I don't necessarily think that's the case. Amazon did make more from AWS than their ecommerce business last quarter, but it wasn't a lot more (less than a billion in profit). They will face as much or more competition in this area than in the ecommerce space.
In any case, since a lot (I would say most) of Amazon's market cap is based on perceived value and growth of its distribution and ecommerce business, if the fundamentals aren't there to make larger profits long term, there's no way the stock can maintain its current valuation.
I do shop on Amazon a lot, because I live in a city where the convenience factor is too great to drive to a store, and believe all this in spite of that. I agree that their working conditions are awful, but unfortunately I don't think most people care when shopping. Wal-Mart has taken a lot of flack for that over the years and it hasn't slowed them. In fact it was only about five years ago that there was a best selling book about how Wal-Mart was taking over the world and had to be stopped at all costs. I don't hear that as much these days and in fact it seems that they are viewed as an underdog. Things can change very quickly.
The market is obviously betting Amazon is going to get a lot larger yet, at the likely cost of Walmart losing sales (Walmart stopped growing meaningfully years ago). In those types of circumstances, the company that is getting consumed is going to get a sizable discount applied to their earnings, as Walmart is today. And the company with growth almost universally gets a seemingly irrational multiplication given to their business. Same story repeats over and over again (IBM vs MSFT -> MSFT vs GOOGL > GOOGL vs FB).
That value gap between Amazon and Walmart - ~$130 billion - can be argued to be solely made up of the market's valuation now slapped on AWS, based on the expectations of the coming three to five years. I've seen arguments getting routinely made by leading analysts and financial press that AWS is already worth nearly as much as IBM today. Is that true? Who knows, but it's clearly extremely valuable, whether that's $60 billion in market cap equivalent or $130 billion.
Amazon's retail business is very low-margin. Most of the profit they do make now is coming from AWS. Their valuation right now comes from investor expectations that they will eventually run every other retailer out of business and then change monopoly rent with much fatter margins, rather than on the margins they have now.
No, you are wrong about this. Or several years out of date at least. The idea that Amazon isn't profitable save for AWS is almost a meme for some reason in parts of the tech community, but it isn't true and never really has been when you account for re-investment.
Retail on its own has been profitable for several years now, and its margins are improving. Some of those numbers are public and some are not, but even with just the public numbers it is easy enough to infer the above. What's more, Amazon retail would be pretty wildly profitable, relative to the typical margins of retail, if Amazon stopped dumping billions of dollars every quarter into continuous expansion of its logistics capabilities. They're able to dump those billions while still pulling a slight profit. In general though, they optimize for free cash flow, not profit.
You're very obviously wrong on Amazon. They have at least 10 to 15 more years of significant growth before peaking. They're still growing near 20%. Their retail business is still eating the competition (total US retail sales are hardly growing). AWS is still growing rapidly and spitting off perpetually greater sums of operating income (that business is nowhere near peak and won't be for a long time). It's very likely Amazon's sales will reach several hundred billion dollars per year over time, just in retail alone. Amazon has a very decent shot of becoming at least 2/3 the size of Walmart in terms of sales.
I'm confused why you would tie Amazon's future, an eCommerce company who also has a strong cloud (AWS) and digital media division and a growing hardware division (Kindle, Fire) to a brick and mortar retailer such as WalMart.
Even discarding all other revenue streams, you want to compare the company to a retailer growing sales at 1% y/y (WalMart), while they grow sales at 22%? All this while only being in 12 international markets and citing a lack of non-English content as holding them back in the high margin area of digital content.
Your evaluation seems entirely misguided and ham-handed to be honest.
Walmart is at $425-$450 billion in traditional retail sales ($485b total), it very clearly can be done. Ecommerce will double over the next ten years in the US. Out of the trillion dollars in that ecommerce expansion, Amazon will very likely get at least a quarter of it. If you slow Amazon's growth down to something like 9%-12% avg per year over the next 10 years - which is very reasonable based on where they're at now - they're over half a trillion in sales at the end of that.
On a modest decline from the present rate of growth, they'll hit $300+ billion in sales in just three years. AWS should easily be at a $9b operating income annualized run-rate, at that point.
The common proclaim for years now, has been that there would be no margins in cloud services. AWS has always proven that wrong, all the way back. There's no reason to believe after 11 years, the margins are suddenly going to disappear. If the fierce AWS / Azure / GC competition the last five years didn't squeeze those margins out yet, then what would? It's more likely that the AWS margins will hold as they add more specialized services that are difficult for basic / smaller competitors to replicate (unlike eg standard compute or database services).
If you look at a company and assume that you can shut the whole thing down except the sales team, usually it'll be profitable in theory. The problems only arise if someone tries that and then they'll discover that there needs to be a bit of a moat around the sales team to make the whole thing work.
Amazon's profits prior to 2017 were laughable. Even now their income is inferior to Walmart - and they have AWS as a business that is a bit of a cheat. Fair enough from a maney making perspective, but it makes it hard to do an apples-to-apples on how well they are running their retail arm.
Retail is a particularly brutal business to turn a profit in and while Amazon looks like it can do it, the proof isn't in yet. Walmart still consistently makes more money than Amazon.
"Oh we could make money at any time!" is one of those claims that is false until the proof is solidly in the rear view mirror. High revenue and 0% margins is a lot easier than middling revenues and a respectable margin.
The math on their business is pretty straightforward.
Extrapolate Amazon's retail business out to the size of Walmart, $500 billion. Assume extreme retail margins: 5% net income margins. $25 billion in profit, at max size, under the best case scenario Amazon will ever see. More likely, Amazon will never reach the retail size of Walmart today (inflation adjusted).
