Amazon is causing the death of retail! Remember when they used to sell books? Now they are the causing the death of retail and the stock price has gone parabolic, making Amazon Inc stock market darling.
Where do Amazon make money?
Amazon make money on their traditional e-commerce platform, the third party marketplace which enabled every day folk to make money online ( in a similar way to Ebay), Amazon Prime subscriptions, Web Services, and hardware.
Less and less people are shopping in bricks and mortar shops either in city centres or out of town shopping centres because they are buying their stuff online. Amazon started as a book retailer and has grown into some much different affecting competitors in every market they enter. They are the largest internet based retailer in the world by total sales and market capitalisation.
How has Amazon done this?
Amazon’s CEO Jeff Bezos has harnessed technology to make Amazon a very lean company. Using technology they have evaporated most of the costs of traditional retail. First by using the power of the internet and riding the digital revolution, then by bringing supply chains into the 21st centuary, reducing the cost of deliveries and now by eliminating human staff from bricks and mortar stores (they are doing this in the USA).
Cutting costs allowed Amazon to compete on price and undercut everyone else. Great for growing revenues. Profit however, have been more elusive. Amazon has a astronomically high share price with a multiple of earnings of 200x as of August 2017.
Automation has been key to Amazon’s business plans. Check out Amazon fulfillment warehouses;
Wow, pretty cool if you ask me, but, are they getting ahead of themselves. Economists say one of the missing ingredients of modern western economies is productivity growth. Simply put, the amount of output per unit of input into the economy. Automation is the future of which Amazon has been a driving force, and it could trigger a productivity miracle. This is not without some serious side affects;
Causing unemployment, where people give up looking for another job, leaving them reliant on the welfare state.
Causing deflation in wages, when wage inflation is needed in a healthy economy.
Amazon has built a brand and grasped market share at the expense of making reliable profits that justify the valuation. Amazon e-commerce operates on very tight margins, as does it’s hardware division.
To be valued the same as any other retailer they are going to need to grow their earnings 16 times by using widely used valuation metrics. So why are they valued so high? Innovation and ingenuity is pushing them forward and the stock market loves it. Increasing the social good by relieving people from doing boring cashier jobs, working in a warehouse, or driving delivery vans. Increasing productivity and making a lot of stuff a lot cheaper than it was before.
Add up all their profits since 1994 they still made less than Microsoft made in the fist 6 months of 2016. Amazon web services is the division that makes makes most money (with the highest margins) and subsidises the expansion and growth of Amazon retail. Amazon has never paid a dividend because most of it’s earnings go into growing the revenues.