Amazon

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

Amazon.com is a multinational technology company, primarily known for its e-commerce operations, cloud services, and digital advertising. However, its business reach has expanded significantly to include areas like streaming, artificial intelligence, and even physical retail stores.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Amazon operates through several segments:

  • North America: This segment focuses on sales from Amazon’s online stores in North America, including revenue from third-party sellers, as well as a portion of sales from physical retail stores. This segment is profitable.
  • International: This segment includes sales from Amazon’s online stores and physical retail stores worldwide. This segment often operates on a loss.
  • Amazon Web Services (AWS): This segment focuses on the company’s cloud-computing services, including compute, storage, databases, and other cloud-based operations. AWS provides critical infrastructure for many companies. This is the most profitable segment and its operating income dwarfs other segments.
  • Advertising: Amazon has a large presence in digital advertising with both display and sponsored advertising. This segment is highly profitable and is seeing a lot of growth lately.

Revenue Distribution (2023):

  • Online stores, including third party sales made up 44% of net revenue in 2023.
  • AWS made up 16% of net revenue in 2023.
  • Advertising services made up 8.4% of net revenue in 2023.
  • Other sales categories, primarily subscriptions, physical stores, made up about 32% of revenue.

Industry Trends and Competitive Landscape:

  • E-commerce: The e-commerce landscape is intensely competitive, with a high degree of pricing pressure and focus on efficiency, delivery speeds, and logistics. Amazon’s biggest competitors in the e-commerce space include Walmart, Alibaba, and Target.
  • Cloud Computing: In the cloud computing space, AWS faces stiff competition from companies such as Microsoft Azure and Google Cloud. The market has continued to grow rapidly, with new innovations and features and expansions happening frequently.
  • Digital Advertising: The digital advertising space is fiercely competitive with the main incumbents being Alphabet (Google), Meta (Facebook, Instagram, etc.) and Amazon.
  • Physical Stores Amazon has expanded their physical stores locations, especially for Amazon Fresh and Whole Foods markets. It faces competition from various traditional grocery store chains.

What Makes Amazon Different? * Massive Scale: Amazon operates a vast global infrastructure, enabling it to offer services and products to a diverse clientele with excellent logistics, fulfillment and supply chain networks. * Diverse Business Segments: With successful operations in e-commerce, cloud computing, advertising, and more, Amazon isn’t dependent on a single line of business to thrive. This makes it a highly diversified company, and that diversity helps to create a stable and resilient business. * Customer-Centric Approach: Amazon has a strong focus on customer satisfaction, and it does everything in its power to keep customers loyal. * Innovation: It has a great history of innovations in new technology, such as AWS, which have created a lot of value for the business. * Data-Driven approach Amazon leverages its data to better understand the behavior of customers, employees and other businesses, which allows them to improve their business and operations.

Recent Concerns and Controversies:

  • Declining Growth in AWS: AWS has not been growing as much in the recent times. The management is trying to combat this by building new AI-powered solutions and products.
  • Regulatory Scrutiny: Amazon has seen increasing regulatory scrutiny around its business practices, including antitrust, consumer protection, and competition. This is mainly happening in the European Union, and the company may face increased restrictions.
  • Economic Headwinds: The current economic conditions have dampened consumer demand, and impacted the company’s e-commerce business. While the company has a diverse portfolio, it is not entirely immune to economic pressures and consumer slowdowns.
  • Labor Issues: There is mounting pressure for better working conditions and higher wages for the warehouse workers, and this is a potential financial burden.
  • Supply Chain and Logistics Pressures: Despite improvement, the costs of shipping and logistics are still an issue for the company. This has affected margins and is something the company is trying to further improve.

Financials Overview:

  • Revenue: While the growth of the company was slowed compared to previous years, the company continued to grow in 2023. North American sales grew 12%, International sales grew 10%, and AWS sales grew 13%. Overall net revenue growth was 11.8% in 2023.
  • Profitability: The overall profitability of the business has been very volatile during the last 3 years. AWS segment remains highly profitable, but other segments such as e-commerce operations are struggling to achieve good profits, and have often been loss-making. While cost cutting initiatives have helped to increase the profitability, it’s still not at previous levels.
  • Cash Flow: Amazon continues to generate significant positive operating cash flow (more than $85 Billion in 2023). Net cash provided by operating activities was $48.4 billion in the first nine months of 2024.

Moat Rating: 3/5 Amazon possesses a narrow moat. The company has established a powerful position in e-commerce and cloud computing, which provides a sustainable competitive advantage. However, as the competitive landscape intensifies with established players trying to compete and new players starting to disrupt the established order, Amazon’s moat is no longer as wide as it used to be. * E-commerce: While it has strong logistics, scale, and brand recognition in e-commerce, the low barriers of entry, intense competition, and changing consumer behavior make it difficult for this to be considered a wide-moat industry for any player. * Cloud Computing: AWS has strong switching costs due to enterprise customer reliance on AWS systems, and the high difficulty of switching vendors without losing out on a lot of operational efficiency. The market is becoming very competitive as other cloud providers such as Google and Microsoft ramp up their offerings. This keeps AWS at a narrow moat, rather than a wide-moat position. * Other segments: There’s little to no evidence to show moats for the company’s advertising and streaming businesses. These sectors are very competitive.

Legitimate Risks to the Moat:

  • Regulatory Risks: Increased antitrust scrutiny could potentially lead to forced divestments of certain operations and other punitive actions.
  • Competition: Intensifying competition in e-commerce, cloud services, and advertising could lead to lower margins and reduced growth opportunities.
  • Technological Disruption: New technologies may arise that disrupt Amazon’s core businesses.
  • Changing Consumer Behavior: If consumer tastes change or preferences switch to a different set of products and services, then the company’s moat may weaken.
  • Labor Issues: Increasing labor costs or strikes could hurt the company’s profitability and logistics performance.
  • Cybersecurity Risk: The company faces constant cyber security threats, which, if successful, can significantly harm the business.

Business Resilience: Despite potential challenges, Amazon has a very resilient business that has shown to withstand and bounce back from most economic headwinds, though sometimes that recovery may take a few quarters. Its diverse revenue streams, strong cash flows, and the data-driven approach position it well to navigate these difficult times. Further, the company has consistently expanded its business into new fields, and it may surprise us with a new business line which has a wide moat.

Understandability: 2/5 Amazon has a very complicated business structure with multiple business segments and the different segments use different methods for growth. It requires a level of understanding to see how all the pieces tie in together. Furthermore, the changing economics of several segments of the company and their interrelation are hard for the outside investor to fathom. An investor should put a lot of time into learning and analyzing the company.

Balance Sheet Health: 4/5 Amazon has a solid balance sheet with a good amount of cash and equivalents, manageable levels of debt and other liabilities, and steadily increasing equity. Although the company’s debt level has grown over time, it has kept up with the company’s growth, and debt is used responsibly. The company has a lot of liquidity and the debt is not that high relative to the company’s overall size.