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Amazon is a giant in the tech industry, but is it a tech stock? We break down the argument for and against Amazon as a tech company.
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Amazon’s Business Model
Amazon.com, Inc. is an American multinational technology company based in Seattle, Washington, that focuses on e-commerce, cloud computing, digital streaming, and artificial intelligence. It is considered one of the Big Four tech companies, along with Google, Apple, and Facebook. So, is Amazon a tech stock?
E-commerce
Amazon.com, Inc. (/ˈæməzɒn/), is an American multinational technology company based in Seattle, with headquarters in Arlington County, Virginia. It is the largest Internet-based retailer in the world by total sales and market capitalization.[12] Amazon.com started as an online bookstore, but soon diversified, selling DVDs, Blu-rays, CDs, video downloads/streaming, MP3 downloads/streaming, audiobook downloads/streaming, software, video games, electronics, apparel books toys food furniture and jewelry. The company also produces consumer electronics—notably the Amazon Kindle e-book reader—and is a major provider of cloud computing services.
Cloud computing
Amazon is a leading provider of cloud computing services. Cloud computing is a model for enabling ubiquitous, convenient, on-demand access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications, and services). This means that users can access and use resources as they need them, without having to purchase and maintain their own infrastructure.
Amazon provides various cloud computing services, including Amazon Elastic Compute Cloud (EC2), Amazon Simple Storage Service (S3), Amazon DynamoDB, and more. These services are used by businesses of all sizes, from small startups to large enterprises.
Cloud computing has become increasingly popular in recent years as businesses look to reduce costs and improve efficiency. Amazon has been able to capitalize on this trend with its comprehensive suite of cloud computing services.
Amazon’s Financials
Amazon is an American multinational technology company based in Seattle, Washington, that focuses on e-commerce, cloud computing, digital streaming, and artificial intelligence. It is one of the Big Four companies in the U.S. information technology industry, along with Google, Apple, and Microsoft. As of March 2021, Amazon had a market capitalization of $1.7 trillion.
Revenue and growth
Amazon’s total revenue has grown significantly over the past few years, reaching $232.9 billion in 2018. This figure represents a 27% increase from 2017, when the company generated $177.9 billion in total revenue.
Amazon’s core retail business is responsible for the majority of its revenue, with sales totaling $141 billion in 2018. This figure represents a year-over-year increase of 29%. The company’s other key businesses, including cloud computing, advertising, and third-party seller services, also contributed to its overall revenue growth.
Amazon’s strong growth is largely due to its expanding product offerings and global reach. The company has continued to invest heavily in new businesses and technologies, which has helped it reach new customers and drive additional sales.
Operating margin
Operating margin is a company’s operating income divided by its revenue. Used to gauge a company’s profitability, this number reveals how much profit a company generates per dollar of sales. The higher the percentage, the more efficient a company is at generating profits from its sales.
Amazon’s operating margin has fluctuated significantly over the years, but has generally been on the rise. In 2019, the company’s operating margin was 7.4%, up from 3.7% in 2015. Amazon’s operating margin is lower than that of many other tech companies, but this is to be expected given the company’s heavy investments in new businesses and growth initiatives.
Looking forward, analysts expect Amazon’s operating margin to continue to expand as the company matures and becomes more efficient at generating profits.
Net income
Amazon’s net income was $3.0 billion in 2017, up from $2.4 billion in 2016. This marks the second consecutive year of profitability for the company, after years of reinvesting its profits back into its business. Amazon’s core retail operations generated an operating profit of $4.1 billion in 2017, while its cloud computing business, Amazon Web Services (AWS), generated an operating profit of $4.3 billion.
Amazon’s Valuation
Amazon is a American electronic commerce and cloud computing company with headquarters in Seattle, Washington. It was founded in 1994 by Jeff Bezos and is now the world’s largest online retailer. Amazon has become one of the most valuable companies in the world with a market cap of over $1 trillion. So, is Amazon a tech stock?
Price-to-earnings ratio
The price-to-earnings (P/E) ratio is a measure of the price paid for a share relative to the annual income or profit earned by the firm per share. It is worked out by dividing the market value per share by the earnings per share. The earnings used in the P/E ratio calculation can be reported earnings or operating earnings.
A high P/E suggests that investors expect higher growth rates in the future compared to companies with a lower P/E. The market seems to be willing to pay more for each unit of earnings for high P/E stocks. A low P/E can indicate either that a company may currently be undervalued or that the market expects relatively lower growth in the future.
Amazon’s current P/E ratio is 106.51, which is high when compared to the average P/E ratios of companies in the consumer discretionary sector, which is 24.62. When considering if Amazon is a tech stock, it is important to note that its high P/E ratio might be due to its position as a leading company in the e-commerce and cloud computing industries.
Enterprise value
The market capitalization of a publicly traded company is the number of shares outstanding times the share price. For example, if a company has 1 million shares outstanding and trades at $50 per share, its market capitalization is $50 million.