A more likely number: maybe $12 to $15 billion in retail profit. Slap an optimistic valuation for the retail sector onto that: $240 to $300 billion valuation. Comparable to Walmart.
Next, AWS at $60 to $80 billion in eventual sales, with 20%-25% margins, spitting off perhaps $15b-$20b in operating income. That business might end up worth $300b to $500b.
All of Amazon's best case scenario growth for the next ten years, is already priced into the stock. That's what you would typically expect with a ~250 PE though.
They're not doing fine as evidenced by the loss of value in their share price. AWS on its own isn't big enough, nor still growing enough, to justify a massive valuation anymore. And the web storefront is suffering too. Amazon simply isn't doing that well at the moment any way you look at it.
"Amazon's retail business is going to completely dwarf AWS in the long term"
It will in revenues but not in profits.
Right now, Wallmart, Exxon, GM etc. 'dwarf' most tech businesses in terms of revenues and the size of their businesses, but the profits are smaller, so tech companies have a higher valuation.
AWS and their ad business are projected to generate $31 billion in operating income for fiscal 2021.
Those two businesses are worth a likely $600b to $1t depending on how aggressive you want to be on the multiple. That's three to four years out, however that's how the market typically treats Amazon (forward expectations of growth, not the prior 12 months earnings). They're richly valued today, no question, and it's quite plausible they'll actually grow into their current valuation in time (the market cap today pulls at least five years of growth forward to the present imo; who knows if AWS and advertising will keep going as anticipated).
The retail business will end up being by far the least valuable part of the Amazon empire. Whenever the day comes that these pieces are split off, particularly AWS, the retail business won't end up being worth more than Walmart.
Bear in mind that prominent stocks like Amazon don't trade in their value, they trade on perceived future value and settle where that perceived value crosses with the markets risk tolerance.
Amazon has, and will continue, upward because they are capable of breaking into new markets at scale. Unlike Netflix which is quickly approaching market saturation, Amazon has virtually unbounded potential to invade untouched markets as they are currently doing with postal and produce. The result is that we can't see where Amazon's revenue will finally plateau. What we do know is that AWS profits make them extremely resilliant to taking losses in these other markets but at the same time highly vulnerable to competition from other providers like Google.
Fyi google has the better product, but it's better because it puts the kind of people who decide which to use out of work. So industry hasn't flipped yet. When they do expect Amazon to take a big hit.
No, I’m not being disingenuous. As an investor, I care less about what percentage of online sales Amazon has. It could be 10% or 90%, but I care more about the total size of the retail space and Amazons specific dollar amount. If you heard their last earnings call, it’s clear their online growth is slowing down. Amazon understands this and they know a long term bet on it isn’t wise - hence, they’re shifting to a more physical presence, but WalMart trounces them. WalMart has the retail space strategically located across the country, and WalMart is offering competitive shipping, without requiring annual memberships. They’re holding their own in the online space. If anything, your 50% metric is an incomplete picture and a gross representation.
I’m still betting on Amazon going forward (I invested ~$2MM when they were below $300 a share, which has grown miraculously), but if their retail business was where all of Amazons eggs were put, I would have offloaded my investment a while ago.
Wal Mart's profit margins are only a few percentage points, maybe 5% if they're lucky. That's the nature of retail. There definitely seems to be some utility and efficiency gains being made by Amazon. I doubt investors are seeking the kind of explosive growth or profits seen in tech companies like Apple, but rather a steady gain in market share from companies like Wal Mart, Best Buy, and whatever else you can deliver to a home.
I'm not going to write an (overly) long comment on it as I think Amazon is in a good position for continued growth but not because market cap is bigger (revenue is still smaller, employees is still smaller, footprint is still smaller, groceries have been a slow burner even post Whole Foods) and certainly not because numbers went up for the last 5 years so therefore they'll just keep going up until all competition is buried.
Also remember when looking at valuations/revenue/profits/growth that these mega companies can be extremely wide. What looks like massively higher profit margins turns out to be from Amazon Web Services driving 2/3 the operating profit not from store sales margins and even if it was that one company can sweep up a certain category of sales doesn't mean it'll be able to sweep all of them up.
There's also nothing to say Amazon can't be outdone by others or can't become the source of its own demise just because it's done well over the last 5 years.
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Anyways back to the XKCD question Amazon has experienced high triple digit growth in the last 5 years and still hasn't approached Walmart in sales/revenue. That doesn't mean it won't do so but that also doesn't mean the next 5 years will be as easy to have triple digit growth, especially if that growth was in enabling new sales rather than displacing traditional sales. Similarly the market isn't worried about Walmart fizzling out any time soon like Yahoo did, to go back to traded value despite Amazon's meteoric rise Walmart is still valued twice as much over the last 5 years compared to the 15 prior where it sat completely flat even though Amazon wasn't much of a competitor at all during that time.
In any case, since a lot (I would say most) of Amazon's market cap is based on perceived value and growth of its distribution and ecommerce business, if the fundamentals aren't there to make larger profits long term, there's no way the stock can maintain its current valuation.
I do shop on Amazon a lot, because I live in a city where the convenience factor is too great to drive to a store, and believe all this in spite of that. I agree that their working conditions are awful, but unfortunately I don't think most people care when shopping. Wal-Mart has taken a lot of flack for that over the years and it hasn't slowed them. In fact it was only about five years ago that there was a best selling book about how Wal-Mart was taking over the world and had to be stopped at all costs. I don't hear that as much these days and in fact it seems that they are viewed as an underdog. Things can change very quickly.
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