In late October, Amazon reported in remains the number one online retailer with over $70 billion in sales. However according to an article by Jeffery Dastin and Akanksha Rana of Reuters, the shares fell because of missed estimates from the cloud computing business, which is a very profitable business.
Amazon has a goal for its Amazon Prime members, they would receive the parcel the next day. Partly this has to do with the competition, Walmart has two day shipping; partly because Amazon believes one day shipping would spur greater sales. The downside is the expense, it is very expensive because the inventory needs to be near customers and the distance from the Amazon warehouse to the customer is a logistical expense. In addition Amazon loses revenue because members do not have to pay the premium fees for one day shipping. The logistics mean the the greater than 100 million Prime members are catered to.
According to Morgan Stanley analysis a typical order for items shipped in 2 days is $23.33 and Amazon spends $5.05 to fulfill it and deliver it. For the one day order, the order is $8.32 and costs is $10.59 or the company loses money. Do all the Prime members want 1 day shipping or just free shipping? are they Prime members for the music and TV streaming? and other perks? it is a judgement Amazon makes and needs to comply. Perhaps one day shipping should be at higher amounts, ie over $125? Amazon is going to spend $800 million to accomplish the one day shipping mandate.
In terms of the Amazon Web Services or AWS, the unit handles data storage and computing operations for other enterprises, revenue increased 35% to $9 billion, but it was the second quarter the growth rate was less than 40%. The operating margins for AWS was 25%.
CFO Brian Olsavsky expects holiday operating income to between $1.2 and $2.9 billion, analysts were expecting $4.19 billion according to research firm FactSet. Is Amazon lowering expectations to beat them the next quarter?
Linking to dividend paying stocks, a company similar to Amazon has taken over the retail side of the on line world and it is important to understand how they make their money. The AWS division has provided most of their profits. Amazon Prime memberships which were increased from $99 to $125 has over 100 million members that is good cash flow; and Amazon receives money from third parties to be the backoffice or warehouse inventory experts. They are now trying for one day shipment. There are many solid dependable repeatable income in their revenue structure based on consistent execution of service.
There are more questions than answers, till the next time – to raising questions.