alexa device users how they use their Alexa most often, Playing Music,
Checking Local Weather, and Setting Timers were among the most popular responses. On the
other hand, Listening to Podcasts, Checking Traffic Reports and Ordering a Service (Lyft, Uber,
Food delivery) were among the least popular.

December 20, 2017 Mark S.F. Mahaney, (415) 633-8608; [email protected] 7

Internet
Amazon.com, Inc.

The percentage of owners that use Alexa to order items on Amazon fell very modestly in this
survey (from 17% to 15%). Voice shopping and ordering is still rather unfamiliar. Over time, as
penetration rises and users’ comfort level with these devices increase, we expect the direction
of this chart to tilt toward purchases and orders on Alexa-enabled devices, in particular for re-
ordering everyday items consumers regularly purchase on Amazon. One item to note, only
Prime members can make purchases from Amazon and only Prime-eligible items are available
for purchase, including Prime Now. Voice interfaces are relatively limiting as far as a shopping
experience and the majority of shopping still needs a display. At a basic level, we see Alexa
devices as removing friction and increasing frequency for Amazon customers, and that is a win
for AMZN.

Exhibit 8: How do you use Alexa most often? (Select all that apply)

Play music (Spotify, Pandora, etc) 71%79%
Check local weather 50%57%
Setting timers 323%5%
Listen to the news 28%39%
1189%%
Create / Add to shopping lists 161%9%
Smart Home functionality 1157%%
Ordering items on Amazon 1113%%
Listen to podcasts 111%5%
Check traffic reports 47%%

Ordering a service (Car, Food Delivery)

0% 20% 40% 60% 80% 100%

Source: RBC Capital Markets Proprietary Survey of Amazon customers n= 228 (March 2017); n=302 (December 2017)

We peeled the onion one layer further on this point to ask those Prime members who do order
items on Amazon, how often they do so. This is a small sample size and there’s a fair amount
of noise in these results; however, the majority of users (53% vs. 46% in March) indicated they
use Alexa at least “somewhat often” to purchase items on Amazon. Further, the percentage
of users who “Almost never” use Alexa to make purchases on Alexa declined materially since
March (6% vs. 26%).

December 20, 2017 Mark S.F. Mahaney, (415) 633-8608; [email protected] 8

Internet
Amazon.com, Inc.

Exhibit 9: How often do you order items on Amazon with Echo or an Alexa?

Very Often 28%
39%

Somewhat often 25%

7%

Rarely 42%
29%

Almost never 6%

26%

0% 10% 20% 30% 40% 50%

Dec-17 Mar-17

Source: RBC Capital Markets Proprietary Survey of Amazon customers n= 31 (March 2017); n=36 (Dec 2017)

While, the sample size is probably too thin to draw any meaningful conclusions, when we
asked these customers whether they’re using Alexa to buy more, less or the same amount on
Amazon, 33% noted they were buying more, while only 3% said they were buying less. We
view this as a positive sign, and although we are still in the very early days, these points suggest
Alexa may be responsible for creating incremental demand among Prime members.

Exhibit 10: Compared to when you first purchased an Alexa enabled device, are you using it
to buy more, less or the same on Amazon?

Buying more on Amazon 33%
43%

Buy about the same on Amazon 64%
43%

Buying less on Amazon 3%
0%

My Alexa is brand new 0% 13%

December 20, 2017 0% 10% 20% 30% 40% 50% 60% 70%

Dec-17 Mar-17

Source: RBC Capital Markets Proprietary Survey of Amazon customers n= 23 (March 2017); n=33 (December 2017)

Which products are these customers buying most often? Again, we hesitate to draw overly
strong conclusions given the small sample size, but we see Consumer Packaged Goods and
Electronics had the most popular response rate at 55% and 42%, respectively. In terms of items
customers are buying least often, Home Furnishings and Sporting goods ranked the lowest at
21% and 9%, respectively. We would largely expect Consumer Packaged Goods and Electronics
to rank highly given they are standardized items, have a relatively limited number of unit sizes
and can be frequent and regular purchases. These items seem to make the most sense for the
simple and streamlined demand fulfillment that Alexa offers. In general, we think VAI will gain

Mark S.F. Mahaney, (415) 633-8608; [email protected] 9

Internet
Amazon.com, Inc.

the most traction when purchasing products where the consumer has previously purchased
the product and the range of choices are limited.

