The majority of Amazon's revenue comes from
AWS
Subscription (Amazon Prime)
Online Store
Physical Store
3rd Party Seller Service
Advertisement
Selling electronic devices, manufactured by them (Alexa, Kindle, Fire tablet, Fire TV, Echo, and Ring)
Develop and Produce Media Content
Content Seller (We also offer programs that allow authors, musicians, filmmakers, Twitch streamers, skill and app developers, and others to publish and sell content - Taken from Annual Report 2021)
Before deep diving into each business lets see their income statement
Amazon crossed nearly $500 billion dollar in revenue
and Amazon net profit is around $10 billion dollar
Taken from https://www.stratosphere.io/
When you examine the company's statistics or numbers, you will discover that it is a relatively typical corporation with a net profit margin of 2%. While it's true that numbers don't always lie, you still need to understand what they're saying.
before talking about their business and how much cash each business is generating i would like to show you how much they are spending into R&D, this year roughly they spent $67 billion dollar alone on R&D
Now let’s talk about their business and how much cash they are generating
Amazon doesn’t provide how much net profit they made on each business but i will try to dig more to find out the relative value (can be wrong by +- 2-3%)
https://prospect.org/power/amazon-continues-preying-on-third-party-sellers/
https://www.thestreet.com/amazon/news/amazons-advertising-business-shoots-for-the-moon
So now if you look at the number
Cash which amazon can save or it can come direct to bottom line, assuming amazon decrease the R&D Spend by 20% is
R&D saving approx $12b
Third party seller service : $20b
Advertisement: $9b
AWS: $12b
Total out of these three business + R&D saving = $53b
Assuming say net income from all other business comes around $3b ( very conservative)
So amazon can make around $56-$60b cash to the bottom line instead of $10b dollar which can give an EPS of around 6 and PE can be 14 on current price $84 (2022) but since amazon is reinvesting all the cash it is generating to the business the net income is low and amazon share optically looks expensive.
Why then, is the share price of Amazon declining? (7th Jan 2023). Market is unaware of the figure I provided? Naturally, the market is aware of this information but market is always forward-looking.
Apart from the reason Fed rate hikes, demand shrink in future and all is there any other reason due to which amazon is falling daily, let’s figure it out.
The reason i can think of
The rate of e-commerce adoption or rise in numbers that we observed during COVID might not continue in the upcoming few years ( Back to normal scenario those who loves to go out and purchase from offline store, may start doing that)
Market is not happy the way Amazon is spending money one of many example i can quote here is
Amazon invested in a electric startup named Rivian and the investment as of now doesn’t seems to be paying off, below are the few headlines
Rivian shares lost over half their value in the first quarter of 2022, forcing Amazon to take a big markdown on its stake in the electric vehicle company.
For a second straight quarter, Amazon took a massive writedown on its investment in electric vehicle maker Rivian.
Source : https://www.cnbc.com/2022/04/28/amazon-takes-7point6-billion-loss-on-rivian-stake-from-q1-stock-plunge.html
https://www.cnbc.com/2022/07/28/amazon-records-tk-billion-loss-on-rivian-holding-in-second-quarter.html
They started the food delivery business in India which now they are shutting it down. Amazon’s experiment with Kirana stores has failed! - Amazon spent $227 million to build a B2B e-commerce platform in India. source - https://finshots.in/archive/amazons-foray-into-b2b-ecommerce/.
so amazon has a habit of making bad investment, Remember One golden rule “market rewards efficiency and punishes incompetency.”
As the e-commerce market is growing, everyone wants to take a chunk of it, amazon is facing more and more competition.
Due to demand and supply gap post covid, wage growth is around 6% which can definitely daunt the thin margin
Work culture “The average Amazon warehouse worker leaves within just eight months – that’s an unmistakable sign that Amazon’s jobs are unpleasant,”
Source : https://www.theguardian.com/commentisfree/2022/feb/04/amazon-chews-through-the-average-worker-in-eight-months-they-need-a-union
This can lead to strike or operation losses
Fed is trying to kill demand which can lead to decrease in earning of Amazon and other companies
Prime Video - The streaming business is a cash guzzling business you need to put more cash to generate more cash, it is capital intensive business
From the annual Report 2021 of Amazon
In 2011, we started offering over 5,000 streaming movies and shows as part of customers’ Amazon Prime subscriptions. Initially, all of our content was produced by other studios and entertainment companies. These deals were expensive, country-specific, and only available to us for a limited period; so, to expand our options, we started creating our own original shows. Our early efforts included short-lived shows like Alpha House and Betas, before we had our first award-winning series in Transparent, and eventually created multi-year franchises in The Marvelous Mrs. Maisel, The Boys, Bosch, and Jack Ryan. Along the way, we’ve learned a lot about producing compelling entertainment with memorable moments and using machine learning and other inventive technology to provide a superior-quality streaming experience (with useful, relevant data about actors, TV shows, movies, music, or sports stats a click away in our unique X-Ray feature). You might have seen some of this in action in our recent new hit series, Reacher, and you’ll hopefully see it in our upcoming Lord of the Rings series launch (coming Labor Day 2022)
So you see here they invested around $465 million on Lord of Ring show but i am not sure how much that helped amazon in growing their subscription or what sort of tangible or intangible return amazon got from it.
