amazon reported record profits in 2018
earning 10.1 billion in net income
compared to just 3 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 that 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 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 u.s e-commerce market
online sales are not actually the
biggest money maker for the company
its e-commerce 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 an e-commerce 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 uh business
by amazon standards but by most
corporate standards it's doing something
like
30 percent operating margins in 2018
aws brought in 7.3 billion dollars in
operating income
and 25.7 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 100 of amazon's operating
profit 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 of its advertising
business it grew 95
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 play as well
they don't break out the profits of this
but looking at comps like facebook and
google
it's almost certainly also in that 30
operating margin
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 fifteen to twenty
percent cut of the sales
while also collecting fees for things
like storage and shipping
while 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 uh 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 seller services
rose 34
in 2018 to 42.7 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 uh without having to do all of the
marketing yourself
amazon's smart speakers also have
analysts excited
the last thing i find really interesting
is alexa so you now have us an installed
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'll
accelerate the move of amazon in 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 200
billion dollars in annual revenue
it's just really hard to grow at 20 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