Amazon: The King of Disruptors

Amazon is the largest e-commerce company by market value; it belongs to Jeff Bezos, the richest man in the world. (1)

Jeff Bezos on a wind turbine while inaugurating Amazon’s new wind farm
Jeff Bezos on a wind turbine while inaugurating Amazon’s new wind farm

The firm offers a large line of products, making it a competitor for retailers across different industries. As you can see from the chart below, Amazon has a strong presence in the U.S. In fact, it is one of the most-loved companies among Americans, who nowadays make a lot of their purchases on Amazon.com.

In the chart below, we can observe that online sales represent most of the firm’s sales. In 2018, for the first time, Amazon has had a source of revenues, 8% of the total, coming from physical stores. This is due to the acquisition of Whole Foods Market Inc., a supermarket chain that sells organic food.

AWS, the cloud computing subsidiary, and Amazon Prime, a membership scheme for a series of services such as fast delivery and video and music on demand, represent small shares of the overall revenues of the company, equal to 18% combined.

Amazon has recently started to produce and buy video content (movies and TV series) and has consequently become a competitor for Netflix. Amazon has so far received 22 Emmy nominations, showing the quality of the firm’s contents library.

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The company has contributed to the diffusion and success of Black Friday (the Friday after Thanksgiving), a day of huge discounts. In 2017, Amazon made more than $1 billion in sales on Black Friday alone. (2)

If you look for “Amazon” on Google Trends you’ll notice that, in the last two years, Amazon online traffic has been higher in November than in December.

Amazon’s history

Amazon was founded in 1994 by Jeff Bezos, when he left his Wall Street job and moved to Seattle, which he preferred to Silicon Valley.

Initially, the firm was an online bookstore, but it has evolved over the years, extending its catalog and becoming an e-commerce behemoth.

The company was listed on the Nasdaq in 1997, and like hundreds of tech companies in the late 90s was part of the so-called “new economy.” This transition to a technology-based economy turned into the dot-com bubble that burst in 2000, generating a three-year downturn. As you can see from the chart below (from my book), Amazon’s stock fell by 94% in a few months.

Amazon_dot-com bubble_2

While many other tech companies went bankrupt, showing that their businesses weren’t sustainable in the long run, the e-commerce giant based in Seattle managed to recover.

The inside of an Amazon warehouse
The inside of an Amazon warehouse

Amazon has often been the subject of journalistic investigations that have spotlighted the hard working conditions in its warehouses. Moreover, the company has been criticized by the President of the U.S., Donald Trump, as you can read in his tweet below:

trump amazon tweet

Amazon recently ordered 20,000 Mercedes vans in order to build its own delivery fleet. This could hit hard old delivery companies such as UPS and FedEx, and the U.S. Postal Service. This looks like Bezos’ response to Trump’s tweet, in particular his comment that “they … use our Postal System as their Delivery Boy (causing tremendous loss to the U.S.)”. Keep in mind that Bezos is the owner of the Washington Post, a journal that has criticized Trump many times.

amazon logo

In 2017, Amazon acquired Whole Foods, a retailer of organic food, and announced its intention to open a second headquarters in the U.S. This has led to a race among many cities, which have offered tax cuts and other benefits for Amazon to choose their area.

Amazon’s financials

Many people have questioned Amazon’s business model, but the firm has survived two economic downturns and has always kept growing.

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Amazon, like superstore chains such as Walmart and Target, has low profit margins. Consequently, the firm has never paid out a dividend to its shareholders.

Retailers' net profit margin - 2018

In recent years, Amazon has entered into industries with high profit margins such as video on demand and cloud hosting services. Despite this, the company’s overall profit margin remains very small compared to other tech giants.

FAANG's net profit margin - TTM

In the chart below, you can see how Amazon is starting to produce significant EBIT and net income. This will allow the firm to self-finance its various investment projects instead of continually relying on debt.

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As you can see from the chart below, Amazon’s leverage is very high, but since 2014 it has started to decrease.

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Amazon’s stock performance

As the chart below illustrates, Amazon has outperformed Walmart in the past three years. The acquisition of Whole Foods was seen as an alarming signal for department stores such as Walmart and Target. In fact, this was the first step of Amazon into the brick-and-mortar stores industry.

Amazon vs walmart over the last 3 years

Amazon has also been able to outperform Alibaba, which is considered by many the “Chinese Amazon”. Amazon is the largest e-commerce company by market value, although Alibaba remains the first by revenues.

Amazon vs Alibaba

In the past few weeks, Amazon’s market value reached the milestone of $1 trillion; but right after it suffered a 15% drop. Now, its stock price has formed an ascending triangle. In the future weeks we’ll see if the stock price will get past the resistance level of $2050 or if it drops below the trend line, interrupting its bull trend.

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Amazon’s potential strategies

Amazon’s march seems unstoppable. Along the way, the firm from Seattle has put down many competitors that haven’t been able to understand the changes brought by the e-commerce revolution.

Its growth in revenues tells us that Amazon is still a growth stock. Despite its incredibly high market value, the growth continues.

Investing in Amazon hoping for dividends is wrong because Amazon puts every single dollar into long-term investment projects.

The swings of the stock price in the short and medium term make Amazon a good stock for those who swing and day trade.

Trivia

If you type relentless.com into a browser, you’ll be redirected to amazon.com. This is because Bezos initially wanted to call his company Cadabra, then relentless.com; finally, after listening to his friends’ advice and looking for a word in the dictionary, he opted for Amazon. He chose it because it was described as a place “exotic and different.” (3)

What do you think about Amazon’s future? Let me know in the comment section below.

Netflix: When David Beats Goliath

Apple: An Overview and What to Expect in 2019

Tesla: The Past and the Future

Check out my book: A Beginners’ Guide to Stock Investing.

References

1. https://www.forbes.com/profile/jeff-bezos/#23a3ab591b23. [Online]

2. https://www.forbes.com/sites/greatspeculations/2017/12/08/amazons-impressive-holiday-season-performance-sends-a-message-to-retail-giants/#29433ac27bd1. [Online]

3. https://en.wikipedia.org/wiki/Amazon_(company). [Online]

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