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AnalysisU.S.

Why investing in Amazon is buying six businesses in one

With a market capitalisation of over one trillion dollars, Amazon is among the top five largest companies in the world. Who would’ve known that an online bookstore operating out of Jeff Bezo’s garage in 1994 would transform into a global leader in e-commerce and cloud computing today.

Since its initial public offering in May 1997, Amazon’s share price went from $18 to a recent high of US$3,773, representing an over 20,861% gain on investment. This means that every US$10,000 invested would have grown to US$2,086,100. Clearly, this impressive performance and growth are attributed to its business model. But, as an investor, how well do you understand Amazon’s business?

Did you know that Amazon has six different revenue segments reported in its annual reports? If the answer is no, and you’ve always been confused about Amazon’s diversified business, this article will help to provide a bird’s eye view of its overall business model.

1. Online stores

Online stores is Amazon’s largest revenue stream contributing US$222.1 billion in net sales (47.3% of total net sales) in 2021. These revenues constitute the sale of both a wide variety of physical product sales (including household items, books, electronics, etc) and digital media content in the form of e-books, videos, games, music, software, etc, from Amazon’s online retail infrastructure. This is Amazon’s business model that we’re most familiar with.

To maintain a margin, Amazon profits by leveraging its economies of scale, allowing them to purchase products in bulk from wholesalers and subsequently markup prices before selling to consumers.

Amazon online stores business model.

2. Physical stores

Besides online stores, Amazon owns a chain of brick-and-mortar stores as well, amounting to 672 stores in North America and seven stores internationally as of 31 December 2021.

The majority of these physical stores comprise of Whole Foods Market, which Amazon acquired in 2017 to get a foothold in the grocery market. The remaining include Amazon-owned stores such as Amazon Fresh (grocery stores), Amazon Go (cashierless convenience stores), Amazon Books (books), Amazon 4-Star (highly rated products from e-commerce), and Amazon Pop Up (stand-up kiosks operating in malls selling Amazon products). However, Amazon recently announced that it will close all of its Amazon Books, Amazon 4-Star, and Amazon Pop Up locations across the U.S. and the UK to focus on its grocery stores.

Revenue generated from this segment amounted to US$17.1 billion in net sales, or 3.6% of total net sales.

Amazon physical stores business model.

3. Third-party seller services

We already know that Amazon has one of the world’s largest online marketplaces connecting both sellers and buyers. Businesses or independent sellers like you and I can list and sell on Amazon’s website, leveraging on its retail and logistics infrastructure, branding, and network of customers. This comes at a fee, depending on the seller’s needs and plan selected.

Amazon makes money from third-party sellers through commissions in the form of monthly subscription fees, selling fees, closing fees, high-volume listing fees, and more. Sellers with storage and shipping needs can also opt for inventory storage and fulfilment services (Fulfilment By Amazon – FBA). Otherwise, merchants will have to handle the logistics process themselves (Fulfilment by Merchant – FBM).

In 2021, third-party seller services made up Amazon’s second-largest revenue stream at US$103.4 billion in net sales, representing 22% of total net sales.

Amazon third-party business model.

4. Subscription services

If you are a loyal customer of Amazon, you would’ve certainly heard of the company’s flagship subscription service – Amazon Prime. Depending on the country you’re based in, the costs for Prime and its benefits will vary.

In the U.S., Prime members pay US$14.99 per month or $139 a year for perks in the form of same-day delivery and other shopping benefits. Amazon also bundles digital video (Amazon Prime Video), music (Amazon Prime Music), and other subscription benefits for Prime members.

This highly recurring revenue segment contributed US$31.8 billion of net sales in 2021, or 6.8% of total net sales.

Amazon subscription business model.

5. Advertising

Many of you would be familiar with Google’s lucrative YouTube advertising business. But did you know that Amazon’s advertising business is larger than YouTube?

Amazon advertising revenue vs YouTube advertising revenue.

With Amazon’s global online and physical presence, it’s no doubt its platforms are highly sought after by advertisers looking to promote their products and services.

Through Amazon Ads, businesses can advertise on Amazon’s e-commerce and physical stores, streaming services, Prime Day shopping events, and more. This segment contributed US$31.2 billion in net sales in 2021, representing 6.6% of total net sales.

Amazon advertising business model.

6.  Amazon Web Services

Amazon’s cloud computing platform, AWS, is one of the company’s fastest-growing segments with an annual growth rate of 34% over the last two years, and grew 37% year-on-year in the first quarter of 2022.

As the world’s largest cloud provider, Amazon serves millions of diverse customers ranging from start-ups to large enterprises like Netflix, Boeing, and government agencies.

AWS earns from the sales of cloud computing, storage, database, and other cloud services offered to companies. These include Amazon Elastic Cloud 2 (computing capabilities), Amazon Simple Storage (object storage service), Amazon Aurora (relational database service), and many more. Revenue from this segment is recognised when customers utilise their services based on the capacity used.

As the leader in cloud computing, it’s no wonder AWS ranks as the third largest revenue segment for Amazon, generating US$62.2 billion of net sales in 2021, or 13.2% of total net sales.

Amazon Web Services business model.

The fifth perspective

Amazon’s business model consists of a synergistic portfolio of companies, driven by its Bezos’s drive and innovation to launch new ideas. AWS and third-party seller services were born out of Amazon’s spare cloud and ecommerce infrastructure capacity respectively. While Amazon Prime, physical stores, and advertising serve as natural extensions of Amazon’s e-commerce business.

Amazon 2021 segmental revenue.

All these segments are now fully-fledged businesses in their own right. In a sense, Amazon’s businesses live up to the hidden meaning behind Amazon’s logo of offering products ranging from A to Z, and showcase the true value of this trillion-dollar company.

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This article was written in collaboration with Tiger Brokers. All views expressed in the article are based solely on The Fifth Person’s independent opinion.

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Brandon Teo

Brandon has a strong interest in analysing equities, focusing on fundamentals and growth. He graduated with a Diploma with Merit in Business at Temasek Polytechnic and ranked first in his course. With a passion for the finance field, Brandon will be exploring the investment banking sector. He will be pursuing a business degree as an undergraduate at Singapore Management University.

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