A Critical Analysis of Amazons Financial Performance for the Last 5 Years - Example

A Critical Analysis of Amazon’s Financial Performance for the Last 5 Years

Table of Contents

• Introduction……………………………………………………………………………….3
• Analysis of Amazon’s Performance ……………………………………………………..4
• Reasons for Amazon’s Mixed Performance….…………………………………………..5
• Index…………………………….………………………………………………………..8
• Works Cited…….………………………………………………………………………12

1.0 Introduction

Amazon is currently the world’s largest online retailer. The company started as a single online book retailer and later diversified its portfolio to include a variety of products and diverse commercial interests. Although the online company is headquartered in Seattle Washington, it owns a number of retail websites across the world and subsidiary companies that cater for new and emerging e-commerce markets. Basically, Amazon’s premier websites are platforms where third party retailers can sell their products while Amazon delivers them. Additionally, the company has placed itself as a leading player in the cloud computing business. Amazon has subsidiary companies in Australia, the United Kingdom, Germany, Japan, India, Mexico among other countries mainly located in Europe, Asia and South America. The year 2015 saw Amazon overtake Walmart as the most valuable retailer in the USA by market capitalization. This momentous achievement is a culmination of years of investments and diversification across all the segments of the e-commerce market (Fortune 500).

Steve Bezos, the man behind Amazon, started the e-commerce venture in 1994, since then, the former employee of a hedge fund firm in Wall Street has remained a key figure in the organization. Currently, Bezos sits as the chairman and CEO of Amazon Inc. Other key figures in Amazon’s executive board include; Werner Vogels, Craig Bearman and Jeffrey Wilke. Bezos is credited to being an ‘astute micromanager’; as a ‘techpreneur’, Bezos virtually controls every aspect of the company driving it towards the vision he conceived in the early 90s. Amazon is also a publicly traded company; its shares are on offer at the NASDAQ and the S&P 500; as of 17th May 2016 8.57 EDT, its share price stood at $710.66, a price which most analysts say should keep investors holding the stock for another five years (Zu & Liu, 4; Google Finance, n.p.).

Amazon is a model internet company that is apt for study because of its history of resilience and metamorphosis. Amazon is visibly one of the few e-commerce companies that survived the 90s internet bubble and its associated stock sensation. Yet, to study this company by this reason alone is unfair; Amazon domination in many areas of modern computing is a phenomenon that warrants a critical analysis.

Analysis of Amazon’ Performance

Amazon can be described as a growth-oriented company that does not put much concern on its profitability but rather seeks to grow its revenues year in year out. One can understand the motivation behind the company’s growth-oriented approach through Bezos business mantra. Bezos believes the company’s shares will always perform if its revenues are always on the upward trajectory. On that note, it is impossible to notice that as of 2014 Amazon facilitated the sale of more than 2 billion items through its website sales services (Forbes, para. 1, Google Finance, n.p.).

Therefore, in order to reveal Amazon’s true performance, the main focus has to be on its revenues. According to figures provided by Google finance, Amazon’s market capitalization stood at $334.96 billion. The company recorded an almost 10% increase in its gross margin up from 22.35%% in the year 2010. This implies that the company retained more money from its sales over the period of 5 years. Additionally, its operating margin also decreased by almost half, down from a value of 4.11% in the year 2010. Amazon’s tax rate increased by almost 30% to a value of 60.59% in the year end 2015. Net profitability margin showed major fluctuations with the numbers staying on the negative 2012 (-0.06%) and 2014 (-0.27%). However, the year 2015 saw an improvement of almost 1%. Returns on Assets (ROA) was on steady downward path from 2010 (7.07%) to a low of 0.99% in the year 2015. The company’s Return on Investment (ROI) also depreciated by 15% during the five-year period. Additionally, return on Invested Capital also went down by almost the same value (14.17%) (Morningstar, n.p. Google Finance, n.p.).

In terms of growth, Amazon recorded a five-year average revenue of 25.62% in 2015. This is a significant drop from 32.11% average in 2010. Its five-year average operating income at the end of 2010 was 26.62% and by the year 2015 the value had shrunk to 9.69%. In between the period, there were mixed recorded ratios between the year 2012 to the year 2014. The company’s five-year average net income also declined from a value of 26.62% in 2010 to -12.5 % in 2015 (Morningstar, n.p.).

