Amazon Historical Background
Amazon.com, Inc. is the world’s largest online bookstore founded on 4th July by Jeff Bezos in Seattle, Washington, US. Due to its global footprint, customer reach, huge market share, and aggressive pricing policy, it is often regarded as the online equivalent of Wal-Mart (Brandt, 2011). Amazon has been described as the most customer-centric company due to its inventions, commitment to excellence, long-term strategic plan, and passion for reaching as many customers as possible. Amazon was initially established as an online bookseller but has now diversified. Today, Amazon focuses on other areas, including e-commerce, digital streaming, artificial intelligence, cloud computing. Besides selling books. Today, it manufactures and sells electronic devices, such as Echo devices, Fire TVs, Fire Tablets, kindle e-readers, and media content. Today, Amazon has strategically positioned itself, providing customers with the most competitive prices and improved operating efficiency.
The reason for selecting Amazon for this analysis is because it is diversified in terms of revenue streams. According to Amazon.com, Inc. SWOT analysis (2004), the economies of scale have allowed the company to compete with large international companies from different industries. As of 2018, it had employed 566,000 employees, many of whom are professionals. Being an online company, Amazon serves its millions of customers through its official website and physical stores spread across the world (M’Barki & Neal, 2016). Customers can access their product offerings through mobile apps, websites, or by visiting their physical stores. Amazon is the second-largest company in terms of revenues. According to Stock Analysis on Net (2018), It trades on NASDAQ using the symbol of AMZN. As of 8th November, Amazon.com, Inc. Share price stood at 1,785.88 US dollars up from the original stock price of just 18 US dollars in 1997.
| Amazon.com Inc. | ||
| Consolidated Income Statement | ||
| US$ in millions | ||
| 12 months ended | Dec 31, 2018 | Dec 31, 2017 |
| Net product sales | 141,915 | 118,573 |
| Net services sales | 90,972 | 59,293 |
| Net sales | 232,887 | 177,866 |
| Cost of sales | (139,156) | (111,934) |
| Gross profit | 93,731 | 65,932 |
| Fulfillment | (34,027) | (25,249) |
| Marketing | (13,814) | (10,069) |
| Technology and content | (28,837) | (22,620) |
| General and administrative | (4,336) | (3,674) |
| Other operating expense, net | (296) | (214) |
| Operating income | 12,421 | 4,106 |
| Interest income | 440 | 202 |
| Interest expense | (1,417) | (848) |
| Other income (expense), net | (183) | 346 |
| Non-operating income (expense) | (1,160) | (300) |
| Income (loss) before income taxes | 11,261 | 3,806 |
| Provision for income taxes | (1,197) | (769) |
| Equity-method investment activity, net of tax | 9 | (4) |
| Net income (loss) | 10,073 | 3,033 |
Net Sales
Net sales are the amounts collected from customers, including taxes from delivery of services and sale of manufactured goods. Amazon has five main revenue-generating activities, including online stores, physical stores, third-party seller services, AWS arrangements, subscriptions, and other services such as advertising services. Amazon’s net sales grew from 177,866 million US dollars in 2017 to 232,887 million US dollars in 2018, representing a 31% growth (Stock Analysis on Net, 2018).
| Amazon.com Inc. | ||
| Income Statement, Revenues | ||
| US$ in millions | ||
| 12 months ended | Dec 31, 2018 | Dec 31, 2017 |
| Online stores | 122,987 | 108,354 |
| Physical stores | 17,224 | 5,798 |
| Third-party seller services | 42,745 | 31,881 |
| Subscription services | 14,168 | 9,721 |
| AWS | 25,655 | 17,459 |
| Other | 10,108 | 4,653 |
| Net sales | 232,887 | 177,866 |
Operating Income
Operating income refers to the net amount for the period after deducting the operating expenses from the operating revenue. Amazon’s operating income increased significantly from 4,106 million US dollars in 2017 to 12,421 million US dollars in 2018, representing 203% growth (Stock Analysis on Net, 2018). Amazon attributed the growth in operating income to a significant increase in sales from online stores, physical stores, and third-party seller services. Operating expenses also remained stable over the same period. Massive subscriptions during the financial year ending 2018 also contributed to the growth in operating income.
Income before Taxes
Income before taxes refers to the amount of income or loss from operating activities, including income or loss from investments before deducting the income tax expense. Amazon’s income before taxes increased significantly from 3,806 million US dollars in 2017 to 11,261 million US dollars in 2018, representing a 196% growth (Stock Analysis on Net, 2018). Amazon attributed the massive growth to a stable business environment and increased sales from market penetration. Amazon strives to penetrate as many parts of the world as possible, which means that income before taxes is expected to grow significantly in the foreseeable future; other things held constant.
Net Income
Net income refers to the amount of profit or loss for the period under review, excluding income tax expense, which was attributed to Amazon or the parent company. Net income for Amazon increased significantly from 3,033 million US dollars in 2017 to 10,073 million US dollars in 2018. This increase represents a 232% growth (Stock Analysis on Net, 2018). Amazon attributed the significant growth in net profits to a stable business environment, diversification, and rather stable operating expenses.
Profitability ratios
The gross profit margin ratio shows the proportion of revenues available to cover expenses and other operating expenditures. Amazon’s gross profit margin grew from 37% in 2017 to 40% in 2018. The growth in gross profit margin can be attributed to the growth in net sales over the same period (Stock Analysis on Net, 2018).
Operating profit margin is another profitability ratio that is arrived at by dividing the operating income by the net sales. Amazon’s operating profit margin increased from 2.3% in 2017 to 5.3% in 2018. Again, the increase can be attributed to an increase in net sales and operating income during the period under review (Stock Analysis on Net, 2018).
Net profit margin is the most accurate approach to calculating the profitability of a company. It is arrived at by dividing the net income by the net sales. The net profit margin grew from 1.7% in 2017 to 4.3% in 2018 (Stock Analysis on Net, 2018). Amazon attributed the growth to increased net profit and net sales over the period under review.
Conclusion
Overall, Amazon remains a revolutionary e-commerce company that has grown exponentially from a small company run in Seattle, Washington, to a fortune 100 company operating across the whole world. Through customer focus, Amazon now provides its customers with over 200 million product offerings in its online store and physical stores spread over the whole world. Its efficient pricing strategy and economies of scale have enabled the multinational company to become the second-largest technology firm and the largest online company in terms of revenues. It currently employs the largest number of people in the private sector in the United States. As illustrated in its financial statements, Amazon continues to grow at an exponential rate. Growing in all aspects, Amazon continues to impress investors with its rapid growth.
References
Amazon.com, Inc. Retrieved from https://www.amazon.com/Inc/s?k=Inc.
Amazon.com, Inc. SWOT Analysis. (2004). Datamonitor Plc.
Brandt, R. L. (2011). One click: Jeff Bezos and the rise of Amazon.com. New York: Portfolio/Penguin.
M’Barki, M., & Neal, R. (2016). Amazon and the rise of e-commerce: The story of Jeff Bezos’ revolutionary company.
Stock Analysis on Net (2018). Amazon.com Inc. Stock Analysis. Retrieved from https://www.stock-analysis-on.net/NASDAQ/Company/Amazoncom-Inc/Financial-Statement/Income-Statement
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