Exhibit 11: What type of items do you order most often from your Alexa enabled device(s)?
(Select all that apply)

Consumer Packaged Goods 39% 55%
Electronics 42% 61%
Grocery
Apparel 33% 43%
27% 48%
Small kitchen appliances 242%6%
Home furnishings 21% 30%
Sporting goods 9% 39%

0% 10% 20% 30% 40% 50% 60% 70%

Dec-17 Mar-17

Source: RBC Capital Markets Proprietary Survey of Amazon customers n= 23 (March 2017); n= 33 (December 2017)

When we look at all Alexa devices, of those consumers that own an Alexa device, we see that
the Echo continues to remain the most popular, though we’d note the Dot gained significant
traction this year. In March 2017, 49% of Alexa device owners reported owning an Echo, versus
62% in our most recent survey. For the Dot, in March, 28% of Alexa device owners reported
owning the Dot, versus 41% in our most recent survey. We’d also point out that 6% of Alexa
users reported owning the Echo Show and 3% reported owning the Echo Plus.

Exhibit 12: What type of Alexa Device, do you own? (Among Amazon device owners, what
devices are among the most popular)

I own an Echo 49% 62% 80%

I own a Dot 10% 28% 41%
I own a Tap 6%10%15%
I own an Echo Show 6%

I own an Echo Plus 3%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
Dec-17 Mar-17 Sep-16

Source: RBC Capital Markets Proprietary Survey of Amazon customers n= 1,745 (March) n=1,645 (Sept); n=1,855 (December 2017)

December 20, 2017 Mark S.F. Mahaney, (415) 633-8608; [email protected] 10

Internet
Amazon.com, Inc.

Other Evidence of Traction for Alexa

Our proprietary tracking of Alexa product reviews and Alexa Skills provides more evidence
that the Alexa ecosystem in gaining in popularity.

Alexa’s family of products is still relatively new but the number of products integrated with
Alexa functionality continues to have a growing presence on Amazon.com’s top selling
Electronics. Below, we show the Top 13 Electronics sellers as of earlier this week. What are the
so-what’s here? – 6 of the top ten items are Echo devices. With three of the remaining top ten
being Amazon devices that are Alexa enabled. So Alexa is in 9 of the top 10 Electronics best
sellers on Amazon. While Amazon clearly has a device strategy and a successful one at that,
we expect the bigger opportunity for Amazon is to spread Alexa capability across as many
devices as possible.

Exhibit 13: Top Selling Electronics Products on Amazon.com

Top Sellers - Amazon Electronics Price Reviews Ratings
1 All new Echo Dot (2nd Generation) - White $29.99 66,310 4.3
2 Fire TV Stick w/ Alexa Voice Remote $34.99 125,456 4.4
3 All new Echo (2nd Generation) - Black $79.99 3,122 4.2
4 All new Echo Dot (2nd Generation) - Black $29.99 66,317 4.3
5 Fire Tablet 8" Display Wi-FI 16 GB with Alexa $49.99 22,862 4.2
6 All new Echo (2nd Generation) - Heather Gray $79.99 3,122 4.2
7 Fujifilm Instax Mini Instant Film Twin Pack $14.88 4,309 4.5
8 Echo Show - Black $149.99 4,138 3.9
9 All new Echo (2nd Generation) - Sandstone $79.99 3,122 4.2
$49.99 22,862 4.2
10 Fire Tablet 8" Display Wi-FI 16 GB with Alexa - Blue $39.99 22,862 4.1
11 Fire Tablet 7" Display Wi-FI 8 GB with Alexa - Black $54.99 4,320 3.7
12 Fire TV with 4K Ultra HD and Voice Remote $99.99 53,116 4.5
13 Kindle Paperwhite E-reader - White

Source: Amazon.com (December 19, 2017)

As mentioned earlier, Alexa’s List of Skills has skyrocketed from around 135 in January 2016 to
20,000+ across more than 20 categories. Below, we show the number of skills in each category.
Two clear category leaders stick out - 1) Games, Trivia & Accessories; 2) News; and 3) Education
& Reference – each of which have over 3,000 Skills. Connected Car has the fewest Skills at 42.

