The Amazing Amazon

Some companies are simple to analyze. Their business models are straightforward, customers are easy to identify, and products clearly distinguishable. To the deep chagrin of analysts, Amazon is not this type of company. 

Amazon went from having Sales of $511k in 1995 to $2.76b in 2000. Fast forward to 2014, Amazon's Sales were roughly $90b. I have no doubt Sales will continue to grow in the future, but the question is just how fast? In percentage terms, Sales growth seems to have slowed since 2011, and has been declining since. This is a normal trend as a company matures, so it's nothing to get preoccupied about, but is nonetheless worth noting. Wall Street adores Amazon because of its unrelenting growth, and any significant slowdown may hurt Amazon's stock price. 

Not much to add here except that Gross Profit continues to grow as a result of Sales growth. 

This next chart is where things get a little more interesting. The Gross Margin percentage restates Gross Profit on a percentage of sales basis to give us a little clue how profitable Amazon is as a business. After a period of plateau from 2003 - 2011 where Gross Margin hovered around 22-24%, it started to lift off in 2012 reaching 25%. Since 2012, it continued to grow to 27% and 29% in 2013 and 2014, respectively. 

I wanted do some more digging on why Gross Margin increased, so I took a deeper look into Amazon's financial statements. In Accounting-speak, here is Amazon's statement on the increase in margins (emphasis mine):

Gross margin increased in 2014, compared to the comparable prior year periods, primarily due to service sales increasing as a percentage of total sales. Service sales represent third-party seller fees earned (including commissions) and related shipping fees, digital content subscriptions, and non-retail activities such as AWS, advertising services, and our co-branded credit card agreements.

There is a lot to take in there, so let's break it down one by one. The first statement I bolded was that margins grew primarily due to service sales increasing. Amazon makes money from two primary sources: 1) product sales and 2) service sales. Products are the physical goods Amazon delivers (clothes, diapers, granola bars) as well as their digital media (video). Services include Amazon Prime (Amazon takes the $99/year subscription and allocates it between products and services such as video/music), Amazon Web Services (AWS), seller fees (Amazon charges you for selling on Amazon just like eBay), advertising ( has ads), co-branded credit cards (you can purchase credit cards on Amazon, for which they take a cut). Since Amazon stated margins grew primarily due to services sales, we know where growth may come from in the future. To narrow it down even further, I suspect growth will come from Amazon Web Services (AWS) at an increasing rate (Apple, for example, uses AWS to host many of its iCloud services).

Percentage of Sales

Operating expenses are growing in real-terms, but decreasing on a percentage basis. Around 70% of these expenses are Cost of Sales, which is as expected. 12% are Fulfillment, which is basically delivery of goods. 10% have to do with Technology and Content, which encompasses the licensing deals Amazon has to pay for the TV, movies, and music it provides with Amazon Prime. 5% of the expenses are Marketing (have you seen their Kindle commercials? They are terrible). Finally, the remaining 3% include General and Administrative and Other expenses, which is nothing in the grand scheme of things. 

There are two types of people in this world: those that think Amazon will never be profitable, and those who think Amazon can turn profitable as soon as Jeff Bezos flips a switch. I think we need a third type of person in this binary world who will say Amazon can turn more profitable, but not necessarily be extremely profitable. Amazon is not exactly a high margin company (perhaps AWS will be as it becomes an increasing part of Amazon's business), so quickly scaling it profitability will be tough. I did a quick calculation that may interest you: since 1995, Amazon made $2,441,872,000 in profits. In other words, after 20 years of being in business, Amazon made roughly $2.5 billion in clean, unadulterated income. Of course, this is because Amazon reinvests most of the money it makes back in the business, but the statistic is nonetheless fascinating. 


If you saw me walking on the street, ran up to me, and said "Larry, what do you think about Amazon", I would tell you I don't know. Amazon is difficult to form an opinion on because it's like trying to predict the behavior of a human being, which in this case is Jeff Bezos. On the whole, people act entirely rationally, and a smart person makes mostly good business decisions (expanding from selling books to products to services and now AWS is what a smart person would do). But even the best of us make strategic blunders sometimes, which can either set us back a little or totally ruin the company (the Amazon Fire devices are just setbacks - why do they exist again?) The best person to ask about the future of Amazon would probably be Bezoz's psychiatrist rather than an analyst.