Is Amazon focused on margins ?

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Amazon

Amazon (NASDAQ:AMZN) reported an operating margin of 1.5% for the six month period ending June 2015, slightly up from 0.34% during the same period last year. [1]  Walmart, which can be termed as the “offline” version of Amazon, generates an operating margin of 6%. [2] Alibaba, the Chinese e-commerce operator, is much ahead in profitability with an operating margin of 30%. Although Amazon and Alibaba have different operating models and profitability numbers cannot be directly compared, Alibaba’s margins are an indicator of where Amazon can reach when it starts expanding in the third party platform business model. The current cost figures clearly shows that the retailer does not seem to be focused on improving margins.

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Dissecting Amazon’s margins

Below table provides a quick comparison of sales and key cost metrics between Amazon, Walmart and Alibaba

Amazon1

While Amazon is generating higher gross margins compared to Walmart, its indirect costs are much higher, thus leading to a very low operating margin. This can be attributed to Amazon’s investment in marketing, content and technology to drive volume sales growth and keep competition at bay.

Using Trefis interactive technology, we can compare Amazon’s EBITDA margin (Electronic and General Merchandise) with Walmart Gross profit margins.

Amazon2

The above chart shows that Amazon’s margins are around 10% whereas Walmart is operating at a much higher level. A further dissection of Amazon’s gross margin reveals that Amazon Web-Services business is generating higher margins than its core merchandise sales division. Below are the regional segment wise operating margins for Amazon. [1] These figures exclude costs relating to stock based compensation and amortization.

Amazon3

Focus continues to be on sales and not profitability

Amazon’s current strategy is focused on increasing volumes via competitive pricing, low shipping costs and other incentives such as Amazon Prime. These efforts to increase volumes impact the margins negatively. This is more prominent in the International segment where Amazon is still trying to establish itself.  It has made huge investments in emerging markets and is likely to focus on revenue growth in these markets in the foreseeable future.

Amazon is growing in size and capturing new markets. While e-commerce has grown rapidly in recent years, it still commands a very small portion of total retail sales globally. Amazon’s annual revenues are around 20% of Walmart’s, indicating huge room for growth. It is likely that Amazon will continue to focus on top line. However, an improvement in margins can come from its push in Web Services in the near future.

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Notes:
  1. Amazon SEC Filings [] []
  2. Walmart SEC Filings []