Amazon Gains Another Weapon in its Profitability Arsenal
- By Shudeep Chandrasekhar
Amazon Business (AMZN), an online marketplace for businesses to buy all their supplies from sellers on Amazon, was launched in April 2015. Almost a year later, Amazon Business has been a roaring success, topping one billion in revenues while connecting 400,000 businesses with 30,000 sellers.
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The intrinsic value of AMZN
The market itself is highly fragmented, so Amazon's move is a kind of consolidation in an industry worth more than $8.2 trillion in the United States alone. For Amazon, it means a 20% month-on-month growth - something that even their tech arm AWS has not seen since it pioneered cloud infrastructure services en masse.
As such, this is Amazon's first seriously successful foray into the B2B market. As an online player with nationwide reach, there is hardly any competition to contend with. Buying trust Amazon as consumers, so there is no reason they won't do that as businesses. The biggest benefit for Amazon is the relatively lower shipping costs. Businesses typically order bulk quantities, so when average sales per user is high, the cost of shipping is not a major component unlike in the case of B2C sales.
Of significance is the fact that nearly 50% of Amazon Business orders are fulfilled by sellers on Amazon. That is a tremendous shift from being a buy-and-sell entity with high overheads to being more like Alibaba (BABA) with its marketplace model. The margins are naturally higher because Amazon merely acts as the portal on which buyer and seller conduct their business.
The biggest differentiator between Amazon Business and Alibaba's pure play marketplace model is that Amazon handles the shipping, while Alibaba merely coordinates it. Being heavily invested in large fleets of delivery trucks with a new fleet of Boeing 767s on the way, Amazon is not likely to emulate Alibaba in that respect.
However, now that they have a taste of higher margins that come with B2B transactions, Amazon has found yet another profitable area that can act as compensator to its B2C retail woes. The important thing to remember is that since they do not break out retail reporting into segments, the higher margins here will positively impact their overall retail margins over time - and we are already seeing evidence of that in their recently reported operating margins for the last two quarters.
The Significance of Amazon Business
The key takeaway from this is that increased profitability along with strong top line growth will embolden Amazon to push even harder and offer even more monetizable services and standalone products, such as Amazon Music and Amazon Echo. Apart from their core B2C retail operations, every other division and initiative is showing profitability, collectively supporting Amazon's bottom line and enabling it to keep introducing high-value services across the width and depth of its businesses.
On the one side, there is AWS with double-digit bottom line growth and on the other there is Prime with tremendous top-line growth, but is weighing on the business due to the high cost of shipping. The gradual shift into consistent profitability that we are seeing now is AWS and every other add-on offering stepping in to support the retail business.
Amazon is essentially a technology company, but a lot of investors fail to see that. They are not in the retail business, but the connectivity business. Just like they connected hundreds of millions of buyers to millions of sellers around the world, they have also connected hundreds of thousands of businesses with tens of thousands of sellers catering to their specific needs.
If they can push the Amazon Business agenda forward in a strong way over the next several quarters, they will have successfully erected yet another pillar under the sagging weight of their retail business.
Disclosure: I have no positions in any of the stocks mentioned above and no intention to initiate a position in the next 72 hours.
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This article first appeared on GuruFocus.
Warning! GuruFocus has detected 4 Warning Signs with AMZN. Click here to check it out.
The intrinsic value of AMZN