Market likes diversification but hates over-diversification.
Other risks can be
Growing competition in cloud space
Regulatory risk - EU govt fined Amazon in 2021 for data violation ($888 million)
I like the graphics made by Finshots describing how Amazon is at war with everyone, this is a double edge sword, In good times( when liquidity is good) the strategy looks amazingly good but in bad times ( when liquidity is dried up) this strategy looks equally bad “to be at war with everyone”
So till now i talked about what are the numbers in the balance sheet of amazon telling to us and what could be the possible reason of amazon’s market cap downfall now lets talk about in detail their investment.
In 2021 Amazon spent around $61b dollar on capex
Amazon is heavily investing on warehouse, logistic infrastructure.
From annual report of Amazon
In the early 2000s, it took us an average of 18 hours to get an item through our fulfillment centers and on the right truck for shipment. Now, it takes us two
For perspective, in 2004, we had seven fulfillment centers in the U.S. and four in other parts of the world, and we hadn’t yet added delivery stations, which connect our fulfillment and sortation centers to the last-mile delivery vans you see driving around your neighborhood. Fast forward to the end of 2021, we had 253 fulfillment centers, 110 sortation centers, and 467 delivery stations in North America, with an additional 157 fulfillment centers, 58 sortation centers, and 588 delivery stations across the globe. Our delivery network grew to more than 260,000 drivers worldwide, and our Amazon Air cargo fleet has more than 100 aircraft. This has represented a capital investment of over $100 billion and countless iterations and small process improvements by over a million Amazonians in the last decade and a half.
The company’s warehouse space jumped from 165 million square feet prepandemic to 379 million square feet by May 2022, according to data from MWPVL International Inc., a Canadian supply-chain consulting firm.
Source : https://www.wsj.com/articles/amazons-plans-for-massive-warehouses-go-forward-amid-logistics-review-11659035631
They are spending a lot of money of logistic infrastructure which in my opinion is the right step or a right thing to do customer now days want “Low price, fast delivery and quality product“ and you need to have your own infra to meet up this kind of customer expectation.
One thing i like about amazon is they think long term
We’re sometimes criticized at Amazon for not shutting much down. It’s true that we have a longer tolerance for our investments than most companies. But, we know that transformational invention takes multiple years, and if you’re making big bets that you believe could substantially change customer experience (and your company), you have to be in it for the long-haul or you’ll give up too quickly.
From concall of amazon - Our network doubled over the last 2.5 years.
While i was going through concall of amazon, i find out there are lot of questions been asked on AWS but in my opinion advertisement and subscription business of amazon is equally good if not better
So far we talked about numbers, why in present, market is disliking Amazon, where amazon is spending its cash, now lets talk about future
In my honest opinion Drone delivery, autonomous driving can be really a game changer for e-commerce business and can significantly contributes towards improving the margin
https://www.aboutamazon.com/news/transportation/how-amazon-is-building-its-drone-delivery-system
Although getting approvals, airspace can be a tough task
https://www.forbes.com/sites/retailwire/2022/04/19/crash-raises-doubts-for-amazons-2-billion-drone-program/?sh=52a33ef637c6
https://www.insiderintelligence.com/insights/drone-delivery-services/
With drone delivery amazon is trying to deliver products in 30 mins.
Automation in warehouses / robots in warehouse can significantly help in bringing the operating cost down.
In my opinion the trend of e-commerce is here to stay for coming decades, for now i will leave you here and i will update the blog as and when I read about a new development or investment that Amazon is undertaking.
Good day, take care
Good article to read about
https://seekingalpha.com/article/4567661-amazon-stellantis-two-stocks-i-will-buy-more-of-2023