December 20, 2017 Mark S.F. Mahaney, (415) 633-8608; [email protected] 11

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Amazon.com, Inc.

Exhibit 14: Alexa Skills Categories Skills
6328
Alexa Skills Categories 3751
Games, Trvia & Accessories 3619
News 2686
Education & Reference 2267
Music & Audio 1907
Lifestyle 1043
Novelty & Humor 801
Productivity 791
Smart Home 735
Travel & Transportation 723
Business & Finance 699
Health & Fitness 666
Sports 652
Food & Drink 616
Weather 367
Local 346
Movies & TV 269
Utilities 124
Social 112
Communication
Shopping 42
Connected Car 28,544
Total

Source: Amazon.com (December 19, 2017)

December 20, 2017 Mark S.F. Mahaney, (415) 633-8608; [email protected] 12

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Thinking Thru The Financial Impact of Alexa

It is very early days, so while we see enormous opportunity from the proliferation of Alexa
devices, the financial impact carries uncertainty. Nevertheless, we are updating our thinking
around Alexa’s potential financial impact. We see the potential financial tailwind as at least
three-fold – 1) Device Sales; 2) Incremental Voice Driven Shopping Sales; & 3) Platform
Revenues. The Net-Net here is we believe the first two could yield over $10-11B in Total
Revenue by 2020, up modestly from the $10B we had estimated back in March 2017. This
$10-11B total is comprised of roughly $5B in device sales, assuming 27% Global adoption by
Amazon customers, and $5-6B in incremental e-commerce revenue, assuming 10%
incremental sales per customer – or $40 per person, implying 2-3 more purchases annually.
In terms of Platform revenues, our view remains that nice things happen when you have
over 100M installed base, which we believe Alexa can reach by 2019.

In general, Amazon’s device philosophy has been to sell the product (Kindle, Fire Tablet, Fire
Stick, and even the Fire Phone…) at cost and capture margin on the services it provides when
consumers use the product. We see increasing evidence that Amazon’s approach to Alexa is
following a similar path. As shown in Exhibit 2 above, the company has materially lowered the
prices of its Alexa devices.

At a high level, we believe there will be three future financial impacts to Amazon from the
successful development of the Alexa Ecosystem: 1) Device sales; 2) Incremental voice-driven
shopping sales; & 3) Platform revenues. For now, we assume that relative to Amazon’s 2018
Revenue base of $225B, that these financial impacts will not be material. At all.

However, given our tracking of the continued growing presence and ownership of Alexa
devices and our own belief in the very strong value proposition of Alexa devices, we believe
that Alexa may be 5% material to AMZN by 2020. We know that’s a very broad range but we’re
still so early in Alexa adoption that we believe more specific estimates couldn’t be credible.
But here’s a crack at key assumptions and drivers.

1) Alexa Device Sales – By 2020, we believe that Amazon could have close to 500MM Active
Customers worldwide. Assuming a 27% global adoption rate by Amazon customers and
each household owning between 1-2 Alexa devices with a two-year replacement cycle, we
believe Amazon could sell around 100MM Alexa devices in 2020. If we apply a relatively
conservative $52 ASP to this number (implying a 15% annual price decline from 2017-
2020), this would suggest Amazon could generate $5B in Alexa device revenue for Amazon
in 2020.

