Amazon – Not your everyday Bookseller

Amazon, once an online bookseller, has gradually transformed into the expansive “everything store.” Utilizing its efficient fulfillment infrastructure, Amazon swiftly delivers both its own products and third-party products worldwide. While its e-commerce segment drives the bulk of revenue, the true profit engine lies in its cloud division: AWS. In the latest quarter, Amazon’s North American e-commerce unit generated $86 billion in revenue with a 5.7% operating margin, while AWS generated $25 billion in revenue with a notable 37.6% operating margin. Amazon’s free cash flow was $50.1bn for the last twelve months, demonstrating its significant financial strength.

Amazon is renowned for identifying pain points within their own operations and devising solutions to overcome them, and then selling that solution as a service to third parties. In this way, they turn cost centres into profit centres. When they managed their internet servers, they noticed significant periods of dormancy in their IT infrastructure, punctuated by occasional spikes in usage. Recognizing this, Amazon seized the opportunity to create AWS. Instead of companies needing to set up and manage their IT infrastructure, Amazon does it for a fee, based on usage. Today, global enterprises rely on AWS to power their entire operations. Now, AWS is increasingly being employed by companies to train their generative AI models. Amazon observed that many companies are still in the training phase of their generative AI products, and that the products aren’t available for the market just yet.

Amazon has followed the same principle with regards to their fulfillment service. Companies are able to sell their products internationally on Amazon’s platform, while not needing to go through the process of figuring out the complicated rates and tariffs they are required to pay in each country.

Amazon’s reach extends far beyond e-commerce and cloud computing. They also run a video-streaming platform, own a significant share of an electric car company (Rivian), and operate an advertising business integrated with their e-commerce operations, which generated $11.8 billion in revenue this recent quarter. Advertising, known for its high operating margins, is likely to contribute to Amazon’s growing profitability.

Yet, amidst their diverse ventures, Amazon faces formidable competition. Beyond rival e-commerce and traditional retail businesses, they contend with tech giants like Alphabet and Microsoft. Big Tech is also facing increased regulatory pressure around the world.

Amazon’s origins in a low-margin environment have instilled a cost-effective mindset into their DNA. They have shown, time and again, how to develop new products and services while keeping costs low.

Amazon and Microsoft are held in the Lunar BCI Worldwide Flexible Fund and by Lunar Capital’s Offshore Portfolio clients.