There’s a public face to Amazon (NASDAQ: AMZN), which is very important. But when you dig into the story just a little bit, you see that Amazon’s public face is only a facade. The real business is about selling technology services. Here’s a look at the one important fact you can’t overlook if you buy, or own, Amazon.
Amazon is a leading web retailer
There’s no way around it, Amazon has become the 800-pound gorilla in the online retail sector. By some estimates, its online market share is more than 5 times greater in the United States than runner-up Walmart and over 10 times larger than third-place Apple. It wouldn’t be a reach to say that more people start their online search for things to buy at Amazon then they do at any other website. And a fair number of lookers buy.
Image source: Getty Images.
In the second quarter of 2024 Amazon’s product sales tallied up to an impressive $59 billion. That’s a massive figure from a company that offers products that span virtually all aspects of daily life, from food to toys to clothing to medication. Now add in the company’s Prime membership, which comes with a video service that competes (very well) with Netflix, among many other perks, and you can see why Amazon is the destination of choice for many consumers.
Amazon recognizes how important it is to be the top dog. Which is why it is always looking for ways to enhance its position. For example, it has branched into selling medications and is working to improve this offering, it bundled a Grubhub+ membership with its own Prime membership, and it worked to bring same-day and next-day delivery to markets around the world. And that’s a short list of things management achieved in the second quarter of 2024.
Amazon’s retail business is a loss leader
There’s no doubt about it, Amazon’s position in the online retail landscape is important. It sets the company apart and makes it a household name. But there’s one small problem. While it sold $59 billion worth of products in the second quarter, its cost of sales was $69 billion. It doesn’t take a math degree to figure out that the retail business isn’t a profit center for the company. Cost of sales includes things like the cost of physical products, shipping and handling expenses, and content creation costs.
This is where service sales come into the picture. The company generated roughly $75 billion in service sales in the second quarter. According to the company’s 10-K annual report, “Service sales primarily represent third-party seller fees, which includes commissions and any related fulfillment and shipping fees, AWS sales, advertising services, Amazon Prime membership fees, and certain digital media content subscriptions.” There’s clearly some overlap here, since Prime membership revenue goes here while the content creation costs go into cost of sales. But the key takeaway is that selling physical products isn’t how Amazon makes the most money.
The company’s core competency is technology driven. It sells advantaged access to its retail services via Prime. It sells access to its industry-leading retail platform to third-party sellers. It sells access to its massive technology system via Amazon Web Services (AWS, effectively the company’s data centers). There are more things in the mix, too, but you get the idea. Amazon is more about technology-related services than it is about selling physical products. The company’s leading position in the online retail world is what allows it to sell all of its services, but that’s just what gets customers in the door.
Make sure you know the real Amazon
There’s clearly nothing wrong with Amazon’s business model. In the second quarter it generated $6.75 billion worth of net income. But that wasn’t driven by product sales on its website, it was driven by the sale of services. Amazon wouldn’t be Amazon without the Amazon.com retail website. However, the Amazon.com retail website is just the tip of the iceberg when you are looking at Amazon the company and stock.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Apple, Netflix, and Walmart. The Motley Fool has a disclosure policy.