Exhibit 15: Amazon’s Family of Alexa Device Revenue

Total Amazon Global Customer Base (MM) 2015 2016 2017 2018 2019 2020
304 334 368 405 445 490

Amazon Alexa Device Global Penetration 0% 2% 8% 15% 22% 27%

Amazon Alexa Households 1 5 28 61 98 132
Devices Per Household 1.0 1.0 1.5 1.5 1.5 1.5

New Alexa Devices Sold (MM) 1 4 33 50 56 51
Replacement Alexa Devices Sold 1 4 33 50
Total Alexa Devices Sold (MM) 1 4 34 54 89 101
Total Alexa Device Installed Base (MM) 1 5 39 88 144 196

Blended ASP $180 $155 $85 $72 $61 $52

Amazon Alexa Device Revenue (Worldwide) $234 $637 $2,914 $3,884 $5,473 $5,276

Source: Company reports, RBC Capital Markets Estimates

December 20, 2017 Mark S.F. Mahaney, (415) 633-8608; [email protected] 13

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2) Incremental Voice Driven Shopping Sales – However, looking simply at device sales is
incomplete. A better estimate of Alexa’s financial impact would also include the
incremental retail revenue opportunity created from the proliferation of Alexa in a range
of devices (both Amazon owned and third party). According to our survey results, 15% of
device owners use Alexa to make purchases on Amazon and about one-third of these
customers stated they are using it to buy more on Amazon.com. While it is still early days,
we expect the direction of these numbers to continue tilting toward more Amazon
purchases on Alexa-enabled devices. We believe Alexa can stimulate customer demand,
accelerate the retail flywheel and drive incremental increases in annualized spending. We
are particularly intrigued by the ability of Amazon to leverage Alexa and Whole Foods to
grow its market share in grocery.

We took a shot at quantifying the impact of increases in annualized spending below.
Although Amazon stopped providing Active Customers in Q1:16, we estimate that by the
end of 2017, Total Retail Revenue per Active Amazon customer will be around $350. We
assume this grows 5% annually, which implies that Total Retail Revenue per Active
Customer reaches approximately $400 by 2020. At that time, we believe it’s reasonable
to assume that Alexa devices could increase spending anywhere from 5% to 15%, or an
incremental $20-$60 per Active Customer. If we take the mid-point of this range - $40 –
and multiply this by our 140MM Alexa Global Households, we land at incremental $5B in
Retail Revenue. An incremental $40 implies 2 to 3 additional purchases per year with the
Alexa device. We see this as a very reasonable scenario.

Exhibit 16: Incremental Retail Revenue from Alexa Devices

Incremental % Annualized Spend Per

Alexa Global HH's (MM)$5,356 5% 8% 10% 13% 15%
100 $6,078
$2,026 $3,039 $4,052 $5,065
120 $7,293
140 $2,431 $3,647 $4,862 $6,078 $8,509
160 $9,724
$2,836 $4,254 $5,672 $7,090
180 $10,940
$3,241 $4,862 $6,483 $8,103

$3,647 $5,470 $7,293 $9,116

December 20, 2017 Source: Company reports, RBC Capital Markets Estimates

We think voice-controlled shopping could have a material impact, particularly for demand
fulfillment for previously ordered items, Amazon-curated recommendations for similar
products, or very specific items. For instance, we see the value in voice shopping on
specific household items, books, movies, etc. but less so for discovery commerce that will
almost always require a display. For the right items, or for rush purchases, voice ordering
could be nearly frictionless and act as a key lever to increasing customer loyalty,
transaction frequency, total annualized spend and overall satisfaction. Net-net, by simply
looking at device sales and incremental e-commerce revenue, we believe the Alexa
ecosystem could generate over $10B in revenue for Amazon by 2020, which is modestly
above our March 2017 published expectation of $10B.

3) Potential Platform Revenues – Nice things happen once you reach a 100MM…or a
200MM…installed base (i.e. ancillary revenue streams). What we have in mind is the $28B
in gross sales ($8B in net revenue) that Apple generated via the Apple App Store and the
iTunes Store in 2016 and the likely $15B-$20B that Google likely generated via the Google
Play store that same year. No, we don’t believe Alexa could generate anything close to
these levels by 2020, but if it achieves a 200MM installed base level by 2020, we can

Mark S.F. Mahaney, (415) 633-8608; [email protected] 14

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certainly envision a scenario where Amazon would look at further monetizing this large
ecosystem.

