Company Overview
Amazon is among the global leading online retailers founded in 1994 by the current chairman and CEO Jeffrey Bezos. It is listed on NASDAQ, a global capital market, and has its headquarters in Seattle, Washington DC. Since the company was listed in 1997, Amazon has been trading under AMZN symbol. In 1995, Amazon became the world’s largest bookstore, and the most customer-centric company at that time (Stone, 2013). At the onset, the company focused on selling books, but has since expanded its product portfolio to include a range of products including electronic appliances, beauty and health products, shoes, media, industrial and auto products, kids’ items, digital downloads, as well as apparel. Other than in the US, Amazon has established operations in other countries including the UK, Germany, Italy, France, Spain, Japan, Brazil, India, China, Australia, Netherlands, and Mexico. In addition to expanding the online business on the basis of geographic regions and categories, Amazon has extended the range of products and services tapping not only consumers, but also enterprises, content creators, and sellers.
According to Schneider (2002), the consumer products that Amazon manufactures include fire TVs, Kindle e-readers, Echo, and Fire tablets. Furthermore, Amazon provides a service known as Amazon Prime that is a membership subscription program valid for one year. Amazon Prime allows the subscribers to enjoy free shipping of products, streaming TV shows and movies, and borrowing e-books (Robinson, 2008). In brief, Amazon leverages on a wide selection of products and services, offered at relatively low prices. Additionally, Amazon’s customers enjoy incredible customer service for its easy-to-use products and services. Moreover, Amazon has a robust e-commerce website with key features, such as previews of popular books, customized recommendations, secure payment methods, product catalogs, product reviews, as well as the customer-wish list. This paper examines Amazon’s key financial highlights in details. It studies the recently published reports and conducts a thorough financial analysis of the company, so as to identify its competitive standing. Moreover, the paper analyzes the impacts of Amazon’s international trade, as well as identifying the underlying risks. Finally, the paper presents the bottom line regarding Amazon taking into consideration the various perspectives from various stakeholders.
Key Financial Highlights
In 1995, the first year of operation, Amazon generated $511,000 in revenues, which translated into a loss of $303,000. It made negative profit margins during the first seven years up to 2002, and then the profits margins turned positive. Cohen (2010) observed that the net sales reported since 2011 through 2015 were as follows, $48,077, $61,093, $74,452, $88,988, and $107,006 million dollars. The revenues recognized during this period were derived from the sale of goods, insurance premiums, and other trading activities constituting Amazon’s earning process. The revenues from financial services include the interest income, investment income, and trading gains. In summary, Amazon generated combined revenues to the tune of $410 billion for the last twenty years up to 2015. This means that if we added Amazon’s revenues for the years since its inception in 1995 to 2015, the total comes to $410 billion. According to Cohen (2010), the company’s stock surged after the second quarter of 2015’s earnings reporting in July. The surging of Amazon’s stock in 2015 made it the largest retailer in the world. The market capitalization stood at $246.5 billion at that time, overtaking Walmart that had been the largest retailer by market capitalization. Amazon’s income declined slightly from 2013 through 2014, but then rose again between 2014 and 2015. Amazon continues to make huge capital investments every year, using the cash flows from normal operations. Other than being the leading e-commerce retailer, Amazon also operates a publishing platform, where it makes sales from every book sold.
The management of Amazon believes that by increasing the market share, it takes advantage of the economies of scale, and eventually lowers the cost. Furthermore, the economies of scale allow the company to exercise some authority over pricing for its customers. Cohen (2010) revealed that since Amazon’s stock is valued solely by its growth potential, the valuation ratios include the price-to-earnings ratio and price-to-book ratio. Currently, Amazon’s P/B and P/E are valued at 25 and 167 respectively, compared to industry’s averages at 24 and 201 respectively. Empirically, the only strategy to maintain the company’s high valuation ratios is to maintain an upward trend in earnings, as well as to expand the equity base in its books.
