Do an analysis of online content about investing in Amazon.com, Inc. (AMZN), and you’ll find that most of them center on how AMZN stock is doing something innovative, ultimately suggesting that Amazon is one for the future.
Go on and read about CEO and Founder Jeff Bezos, and you’ll find how he’s mostly being described as someone with a long-term focus.
But, hey, this is 2016 … close to 22 years since this long-term story began. It’s on the promise of a great long-term that its stock has risen from about $125 a share at the start of 2010 to its current roughly $580-a-share price, even though it has been struggling to post positive earning.
Yet, some say AMZN stock is still not yet adequately valued.
So it won’t be myopic for anyone who’s been following AMZN stock to ask at this point if that promised future will ever start. For those who have such questions, here is proof that the future of Amazon profitability has began — and in fact began a few years ago.
How Amazon Profitability Has Been Growing
Due to tight margins on items sold and then quite expenses, AMZN stock has historically struggled to post positive earnings — and most of its critics point to that lack of a strong earnings record. However, looking through Amazon’s annual filings, you’ll find that a trend of profitability has been ongoing for some time now that suggests that we can consistently write AMZN stock earnings numbers with blue ink.
To get a clear view of Amazon stock profitability, you’d want to look at its operating income and expenses, instead of the net income, because what eventually ends up in the net income column is largely decided in the operating expenses column.
Here’s what I mean.
The other three columns before the net income are interest income, interest expenses and other income/expenses. The interest expense is a reflection of long-term debt and capital/finance lease arrangements. The “other income/expense” is a reflection of foreign exchange gain or loss. So you see, what really matters is the operating expenses.
In 2015, AMZN stock reported operating expenses of $104.8 billion for total revenue of $107 billion, yielding an operating income of $2.2 billion, the highest ever. What actually made this possible is that AMZN stock has been growing its operating income faster than its revenues — another way saying revenues have been growing faster than operating expenses.
Over the last five years, AMZN stock has grown its operating income by 159% compared to revenue growth of 122.6%. You’ll appreciate the work over the last five years, when you see that AMZN stock grew revenue by 899% and operating income by 474% over the last ten years. Revenue grew almost twice as fast as operating income.
Translation? AMZN stock has been making more money for less cost.
Even Further Promise of Profitability
Looking through the breakdown of the operating income, you’d find that the Amazon Web Services segment is becoming a key driver for AMZN stock profitability. The AWS segment, which contributes just 7% to AMZN stock revenue, contributed a whopping 41.2% to its consolidated segment operating income of $4.5 billion. This is essentially an operating income from which stock-based compensation hasn’t been removed.
So as AWS grows, we can expect to see improved profitability from AMZN stock. And it is already the largest cloud services provider in the world with an annual run rate close to $10 billion as of the fourth quarter. So you know it’s well positioned for further growth in the cloud space.
Final Word on AMZN Stock
While it seem that the retail segment isn’t as profitable as the AWS segment at the moment, investor should know that it will eventually become a big force. It is essentially a funnel through which Amazon grows its Prime business, a business that it can monetize in several ways eventually.
With dominance in e-commerce and cloud computing — markets that are still growing — the future still holds a lot for AMZN stock and it’s definitely one for the future.
As of this writing, Craig Adeyanju did not hold a position in any of the aforementioned stocks.