Two Platform Revenue streams in particular come to mind. First, the ability for consumer
to find and discover Skills is becoming increasingly challenging. Thus, there will be the
opportunity for a filtered/curated marketplace to emerge in the Alexa ecosystem, with
companies offering the most relevant Skills and paying the most for placement rising in
the marketplace search results. (Sound like Google Search?!) Second, although there are
currently no paid Skills on Alexa today, it seems odd to think there won’t be some Skills
that exist in a freemium model in the future. NPR, WSJ and CNBC all have Alexa Skills and
why wouldn’t premium content sites create paid content for a 100MM-200MM installed
base platform. And to the extent that paid content is developed for the Alexa ecosystem,
Amazon will have the ability to collect revenue share payments.

December 20, 2017 Mark S.F. Mahaney, (415) 633-8608; [email protected] 15

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Amazon.com, Inc.

Valuation

Our price target of $1,200 is based on a blended average of EV/Adjusted EBITDA, P/FCF, and
GAAP P/E on our 2019 estimates. We apply a 17x multiple on estimated Adjusted EBITDA of
$34B, 20x Multiple on 2019E FCF of $31B, and 80x Multiple on 2019 GAAP EPS of $15.13.
Our price target is also supported by a Sum of the Parts analysis where we value Amazon's 3
segments separately. Our $1,200 PT supports our Outperform rating.

Risks to rating and price target

• Increase in competitive intensity either from online competitors or online segments of
traditional retailers.

• Additional gross margin pressure from rising oil prices, operating margin pressure from
continued investments in technology, and potential for additional international expansion.

• Decrease in e-commerce activity by consumers.

Company description

Amazon is the largest global retailer on the Internet and operates in seven countries with over
300 million customers worldwide.