Sutherland (2016) noted that during the five-year period from 2011 through 2015, Amazon’s current ratios were almost similar to those of Barnes and Nobles (BN) and Ebay, who are its main competitors. The current ratios have remained between 1.3 and 1.5 for the five years, indicating that for every $1 that the Amazon owes, it can lay hands on $1.3 to $1.5. Comparing the company’s current ratio with its acid test ratio, the latter is relatively low, averaging at 1.0 for the five-year period. This implies that Amazon is adequately able to cover its short-term obligations using the liquid assets. According to Sutherland (2016), comparing the company to the industry, Amazon fell short of the standards, especially during its early years, but almost met the standard before the global financial crisis in 2008 averaging.
During the five-year period under review, Ebay has performed better that than Amazon, regarding the current ratio and quick ratio (Sutherland, 2016). However, although Amazon is unable to perform above the industry averages, the company has stable and healthy ratios that indicate that it can meet its current obligations. Amazon’s gearing ratio was the highest in 2005 averaging 86%, but the ratio decreased over time averaging 40%. As at September 2016, the gearing ratio averaged 46%, indicating a lower risk as the debt holders have lesser claims on Amazon’s assets. Over the years, Amazon has enhanced its operational efficiency and increased the sales. As a result, the company has reduced the long-term operating debt to manageable levels implying that most of the investments are funded with internally generated funds. As at October 2016, Amazon’s outstanding shares totaled 475.17 million, compared to 469 million in 2015 (Sutherland, 2016). The decreasing outstanding shares over time were due to company share buybacks. The shares bought back were converted into treasury stocks. Furthermore, Amazon’s earnings per share increased from -0.12 in 2015 to 1.07 in 2016. Since EPS indicates the percentage of company’s net earnings allocated to every common stock held, the increased EPS in an indication that there are growth prospects above and over the company’s current position. The analysts predict that the holiday sales advanced online by Amazon are likely to further boost the EPS. In fact, they have projected that the Amazon’s share price will eventually outperform those of the competitors.
Due to its massive growth potential and the management’s willingness to invest more in future, Amazon’s share is a perfect long-term investment. AMZN stock is currently trading at $827, although the price fluctuates now and then (Lundholm & Sloan, 2013). Analysts project that the Amazon’s share price could hit $900 by the end of 2017. The Amazon Prime loyalty program is a major reason why investors are interested in buying and holding AMZN stock. Other than binding people to the company’s ecosystem, the subscription fee from the loyalty program provides the company with a constant revenue stream. Amazon has expanded the loyalty program including additional benefits, such as dash-buttons that allow the customers to re-order some products, stream music, and movies at just the click of a button. The Prime program members with access all services at Amazon are likely to purchase other products at the company’s website before considering its rivals, although it may not be offering the lowest prices.
International Trade and the Underlying Risks
Hill (2014) noted that although Amazon continues impressing investors every quarter by reporting profits, earnings from international business have not been impressive. In 2014, for instance, 37% of Amazon’s net sales were generated from the international markets. However, the international market growth has been decelerating for the past five years. In the third financial quarter of 2014, Amazon’s net sales from North America increased by 22%, while the international sales increased by a mere 3% from the sales in the previous year (Hill, 2014). Moreover, while the net sales from North America throughout 2014 increased by 25%, the sales from international markets only increased by 12%. The declining international sales growth continues to be the biggest puzzle for Amazon. When the company reported its financial results in 2015, the declining revenue from international markets was attributed to the fluctuating exchange rates. Empirically, even without fluctuations in the exchange rates, the sales revenues from international markets would still be lower, compared to those generated in North America. According to Sutherland (2016), one of the Amazon’s effective strategies in the online business involves establishing a close relationship with customers, so as to provide them with more competitive features. In fact, most of its services are exclusively tailored to fit particular geographical areas.
