Amazon keeps popping up on a value screen I run, but I’m having a hard time seeing that value in Amazon. My contention is that Amazon is really five different businesses: an online retail behemoth, a subscription based entertainment service, a logistics company, AWS, and advertising services. The way that Amazon reports its segments is regionally (North America and International) as well as breaking out AWS. The retail, subscription, and logistics services are all reported collectively but really should be broken out separately within each region to get a grasp of the value of its parts.
Let’s start with AWS, which many cite as a sufficient reason to invest in Amazon. It looks like a great business on paper. Sales were $62.2 billion last year accounting for just over 13% of net sales. Operating profits for AWS were $18.5 bil after operating costs of $43.7 bil, resulting in a not too shabby operating margin of 30% and accounting for a whopping 79% of Amazon’s operating profits! Of course we don’t really know what net margins would be if Amazon spun out AWS because a lot of corporate costs are consolidated.
After AWS, things get complicated. North American sales account for 59.5% of all sales, with International accounting for just over 27%. Now they do break out net sales by online stores, physical stores, 3rd party sellers, subscription services, advertising services, and other, however they don’t break it out by region. If we consolidate non-AWS revenues we get $553.4 bil in sales of which $222.1 bil is through the online stores and $17.1 bil is in physical stores. Another $103.4 bil in sales is generated through 3rd party transactions. This allows us to isolate $31.8 bil in subscription services and another $31.2 bil in advertising services. What is missing from this breakout is the logistics business, as well as the entertainment revenues and costs, which are being folded into the revenues and costs of the subscription services. While we can estimate that Amazon Prime delivery and Amazon Prime video are generating $32 bil in revenue, we have no idea what the costs of these services are to Amazon. What we do know is that the operating income from all of the non-AWS businesses is $7.4 bil.
On the cost side of the equation Amazon breaks out costs of sales at $272.3 bil, fulfilment costs (warehouse and logistics) at $75.1 bil, technology and content at $56.1 bil, marketing at $32.6 bil, and GA at $8.8 bil. I think it is safe to put cost of sales and fulfilment costs with consolidated retail sales. The tech and content costs include AWS, which we know was $43.7 bil, so about $12.4 bil of tech and content costs need to be assigned somewhere else? Amazon Prime Video? Same with advertising costs. A share of ad costs are attributable to AWS for sales commissions, but the distribution of these costs across the various businesses is a mystery.
The bottom line is it would appear that AWS is the beating heart of Amazon’s profitability. With operating margins of 30%, AWS accounted for almost all of Amazon’s operating profits. Excluding AWS, Amazon earned just over $6.3 bil in operating income on sales of $407.6 bil, for an op margin of 1.6%. The retail business–consisting of online, 3rd party, and physical stores–would appear to be a money loser if you include the cost of sales and fulfilments costs (never mind including a share of marketing and tech costs as well). We have no idea what the margins might be for a stand alone Prime Video streaming service, but I would guess there is some money being made there given the loss leading economics of the retail business.
Given the byzantine operational structure of Amazon, I don’t see how anyone can value it in a meaningful way.