How Amazon Makes Money

Amazon reported record profits in 2018 earning 10.1 billion in net income compared to just three billion in 2017 considering the company hardly had any annual profit until 2016 this represents major growth whether that’s gap earnings operating income free cash flow this company hit an inflection point at the beginning of 2018 is one of the reasons that the stock materially outperformed the market traditionally Amazon has funneled most of its money straight back into the company itself leading to meager earnings compared to other tech giants like Apple or Google but in spite of this strategy Amazon has been making enough lately but there’s still money left after all of its expenses on inventory fulfillment centers and people Amazon still doesn’t have the types of profits that other big tech companies do say a Google or an apple or a Microsoft but significantly more than they ever have in the past and it really allows them to do much more experimentation with the core business so what’s changed though Amazon has long dominated the US ecommerce market online sales are not actually the biggest moneymaker for the company its ecommerce division isn’t even profitable internationally instead Amazon Web Services or AWS has generated the majority of the company’s operating income since 2016 AWS is Amazon’s cloud computing division comprised of a huge network of servers providing processing and storage solutions for companies government agencies and individuals what that did for Amazon is it turned Amazon into a technology company as well as being a ecommerce and and retailer its clients which include Netflix Airbnb and Yelp are charged for their volume of usage the features they subscribe to and the services they use AWS really started to grow about four or five years ago and became a significant force in computing Amazon Web Services continues to get bigger as a percentage of overall revenue and it’s a highly profitable business by Amazon standards but by most corporate standards it’s doing something like 30% operating margins in 2018 AWS brought in 7.3 billion dollars in operating income and twenty five point seven billion dollars in revenue which for reference is more than both McDonald’s and Macy’s in this last quarter AWS was 58% of total operating profit for Amazon so it’s still clearly the profit driver for the overall company in fact in 2017 AWS was actually more than a hundred percent of Amazon’s operating profits so without AWS Amazon would not have been making any money but though it’s a huge reason behind Amazon’s recent profitability other areas of the company are seeing major growth as well the fastest growing division of Amazon is its other category comprised mainly if it’s advertising business it grew ninety five percent in the fourth quarter of 2018 and brought in 10.1 billion in revenue for the year overall as Amazon has become the center of commerce for a lot of businesses it’s become a huge advertising player as well they don’t bring out the profits of this but looking at comps like Facebook and Google it’s almost certainly also in that 30% operating margins range if advertising continues to grow at this rate some analysts even predict it will be more profitable than AWS by 2021 the last segment experiencing major growth is the third party marketplace well Amazon traditionally buys products in bulk from wholesalers and sells them at a slight markup in the third-party marketplace outside companies pay Amazon to sell their goods using its platform Amazon takes about a 15 to 20 percent cut of the sales while also collecting fees for things like storage and shipping well Amazon generates significantly less revenue from third-party merchants than from products it sells margins are much higher making it more profitable than the traditional model if you assume even a small five percent margin you’re talking about potentially two billion dollars in profit just from third-party contributing to overall Amazon today more than half of all goods sold come from third-party sellers and more and more businesses are signing up sales of third-party sellers services rose 34 percent in 2018 it’s a forty two point seven billion dollars you really have to be on Amazon unless you are going to go it alone Amazon is the is the only place where you can instantly get scale without having to do all of the marketing yourself Amazon smart speakers also have analysts I did the last thing I find really interesting is Alexa so you now have us an install base of over a hundred million of these voice-activated devices over time you’ll find yourself increasingly turning to Alexa and say Alexa order more coffee and it’s one of those things that will accelerate the move of Amazon into two places the pantry and into the refrigerator the boom in all these categories from Alexa to cloud computing advertising and third party seller divisions raises the question of how the company should be valued at the size of the company now over to well over two hundred billion dollars in annual revenue it’s just really hard to grow at twenty plus percent so that means these investors who have expected high growth repeatedly every quarter are now looking at a company that with slowing growth but lots of profitability there’s clearly some consternation in the investor community as to how to value Amazon today you you

Author: Moderator