The success of most Amazon’s services largely depends on an availability of an effective infrastructure, such as fulfillment centers and distributors. It also depends on how well the company signs agreements with partners like local retailers and postal services. Amazon fulfillment networks are crucial in foreign countries where the partners sometimes lack a physical presence. In the US for instance, Amazon has over sixty distribution and fulfillment centers, each with ample space of approximately fifty million square feet. In foreign countries, including Germany and China, the distribution centers are relatively small, each being less than ten million square feet. In the past, Amazon could differentiate itself from the competitors solely by its low pricing and wide online selections, but today its differentiation depends on how close the company can get to its customers (Sutherland, 2016). The lack of the necessary infrastructure in the foreign markets prevents it from matching the revenues generated in North America. As a result, the local competitors with better in-country infrastructure prevent Amazon from tapping the foreign markets. In reality, 95% of Amazon’s revenues come from a few countries, including the North American countries (the US, Mexico, and Canada), Japan, UK, and Germany. Other than North America, Amazon is only likely to achieve the same scale and I in the UK, Germany, and Japan only (Hill, 2014). At the moment, Amazon is heavily establishing investments in China and India, but due to local competition and high regulation in these countries, it is unlikely to be successful in the future. Although Amazon is plowing back its profits into the business by pursuing international business plans, the international markets do not seem to be paying off. The more it spreads into more countries, the less it differentiates itself in these countries. Therefore, this strategy has proven to be counterproductive. The problem with Amazon is that it has already sensed that has little chances of positioning itself well in foreign markets before its competitors, who seem already entrenched in these markets. It hinted out this challenge most recently in its disclosures listing it as its biggest risk. In disclosures to the financial statements, the company revealed that it has little experience to operate in some international markets (Hill, 2014). The management demonstrated how developing and maintaining international websites, operations, and promoting the brand internationally had been costly to the company. This is the reason why its international markets have not generated impressive revenues in the past. In reality, it looks too late for some foreign markets to try to establish a dominant position that Amazon is planning, especially in online retail business.
SWOT Analysis
Ratnasingam (2006) revealed that even though Amazon is facing stiff competition, it still enjoys a strong base of repeat customers. The company can leverage on some opportunities, especially from the emerging markets. Moreover, it can create value for its customers by enhancing its global supply chain, fulfillment centers, and the network of distributors across the world. To achieve this, Amazon has to re-engineer its model of operation to generate decent profits for the coming years. Following is the analysis of the various strengths, weaknesses, opportunities, and threats that Amazon is facing in its effort to dominate the online market.
Strengths: Being the largest online retailer, Amazon’s strengths stem from its differentiation strategy, cost leadership, and focus. According to Ratnasingam (2006), these strategies have helped the company to reap substantial gains from its operations over time. As a result, Amazon’s shareholders continue deriving value from the company. Additionally, leveraging information technology is a great source of competitive advantage for Amazon. The use of e-commerce as its accessible platform ensures that the company remains ahead of the market rivals. Another key strength that gives Amazon competitive advantage is that its consumers globally position it well in their minds. It is this recognition that has helped it penetrate new market, including the ones considered unfavorable by most e-commerce firms. Utilizing its superior distribution and logistics networks, Amazon has been able to meet the customer needs effectively than its rivals in the industry.
Weaknesses: As a part of its differentiation plan, Amazon has in the recent past spread itself thin by moving away from its core competencies. Other than its core objective of retailing books online, it has diversified into new areas. Although this could be a sound strategy from diversification of risks perspective, Amazon must be careful not to lose the strategic gains, as it focuses on new areas. The free shipping of goods for customers is a major weakness that decreases Amazon’s margins considerably (Ratnasingam, 2006). Because of this service, Amazon may not be able to control its costs effectively. Furthermore, the Amazon’s biggest weakness that has in the recent past received criticism from analysts is its near-zero margin model of operation. This model has dented the company’s profitability, so that even though it reports huge revenues every year, this has not resulted in meaningful profits for the organization.
