The Success Of Amazon's "Zero Profit Model"

Over the past 20 years, Amazon's real profit growth has been close to zero, which is obviously far from its ambitious goal of building up Sears Roback in twenty-first Century. Amazon is also seen as a wonderful thing in the industry - without profit growth, stock prices are rising steadily. Obviously, there are some "doorways" which are unknown to outsiders.

　　 Amazon The main revenue consists of three parts: media, electronics and EGM, and "other" (Amazon network service platform AWS). According to the data, EGM expansion is very obvious, media business is also in the growth trend, while AWS is progressing slowly.

In the US and non US regions, the development is also different. The media accounted for 25% of Amazon's revenue in the first quarter, compared with 20% in North America.

And in the AWS category, Amazon's revenue growth can not be ignored. Obviously, Amazon's business and products are very extensive, and different costs cause their actual profits to differ widely. These simple pictures may still not be able to explain the true situation of Amazon.

In fact, Amazon's composition is more complex than it looks, and each product has different departments. For example, the shoe sales department in Germany is totally different from the electronic department in France, and each business has its own unique pricing. Some departments and businesses are already very mature, and the profits are relatively high. Amazon will attract users through discount and other ways, and create user loyalty to products. For example, selling books is the best example. Amazon is known to sell books at a loss, but Actual The difference between the average selling price and the physical store will not be very obvious.

Amazon's Prime offers customers entertainment such as movies and music. Although Amazon has a high cost of copyright purchase, Amazon's cost is very low. In this way, users' dependence on websites will gradually increase, and eventually they will spend more money. If we only consider the profitability of the video, it is difficult to understand the real benefits of Amazon.

Third party sales are also becoming a profitable tool for Amazon. On Amazon platform AWS, sales of third parties reached 40% of the total. Amazon charges 20% of Amazon's revenue for these commodity manufacturers. For Amazon, nearly half of the products sold on the website can only be paid by sitting without any cost pressures.

The third party Sale The subtlety is that Amazon's revenue is based on the revenue generated by third party companies from Amazon's services, rather than the total revenue of third party companies. For example, if you buy a pair of shoes from third party companies on Amazon website, Amazon may charge your money through your Amazon account, then let its transport partners transfer your purchase shoes from Amazon warehouse to your hands.

However, Amazon will only list its transportation fees and service fees to its dealers. It will not show all revenue. This suggests that the third party sales generated by Amazon website may be two times that of Amazon's actual revenue figures. So Amazon's revenue chart does not tell you the truth, which is one reason why profit is meaningless. Amazon's total profit increased from 22.4% in 2011 to 27.2% in 2013, but this did not really reflect changes in the price of consumer products and their profit margins, only reflecting the overall change.

If we simply don't understand Amazon's profit, cash flow may be one of the more effective indicators. Amazon is very much concerned about free cash flow (FCF), while OCF is more critical. OCF represents the result of increased capital expenditure (capex). Over the past 10 years, Amazon's OCF has been very robust, but FCF is declining because of the increase in capex.

According to absolute value, a business generates higher and higher operating cash flow (over $5 billion in the past 12 months) and has been reinvested into the business as capital expenditure.

Since 2009, the ratio of capital expenditure to sales of Amazon has begun to increase, and there is no sign of any reduction.

If Amazon maintains its capital expenditure and sales ratio in 2009, the difference is equivalent to more than $3 billion in cash. That is to say, if Amazon maintains its capital expenditure and sales ratio in 2009, it will generate more than $3 billion in cash in the past 12 months.

So where are these superfluous capex going? The key question is whether Amazon needs to maintain this new higher ratio to support Amazon's business development, or do we need to reduce this level in the future?

Obviously, these capital flows are used in expanded storage (storage) and AWS cloud services.

The investment in this part of the fund may generate a higher profit margin in the future. The increase in warehouses did not bring a significant increase in operating gift. The ratio of third party sales has not increased like the ratio of capital expenditure and sales in the same period.

The transportation cost of goods has not increased, so will the capital expenditure of warehouses increase significantly? The answer seems to be negative.

Amazon's capital expenditure growth does not seem to be due to the increased operating costs of its existing businesses, but because it has invested more cash flow in the future. This explains the initial doubt that Amazon's business has achieved rapid growth in revenue, but it has not accumulated excess cash or profits, and the profits have been invested in opening up new businesses.

However, investors put their money into Amazon, so that they can get substantial returns at some time in the future. But in the Amazon mode, this return seems to be far from being expected. From this point of view, when buying Amazon shares, it is actually a bet on the last big red envelope. The question is, how long will this take? But from the current stock price reaction, investors seem to be very patient.