An in-depth look at its cash flow ratios shows a decreased conversion of revenue. Amazon’s free cash flow-sales ratio reduced 7.36 to 6.85 in the year 2015. During the same five-year period, the value decreased to a low of 0.65 in 2012. Thereafter, the ratio improved in the subsequent years. Free cash flow to net income ratio improved to 12.30 in 2015 from 2.18 in 2015. The company’s liquidity did relatively well since the current ratio was always above 1.0 percent for the indicated period. However, the value was on a constant decrease indicating a likelihood it would go less than 1 past the year 2015. The quick ratio decreased from 1% in 2010 to 0.87% in 2015. Additionally, the debt/equity ratio stood at 1.06 in 2015 up from 0.09 in 2015. These figures indicate that the company was financing more of its project on debt; therefore, it could be the reason why its profitability was volatile during the five-year period. Amazon’s expenses increased during the same period by a value of almost $9.5 billion dollars (Morningstar, n.p.).

In summary, Amazon’s performance compared to the industry average is low. This could be due to the fact that the company is aggressively investing in new ventures which add to its debt levels. Additionally, over the past five years there have been high stock price fluctuations with a low of $172 in 2012 to a high of $722 in 2016. It implies that price per earnings ratio has been extremely high in between the five-year period. Moreover, the volumes traded have been relatively low during the five year period because many of the investors want to hold the stock for long- term benefit. However, it’s good to note that Amazon has not been giving dividends from profits earned since their business model seeks to increase their share value by diversifying investments. It would be a complex issue to assess Amazon’s on the grounds of profitability, though there has recorded low profit margins over the years. Nevertheless, if you look at its revenue growth, there is an upward trend over the five-year period.

Reasons for Amazon’s Low Profitability and Increased Revenue

Amazon’s Revenue Growth Business Model

Amazon has not made a significant profit since its inception. Only once in the year 2009 have they made a significant profit exceeding the 1 billion mark. Bezos’ business model could well be the reason why their profitability has been low and their revenues have steadily grown. The company retains almost all of its profits to fund its aggressive expansion policy. Additionally, through expanding their businesses throughout the world they aim at increasing their customer base through third party sellers. Third party selling maintains their customer base by giving them a wide variety of product options. Consequently, through a wide net of customers, they have enough data to identify which products are raking in more revenue. Hence, they optimize their sales by advertising more on the product lines that give them strategic demographic advantage over other platform-based shops. Another dimension to this strategy is that Amazon can increase its market share in a two-pronged strategy. The company can increase its share in the market through increasing variety for swing buyers. Additionally, they can diversify through acquisitions of smaller companies which have a loyal customer base but are expensive to run.

Low Pricing Strategy & Investment in Various Strategies

Due to intense competition from other web-services business such as Google and Alibaba, Amazon has opted to significantly cut its prices. Forbes records an average of 28% to 51% price cuts in the product sales segment. Moreover, low profitability is attributable to expensive long-term investments in cloud computing which is yet to make a big impact. Coupled with low sales on new products such as the Kindle Tablet and the Fire phone, losses of up to $170 million have been recorded during the five period. According to the Amazon’s management the fact that they make losses does not justify the negative publicity that the company is receiving from analysts. It seems that by increasing its product range, it customer-retention power increases. Therefore, a low-cost approach and product variety in its inventory are core competencies that ensure they stand up against key players and other brick and mortar online retail companies. The latter corresponds to Bezos’ ‘Amazon Flywheel’ dream of offering customers a wide range of products at low costs (Forbes, para. 1, 2 and 3).

Rising Costs of Technology and Shipping

Amazon’s ability to turn a profit on their investment is reliant on shipping costs. Shipping costs account for an average of 9% of Amazon’s its net sales. The costs are also likely to increase due to shipping offers they provide and the development of their own logistics company. Consequently, the company has seen more customers opt for their shipping offers since they are relatively lower compared to shipping rates offered by major companies such as Fedex and UPS. Through its Prime and Super saving shipping offers, the company spent over $5.02 billion up from an approximate cost of $1.4 billion in the year 2010. Evidently, investment in shipping and delivery technologies such as the Amazon drones is drawing more tech-savvy consumers where it is estimated that over 1.5 billion people in the world have smart phones (Zhu and Liu, 13 &14).

Summative of this discussion, it is true that Amazon has taken a ‘growth first and profits later’ strategy. This strategy has affected their profitability but offered them great advantages in terms of revenue. Additionally, it has improved the company’s share price by almost 200% over a five-year period. It is due to the fact that Amazon has increased its global market share through a low-pricing strategy and an innovative product inventory. Moreover, its effort to invest for the consumers’ sake rather than for the investors’ needs has immensely paid off. Therefore, it is safe to conclude that Amazon has been ‘weirdly’ successful.

Indices

Amazon Financials 2010-2015

Amazon Key Ratios & Profitability 2010-2015

Revenue Records 2010-2015

Cash Flow Ratios 2010-2015

Shipping Costs: 2010-2015

Amazon’s Growth of Customer Base

Sources: http://www/morningstar.com & http://www.statista.com