Here’s What Makes Amazon A Sum-Of-All-Parts Commerce Juggernaut

 | Oct 04, 2022 02:40AM ET

  • Amazon continues to grow even after 27 years of operations

  • Amazon Web Services (AWS) is the profit driver as revenues climbed 33% to $19.75 billion in its recent quarter

  • Over 1.9 million small business third-party sellers account for 58% of the sales on Amazon

    • Retailer marketplace and technology applications behemoth Amazon.com Inc (NASDAQ:AMZN) has grown into a juggernaut of commerce. Amazon is a paragon of the network effect as its ecosystem often induces the same customer to use multiple services simultaneously without a second thought. Amazon is the #1 Top Shopping Website, the #5 Top Beauty Destination among Gen-Z-ers, and the #2 Most Trusted Brand in America, according to Piper Sandler’s Generation Z Survey and Morning Consult.

    Familiarity with the brand and quality of services have become ingrained into consumers' daily habits worldwide. It’s hard to fathom that a company that does over half a trillion dollars in annual sales once started from a garage selling books online in 1994.

    Amazon enjoys the massive economies of scale and dominance that give them a halo effect when entering new industries or introducing new product services. It has over 300 million active customers and over 100 million Amazon Prime members. Shares have risen from single digits to over $3,000 per share in the past 27 years.

    A 30-for-1 stock split has made shares more accessible to retail investors. Here’s a breakdown of the many moving parts of the Amazon juggernaut.

    h2 Pioneer of E-commerce and Virtualization /h2

    It’s a fact that Amazon is one of the original pioneers of e-commerce and, at one point, had a 49% market share of the e-commerce industry. They have grown so massive that it’s hard to keep up with the innovations and numerous services they provide.

    Amazon segments its operations into three segments: North America, International, and Amazon Web Services (AWS). AWS is the profit driver as it continues to grow at a double-digit pace, responsible for most of the profits for the Company.

    AWS enables businesses to operate on the cloud without needing on-premise investments in hardware and software. This results in asset-light operations for a fee. It’s comparable to eating a well-prepared meal at a restaurant for one price instead of manually buying all the ingredients, cooking them up, serving them, and washing the dishes afterward.

    It’s cheaper, tastier, and more efficient. AWS provides every kind of business application under the sun as well. AWS is the market leader in virtualization platforms, with Microsoft’s Azure (NASDAQ: MSFT) running at a distant second.

    h2 The Amazon Effect /h2
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    Amazon has a history of disrupting and dominating market categories once it set its sights on entering. The mere rumor of Amazon’s interest in entering a market or industry results in the stocks of competitors taking an immediate plunge. Much like how Walmart (NYSE:WMT) is criticized for devastating small local retailers when they enter a strategic location for one of their massive superstores, Amazon carries an even more ominous reputation for trampling incumbent businesses.

    They are considered the great disruptor, evidenced by their Kindle e-readers, Fire TV and tablets, and Alexa and Echo smart speakers, to name a few examples. On the flipside, companies that do business with Amazon often see their stock prices get an immediate spike. This was the case on Aug. 22, 2022, when Peloton (NASDAQ:PTON) shares spiked 15% when they announced the launch of their Peloton store selling their fitness equipment and gear on Amazon.

    h2 Revenge of the Little Guys/h2

    However, the irony here is that unlike big warehouse clubs like Costco (NASDAQ:COST), or major retailers like Target (NYSE:TGT), and Walmart, Amazon derives 58% of all sales through its third-party sellers. Like eBay (NASDAQ:EBAY) and Etsy (NASDAQ:ETSY), Amazon empowers the little guy.

    Third-party sellers account for over half of all units sold in Amazon stores. Third-party sellers comprise over 1.9 million small and medium-sized businesses on Amazon. This is largely in part by its innovative Fulfillment By Amazon (FBA) program that will warehouse and ship products on behalf of third-party sellers for a fee.

    Third-party sales are growing at 52% per year compared to 25% for first-party sales. Independent third-party sellers increased their sales by 55% from Apr. 25, 2020, to Jan. 15, 2021. The big box stores are a mom and pop’s nightmare, but Amazon is “America’s Corporate Nightmare” as labeled by Bloomberg.

    h2 If You Can’t Beat’em or Build them, then Just Buy’em/h2

    Their dominance and deep pockets have been criticized for stifling competition, and If they can’t build it, they will buy it. Such is the case with Whole Foods Market for #13.7 billion in 2017, Zappos footwear for $1.2 billion in 2009, Kiva Systems for robotics for $775 million in 2012, PillPack online pharmacy services for $753 million in 2018, Twitch streaming video platform for $970 million in 2014.

    Its MGM Holdings film and tv production and distribution acquisition for $8.5 billion in 2022 augment its content library and its Prime Video streaming service as it takes the streaming wars directly to competing platforms owned by Netflix (NASDAQ:NFLX), Walt Disney’s Disney+ (NYSE:DIS), Comcast’s Peacock and NBCUniversal, Paramount Global Class B (NASDAQ:PARA), and Warner Brothers Discovery’s HBO Max platform.

    Amazon announced the acquisition of consumer robot company iRobot (NASDAQ: NASDAQ:IRBT) in a $1.6 billion all-cash transaction in August 2022. It has since received scrutiny from members of Congress, led by Senator Elizabeth Warren (D-MA), with anti-competitive practice and privacy infringement concerns.

    h2 Slowing But Still Growing /h2

    Even at 27 years after its launch, Amazon continues to grow. Their fiscal Q2 2022 earnings report saw revenues rise 7.2% year-over-year (YoY) to $121.23 billion versus $119.16 billion consensus analyst estimates. While they reported a (-$0.20) loss per share, most of it was attributed to the $3.9 billion pre-tax valuation loss in its non-operating expense investment in electric truck maker Rivian (NASDAQ: RIVN).

    Operating income was $3.317 billion. Its AWS segment revenues grew 33% to $19.75 billion, with an improved operating margin of 29% versus 28.3% in the year-ago period. Their Advertising Services business grew 18% YoY or 21% in constant currency to $8.76 billion. Amazon CEO Andy Jassy commented,

    “Despite continued inflationary pressures in fuel, energy, and transportation costs, we’re making progress on the more controllable costs we referenced last quarter, particularly improving the productivity of our fulfillment network.

    We’re also seeing revenue accelerate as we continue to make Prime even better for members, both investing in faster shipping speeds, and adding unique benefits such as free delivery from Grubhub for a year, exclusive access to NFL Thursday Night Football games starting Sept. 15, and releasing the highly anticipated series The Lord of the Rings: The Rings of Power on September 2.”

    Amazon expects Q3 2022 revenues to come in between $125 billion to $130 billion versus $126.58 billion consensus analyst estimates but expects operating income between zero to $3.5 billion.