Opportunities: The Amazon’s robust online payment system that addresses security and privacy issues enable the company to scale up substantially. Besides, as a result of rolling out its payment gateway, Amazon increases its profit margins considerably. Rolling out more services and products through its brand is another opportunity that Amazon can capitalize on, instead of acting as a forwarding agent for third party services. Simply put, Ratnasingam (2006) noted that Amazon could increase its product portfolio, instead of stocking and selling products manufactured by other companies. Further, Amazon can seize the growth opportunity by expanding its global presence. Establishing more sites, especially in the emerging markets, would obviously give Amazon an edge over its competitors in the online retail business.
Threats: The biggest threat to the success of Amazon lies in the concerns over hacking and identity theft that characterizes online businesses. Any of these leaves consumers’ data exposed and could lead to loss of customers. Amazon has to move with speed to address these concerns on its website to ensure that both privacy and security are guaranteed. Additionally, due to the aggressiveness of Amazon’s pricing strategy, the firm has faced some law suits from competitors and publishers in the industry. The cost leadership strategy pursued by Amazon has been a source of problems for the company (Ratnasingam, 2006). In most instances, the rivals are upset as a result of Amazon denying their business. Further, Amazon faces tough competition from local retailers who are relatively nimble and agile. This implies that Amazon has to keep track of the local competitors, as it pursues its retail business online.
Recommendations and Conclusion
Going forward, Amazon needs to work on having advanced filtering options on its website to help customers in thesearch for what they want. According to Wittig & Wittig (2016), it is crucial in e-commerce, especially for companies with thousands of products. Further, it should work towards cleaning up reviews on its website, as some products are reviewed even before release. The next step should be taking advantage of the numerous strengths and opportunities that the company has to enhance growth, monitoring the threats and improving on the weaknesses to avoid their adverse effects. One of the things that would influence me to buy Amazon stock is its long-term goals. According to Walden & Shaughnessy (2000), the firm is often in investment mode. It is purposely reinvesting its earnings back into business and expanding to new areas to tap more market. This magnificent ambition makes the AMZN stock so attractive for me to buy. Acquiring Amazon would be the best decision for me, as the company has already dominated the fast-growing online business. Furthermore, Walden & Shaughnessy (2000) observed that Amazon has already positioned itself well in foreign markets, implying that it has future growth prospects. If I were Amazon’s CEO, going forward, I would concentrate on profitability, as opposed to volumes to remain competitive. Market leadership and sales volume alone cannot add value to the company’s common stock. The response to Amazon’s Prime membership program has been astounding. Going forward as the CEO, I would work towards strengthening the program to make it more popular (Wittig & Wittig, 2016). Moreover, I would do away with the two-day free shipping, as it is a major undoing to the company. In the long-term, Amazon loses million dollars in shipping expenses. Finally, from the financial point of view, I would certainly lend money to Amazon,. The company’s gearing ratio currently below 50%, implying that the leverage level is relatively low. Amazon can be categorized as a low-risk company by lenders as its gearing ratio is below 50%.
References
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Hill, C. W. L. (2014). International business: Competing in the global marketplace. New York, NY: McGraw Hill Education
Ratnasingam, P. (2006). SWOT analysis for B2C e-commerce: The case of Amazon.com. Hershey, PA: Idea Group Pub.
Robinson, D. (2008). Amazon web services made simple: Learn how Amazon EC2, S3, SimpleDB and SQS web services enables you to reach business goals faster. Brisbane, Australia: Emereo
Schneider, R. R. (2002). Sustainable Amazon: Limitations and Opportunities for Rural Development. Washington, D.C: World Bank.
Stone, B. (2013). The everything store: Jeff Bezos and the age of Amazon. New York: Little, Brown and Company
Sutherland, A. (2016). Amazon: The business behind the “everything” store. Minneapolis: Lerner Publications
Lundholm, R. J., & Sloan, R. G. (2013). Equity valuation and analysis with eVal. New York, NY: McGraw-Hill Irwin.
Walden, G., & Shaughnessy, T. (2000). The 100 best Internet stocks to own for the long run: Investing in the Internet economy and the companies that make it click. Chicago: Dearborn
Wittig, M., & Wittig, A. (2016). Amazon Web Services in action. Shelter Island, NY: Manning