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Amazon retail business has picked up as consumers prefer online contactless purchases to going to the store due to the Covid-19 pandemic. The company also recruited nearly 175,000 in their fulfillment and delivery network in response to increased customer demand. The company also has increased costs due to the pandemic as they make changes in processes and invest in equipment to make sure the employees stay healthy.
Amazon's (NASDAQ:AMZN) Net sales for Q3 2020 increased 37% to $96.1 billion, compared with $40 billion in the same period of the previous year. Excluding the $691 million favorable impact from y-o-y changes in foreign exchange rates throughout the quarter, net sales increased 36% compared to the same period of the previous year. Operating income increased to $6.2 billion, compared with operating income of $3.2 billion in the same period of the previous year. Net income increased to $6.3 billion, or $12.37 per diluted share, compared with net income of $2.1 billion, or $4.23 per diluted share, in the same period of the previous year.
Below are key drivers of Amazon's value that present opportunities for upside or downside to the current Trefis price estimate for Amazon:
For additional details, select a driver above or select a division from the interactive Trefis split for Amazon at the top of the page.
Amazon is an online retailer which sells electronics, books, retail consumer goods, music, games, apparel and other merchandise to consumers in the U.S., Canada, the United Kingdom, Germany, Brazil, France, China, Japan, India Mexico, Netherlands, Italy and other countries. The company also provides web services such as cloud computing and online storage to web sites and web developers.
Amazon Web Services business is the most valuable segment for Amazon due to the company's high growth within this segment. In recent years, consolidated AWS revenues have grown at high double digits. Despite the lowest revenue contribution, AWS is the most valuable segment due to high margins of cloud computing as compared to e-commerce retail business which operates on razor thin margins.
The growth in Amazon's Web Services has become a critical factor driving the company's expansion globally. Several companies continued to adopt these services in recent years. Besides helping big businesses, the company’s cost efficient web services are also useful for young start-ups that may have cash restrictions.
The growth in the AWS segment has been massive - the annual growth in AWS revenues came in at 70% in 2015, 55% in 2016, 43% in 2017, 46% in 2018 and 37% in 2019. Apart from this, the company also showed strong profitability in the cloud-services business as margins have improved in this segment in successive years.
Amazon is making significant investments to expand its presence in regions such as China, India, Italy and Spain. While these investments will enhance revenue growth, however, this strategy could also raise margin pressure. Amazon will invest a couple of billion dollars on its Indian operations, but since the country’s e-commerce market is highly competitive, we believe it will be difficult for Amazon to attain profitability in the region for at least a couple of years.