December 20, 2017 Mark S.F. Mahaney, (415) 633-8608; [email protected] 16

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Amazon.com 3/17A 6/17A 9/17A 12/17E 3/18E 6/18E 9/18E 12/18E 2015A 2016A 2017E 2018E 2019E 2020E
00 $35,714,00000 $37,955,00000 $43,744,00000 $59,571,56000 $48,198,06600 $50,843,23900 $55,092,97700 $71,029,21400 $107,007,00000 $135,987,00000 $176,984,56000 $225,163,49600 $267,688,05500 $313,204,05300
Total Revenue 0 22,432,0000
0 13,282,0000 23,439,0000 27,536,0000 38,234,6700 29,309,2940 30,381,2300 33,853,5660 44,523,0700 71,651,0000 88,248,0000 111,641,6700 138,067,1600 160,127,3130 182,656,2970
Cost of Goods 14,516,0000 16,208,0000 21,336,8900 18,888,7730 20,462,0090 21,239,4110 26,506,1440 35,356,0000 47,739,0000 65,342,8900 87,096,3370 107,560,7410 130,547,7560
Gross Profit 12,277,000 13,888,000 15,861,000 19,824,827 17,847,796 19,238,554 19,958,772 23,155,498 33,123,000 43,553,000 61,850,827 80,200,620 110,973,573
Operating Expenses 1,826,000 9,423,293 11,763,535 95,140,320
Marketing 4,534,000 2,096,000 2,344,000 3,157,293 2,416,092 2,756,888 2,897,036 3,693,519 5,062,000 6,910,000 23,961,018 30,798,808 13,717,518 15,736,755
Fulfillment 4,372,000 4,897,000 6,190,000 8,340,018 6,844,125 7,118,053 7,602,831 9,233,798 12,930,000 16,962,000 20,772,871 28,411,596 35,812,431 40,962,140
Technology and Content 709,000 4,916,000 5,349,000 6,135,871 6,382,242 7,093,740 7,122,400 7,813,213 11,317,000 14,423,000 3,265,145 4,172,681 35,115,873 42,652,776
General & Administrative 792,000 1,011,373 1,068,006 1,136,467 4,228,500 4,874,000
Stock-Based Compensation 44,000 755,000 848,000 953,145 956,836 1,213,500 1,223,500 1,233,500 1,523,000 2,117,000 200,000 180,000 4,693,049 5,177,822
Other 1,158,000 1,085,000 1,193,500 1,203,500 2,120,000 2,975,000 5,621,449 6,264,081
1,005,000 45,000 45,000 45,000 3,492,063 6,895,717
Operating Income (GAAP) 66,000 45,000 45,000 45,000 171,000 166,000 180,000 180,000
1,841,000 1,223,455 1,280,638 3,350,646 7,920,563 11,949,717
Non-GAAP Oper. Inc. (Ex-SBC & Other) 628,000 347,000 1,512,063 1,040,977 2,233,000 4,186,000 12,420,421 19,574,183
-- 2,481,955 2,549,138 4,629,146 -- --
Proforma Guidance 1,852,000 1,477,000 2,750,563 2,289,477 4,524,000 7,327,000 18,221,870 26,018,264
2,435,000 -- -- -- 11,042,000 13,748,000
Depreciation Add Back 3,484,000 -- -- -- -- -- -- 14,734,063 20,823,717 -- --
EBITDA (incl. SBC) 3,362,000 3,512,000 3,662,000
(52,000) 2,633,000 2,912,000 3,062,000 3,212,000 4,630,455 4,837,638 7,057,646 6,281,000 8,117,000 (199,500) (598,000) 15,748,000 17,748,000
Net Interest Expense and Other 39,000 3,327,000 3,304,000 4,619,063 4,297,977 8,685,000 12,469,000 194,000 248,000 28,348,421 37,502,183
Interest Income (139,000) (150,500) (148,500) (146,500) (771,500) (1,046,000)
Interest expense 38,000 (31,000) (154,500) (152,500) 61,000 63,000 65,000 (665,000) (294,000) (571,000) (546,000)
Other Income/(Expense), net -- 44,000 54,000 57,000 59,000 49,000 101,000 -- -- 275,000 300,000
(143,000) (228,000) (261,500) (261,500) (261,500) (484,000) (1,046,000) (1,046,000)
Pre-Tax Income 953,000 (261,500) (261,500) -- -- -- (460,000) 3,292,563 6,297,717
Provision for Income Tax 229,000 -- -- -- -- -- -- 1,283,450 2,204,201 -- --
Net Income 724,000 1,072,955 1,132,138 3,204,146 2,009,114 4,093,516
Other 666,000 316,000 1,357,563 888,477 375,534 396,248 1,121,451 1,568,000 3,892,000 11,849,421 19,028,183
- 467,000 58,000 529,450 310,967 697,421 735,890 2,082,695 951,000 1,493,000 (4,000) - 4,147,297 6,659,864
Net Income - GAAP 199,000 828,114 577,510 - - 617,000 2,399,000 7,702,124
724,000 258,000 - - (21,000) 2,005,114 4,093,516 - 12,368,319
(2,000) (2,000) - 697,421 735,890 (28,000) -
Earnings Per Share - GAAP $1.48 828,114 2,082,695 596,000 $4.07 $8.17 7,702,124
197,000 256,000 577,510 $1.39 $1.47 2,371,000 12,368,319
Net Income - Adj. (Excl. SBC & Amort) 1,359,114 $1.67 $4.13 $1.25 0 0 $15.13
$0.40 $0.52 $1.16 1,515,446 1,560,415 $4.90 $23.92
Earnings Per Share - Adjusted $2.77 1,583,599 2,913,720 1,497,497 $0.00 $0.00 0
562,730 1,178,595 1,389,035 $3.03 $3.11 0 0
Shares used to calculate EPS ('000) 0 490,0000 $3.19 $5.78 $3.15 493,0000 501,0000 $0.00
$1.14 $2.39 $2.79 500,0000 502,0000 $0.00 $0.00
Growth Rate 23% 496,0000 504,0000 475,0000 30% 27% 509,0000
Total Revenue (yr-yr) 24% 492,0000 494,0000 498,0000 34% 26% 483,7000 -- -- 517,0000
Total Revenue (yr-yr) -- Organic 53% 36% 24% 26% 19% 20% -- -- 19%
Two Year Stack -- Organic -18% 25% 34% 23% 35% 50% 55% 19% -- 27% -- -- -- 17%
Total Revenue (seq) 29% 26% 29% 47% 24% 43% -- -- -- --
Gross Profit (yr-yr) 18% 56% 58% 36% 48% 5% 8% 29% -- -- 37% 33% -- --
EBITDA (yr-yr) 39% 15% 44% -19% 41% 31% 24% -- 18% 41% --
GAAP EPS (yr-yr) 6% 41% 29% 42% 39% 46% 53% 34% -17% 101% 23%
29% 23% 23% 248% 183% 148% -44% 35% 36% 21%
8% -22% 44% 85% 32%
2% 0% 40.2% 38.6% 37.3% -- 291% 58%
-77% 35.8% 39.2% 2.0% 1.5% 1.5%
Margin Analysis (% of Total Rev) 37.2% 37.1% 2.0% 2.0% 5.4 5.3 5.2 33.0% 35.1% 36.9% 38.7% 40.2% 41.7%
Gross Margin 2.0% 38.2% 2.0% 5.3 5.0 14.0 13.8 13.0 3.4% 2.1% 1.8% 1.8% 1.5% 1.5%
Y/Y Change 5.1 1.3% 5.4 14.0 14.2 14.0 12.9 11.0 4.7 5.1 5.3 5.2 5.1 5.0
Marketing 12.7 5.5 14.2 10.3 13.2 2.0 1.9 1.6 12.1 12.5 13.5 13.7 13.4 13.1
Fulfillment 12.2 12.9 12.2 1.6 2.0 3.0 2.4 2.0 10.6 10.6 11.7 12.6 13.1 13.6
Technology and Content 2.0 13.0 1.9 2.1 2.2 2.4% 2.3% 4.7% 1.4 1.6 1.8 1.9 1.8 1.7
General & Administrative 2.2 2.0 2.5 2.5% 2.2% 4.9% 4.6% 6.5% 2.0 2.2 2.4 2.2 2.1 2.0
Stock-Based Compensation 2.8% 3.1 0.8% 4.6% 4.8% 9.8% 2.1% 3.1% 2.0% 3.1% 4.6% 6.2%
GAAP Operating Margin 5.2% 1.7% 3.4% 11.8% 10.0% 4.2% 5.4% 4.5% 5.3% 6.8% 8.3%
Proforma Operating Margin 4.9% 10.2% 12.0% 35.0% 35.0% 35.0% 8.1%
Adjusted EBITDA Margin 12.0% 10.6% 39.0% 35.0% 13.6% 15.1% 16.7% 17.5% 11.4%
Tax Rate 24.0% 13.2% 18.4% 60.7% 38.4% 39.0% 35.0% 35.0% 35.0%
70.1%

