Is Amazon a fundamentally unfair company? It certainly looks that way
Evidence of the demise of the U.S. retail industry is clear in almost every household. It exists in every neighborhood, even in the White House, and it was clear again Thursday.
That’s when Amazon.com Inc. AMZN, +4.96% reported first-quarter earnings. And we learned just how big the pressure is. Seattle-based Amazon, which is defined as a retail powerhouse on Wall Street, loses money from its retail business. In order to compete, other retailers must be willing to lose money too.
According to Amazon’s earnings report, revenues were $ 51 billion and earnings were $ 1.9 billion, creating a profit margin of only 3.7%. That is very low, but it gets worse when you look at retail by itself.
Specifically, we will remove Amazon Web Services (AWS) — its cloud business — and Prime to quantify this.
Beating Google, IBM
AWS has been a growth vehicle and the driving force behind Amazon earnings for some time. Competitors see this too, but Amazon still leads Google GOOG, -0.45% GOOGL, -0.59% IBM IBM, -0.33% and other rivals in this segment. In fact, analysts say that IBM, a bellwether stock historically, can’t even compete. AWS boosted revenues by 48%, earnings by 57%, and margins came in at 25%. That is very good.
Specifically, AWS made $ 1.4 billion on $ 5.4 billion in revenue. We can remove that from the overall results to get a better look at Amazon’s retail business. When we do, we see that margins shrink to a razor-thin 1%. AWS’s $ 1.4 billion in earnings accounted for almost all of the $ 1.9 billion in total earnings.
Amazon earns only half a billion dollars from its non-cloud business, most of which is retail, but we should also back out the Prime subscriptions to see this more clearly. We do not know exactly how much money was earned from Prime in the past quarter, but we can estimate. Based on disclosures earlier this week, we can estimate that Amazon earns $ 10 billion a year from Prime, or $ 2.5 billion a quarter.
Amazon’s $ 2 billion loss
If $ 2.5 billion is coming from Prime, and the non-cloud business earned only half a billion dollars, the business without cloud and Prime actually lost $ 2 billion. Part of that is advertising, but most of it is retail.
As 60% of Amazon’s revenues are from retail, most of the company therefore loses money.
So we can say that Amazon retail is a money-losing business. That puts pressure on other retailers, which might actually want to make money. If they are to compete, they will need to come up with other ways to make money, just as Amazon has.
The retail industry has changed, and not even tweets from President Trump seem capable of changing that.
Thomas H. Kee Jr. is a former Morgan Stanley broker and founder of Stock Traders Daily.