Amazon’s Tiny Profits Explained.
In it is early years Amazon began as an online marketplace that sold books, but over the past 2 decades it has expanded into becoming a household name. From books to household items to art, Amazon sells it all. The company is known for having “Earth’s biggest collection” of products. So, how does it do that?
For a long time, Amazon skeptics have repeated the narrative that the e-commerce giant worth $880 billion today has exceptionally low profit margins and that it is business model will eventually fail.
According to a report form July 2015, Amazon only made $92 million for the previous quarter’s profit. When comparing this margin to other tech giants like Google, which netted $3.93 billion that quarter Amazon does not measure up. How can the company be expanding so rapidly with low net income?
Amazon intentionally posts low profits because it takes most of its profits and invests them into the company so that it benefits even more in the future.
Look at the Chart below:
Think of revenue as Amazon’s cut from third party sales or the total of your amazon shopping cart. This includes sale of goods and services, including when Amazon ships goods for third parties.
Net income is how much of those total sales Amazon gets to keep after it accounts for the cost of selling those items i.e. the items themselves ,the shipping cost , packaging, theft protection, marketing and keeping the lights on.
What worked for the visualization?
· The title in one line tells me the story behind revenue and profit across first quarters of various years.
· The lines are clearly labeled, and the colors make them easy to identify.
· The usage of a line chart to show trends across time is apt.
What did not work for the visualization?
· The chart seems to use the word revenue and sales interchangeably. That confuses the reader.
· An explanation behind the seasonal peaks and troughs on the revenue line or more details in terms of how the profit is distributed across years could have added more depth to the story.
My interpretation:
· I decided to create a dual axis chart showing revenue and net income trends over the years.
· I wanted to understand how the net income is distributed quarter wise. A bar chart is great for comparison purposes. Net income was negative for only 5 quarters over a span of 15 years from 2005–20.
· After Q1 in 2015, Amazon has been consistently making positive profits as can be seen from the line chart on the right-hand side implying that the company only recently became profitable.
· Amazon lost $437 million dollars of net income in the 3rd quarter of 2014. This was its biggest loss since the company started.
· Amazon recorded $3,513 million dollars of net income in the first quarter of 2019. This was almost 8 times higher than its lowest recorded income in 2014.
· The company saw its biggest jump between the last quarter of 2017 and the first quarter of 2018 when net income increased by 536%.
· In the first quarter of 2020, Amazon’s revenue was almost 30 times its net income or profit.
What is interesting to note here is that Amazon invests its profits back into the business with capital expenses such as data centers, upgrading distribution networks and new technology like AWS (Amazon Web Services). Since it does not have to borrow money to do so, it does not incur any interest costs, and this allows them to have incredibly free cash flow.
The revenue figures are staggering, and the profit margins are incredibly low. But Bezos manages to re imagine the way we conduct business by strategizing investment.