Source: RBC Capital Markets estimates, Company reports

December 20, 2017 Mark S.F. Mahaney, (415) 633-8608; [email protected] 17

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Please note that current conflicts disclosures may differ from those as of the publication date on, and as set forth in,
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RBC Capital Markets, LLC makes a market in the securities of Amazon.com, Inc..

A member company of RBC Capital Markets or one of its affiliates received compensation for products or services other than
investment banking services from Amazon.com, Inc. during the past 12 months. During this time, a member company of RBC
Capital Markets or one of its affiliates provided non-securities services to Amazon.com, Inc..

RBC Capital Markets is currently providing Amazon.com, Inc. with non-securities services.

RBC Capital Markets has provided Amazon.com, Inc. with non-securities services in the past 12 months.

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Amazon.com, Inc.

Valuation

Our price target of $1,200 is based on a blended average of EV/Adjusted EBITDA, P/FCF, and GAAP P/E on our 2019 estimates. We
apply a 17x multiple on estimated Adjusted EBITDA of $34B, 20x Multiple on 2019E FCF of $31B, and 80x Multiple on 2019 GAAP
EPS of $15.13. Our price target is also supported by a Sum of the Parts analysis where we value Amazon's 3 segments separately.
Our $1,200 PT supports our Outperform rating.

Risks to rating and price target

• Increase in competitive intensity either from online competitors or online segments of traditional retailers.
• Additional gross margin pressure from rising oil prices, operating margin pressure from continued investments in technology,

and potential for additional international expansion.
• Decrease in e-commerce activity by consumers.

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RBC Capital Markets Policy for Managing Conflicts of Interest in Relation to Investment Research is available from us on request.
To access our current policy, clients should refer to
https://www.rbccm.com/global/file-414164.pdf

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