However, for many companies, particularly those in the tech sector, the market capitalization doesn’t give you the whole picture. That’s because these companies often have a large amount of debt and/or preferred stock that isn’t reflected in the market cap. To get a more accurate picture of a tech company’s value, you need to look at its enterprise value (EV).
Enterprise value is calculated as market cap plus debt, minority interest and preferred shares, minus total cash and investments. For example, let’s say Company X has a market cap of $1 billion, $500 million in debt, $200 million in cash and investments, and $100 million in preferred shares. Its enterprise value would be $1.4 billion (($1 billion + $500 million + $100 million) – $200 million).
Amazon’s enterprise value is around $650 billion. That’s much higher than its market cap of roughly $450 billion because it has a lot of debt (about $20 billion) and preferred stock (roughly $5 billion).
Amazon’s competitive advantages
Amazon has a number of competitive advantages that have helped it become the largest online retailer in the world. One of its biggest advantages is its scale. Amazon has a huge customer base and a large number of products. This gives it a lot of data that it can use to improve its algorithms and personalize its recommendations. Amazon is also very good at using technology to improve its operations. It has developed sophisticated algorithms for logistics and has built a world-class fulfillment network.
Scale
Amazon has a number of competitive advantages that have allowed it to become one of the largest companies in the world. One of its key advantages is scale. Amazon is a massive company with a huge customer base. This gives it a number of advantages. For example, Amazon can offer lower prices than its competitors because it can buy in bulk and has economies of scale. It can also invest more in research and development than its rivals and can therefore bring new products and services to market more quickly.
Network effects
One of Amazon’s key competitive advantages is its network effects. Network effects occur when a product or service becomes more valuable to users as more people use it. For example, the value of social networking sites like Facebook and LinkedIn increases as more people join them because users can connect with more people. This creates a virtuous circle where more users join, making the platform more valuable, which attracts even more users.
Amazon’s network effects are particularly strong because the company operates in so many different areas including e-commerce, cloud computing, and artificial intelligence. This gives Amazon a huge customer base that it can leverage to continue winning new business. And because Amazon is so dominant in so many areas, it’s very hard for competitors to catch up.
Customer loyalty
Amazon has built a massive customer base over the years and has been very successful in retaining them. A key reason for this is Amazon’s focus on customer experience. They constantly strive to improve the shopping experience for their customers and offer features like Prime that provide real value. This has made Amazon one of the most trusted brands in the US.
Another competitive advantage that Amazon has is its huge ecosystem. The company offers a wide range of products and services, which all work together to create a sticky platform. This ecosystem includes everything from e-commerce and cloud computing to streaming media and smart home devices. Once customers are locked into Amazon’s ecosystem, it becomes very difficult for them to switch to another provider.
Risks to Amazon’s business model
Amazon has been one of the hottest tech stocks over the past few years. The company’s share price has more than tripled since 2013. But Amazon is not just a tech company, it’s also a retailer. And that’s where the risks to its business model lie.
Competition
As the largest online retailer in the world, it’s no surprise that Amazon has some pretty stiff competition, especially from other tech giants like Google and Microsoft. But even traditional retailers like Walmart and Target are starting to give Amazon a run for its money.
Walmart, in particular, has been ramping up its online presence in recent years and offering more competitive prices for both physical and digital goods. The company is also investing in new technologies like artificial intelligence and robotics to help automate its warehouses and speed up delivery times.
There’s no doubt that Amazon will continue to be a dominant force in the e-commerce space for the foreseeable future. But with more companies starting to challenge its supremacy, the company will need to continue to innovate and invest in new technologies to stay ahead of the competition.
Regulatory risk
It is no secret that Amazon has been the subject of antitrust scrutiny in both the United States and Europe. In July, the U.S. House Judiciary Subcommittee on Antitrust, Commercial, and Administrative Law opened an investigation into whether “large tech companies are engaging in anti-competitive practices.” While it is still early in the investigation, and it is not clear if any regulations will come from it, the risk remains that Amazon could be hit with antitrust regulations that could impact its business model.
In Europe, Amazon is already under investigation by the European Commission for possible antitrust violations. The Commission is looking into whether Amazon gives preferential treatment to “marketplace sellers that use Amazon’s logistics and delivery services.” If the Commission finds that Amazon has violated antitrust laws, it could impose hefty fines on the company and force it to change its business practices.
Regulatory risk is just one of the many risks that Amazon faces, but it is a risk that could have a significant impact on the company’s business model.
Dependence on third-party sellers
Third-party sellers are a crucial part of Amazon’s business model, accounting for 58% of its total unit sales in 2017. However, this dependence could be a risk to the company’s long-term growth.
Amazon charges fees to these third-party sellers in exchange for the exposure and sales platform it provides. However, if these sellers were to direct their business elsewhere, Amazon would lose a major source of revenue.
In addition, many of the products sold on Amazon are low-margin or even unprofitable items that the company sells at a loss in order to drive traffic to its site. If Amazon were to lose even a small percentage of its third-party sellers, it could have a significant impact on its bottom line.
