There’s a public face to Amazon (NASDAQ: AMZN), which is very important. However, when you venture past the glittering surface, you’ll uncover the real essence of Amazon’s operations. At its core, Amazon isn’t predominantly about retail; instead, it’s a tech services juggernaut. Let’s delve into a crucial aspect that investors simply cannot afford to overlook.
The E-Commerce Behemoth
Undoubtedly, Amazon has risen to be the undisputed giant in the online retail arena. Estimates suggest its market share in the United States surpasses that of key players like Walmart and Apple combined. It’s fair to say that when consumers initiate their online shopping quests, Amazon often stands as their initial port of call. And a substantial number of these browsers ultimately convert into buyers.
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In the second quarter of 2024, Amazon’s product sales tallied up to an impressive $59 billion. This figure is monumental, spanning a wide array of products from food to toys to clothing to medication. When you add in Prime membership perks, including a competitive video service akin to Netflix, it becomes clear why Amazon commands such consumer loyalty.
Amazon’s relentless pursuit of dominance is evident by its foray into selling medications, bundling memberships, and expanding its same-day and next-day delivery offerings across the globe. And this merely scratches the surface of the company’s second-quarter accomplishments.
Evaluating Amazon’s Retail Dynamics
Amazon’s prominence in the online retail realm is indisputable, solidifying its brand recognition and market presence. Nevertheless, a hitch exists. Despite generating $59 billion in product sales in the second quarter, the cost of sales totaled a staggering $69 billion. This disjunction illustrates that the retail segment isn’t a profit-generating engine for Amazon. Costs encompass product expenses, shipping, and content creation.
Here’s where service revenue plays a pivotal role. Reportedly, Amazon amassed roughly $75 billion in service sales during the second quarter. These sales include third-party seller fees, AWS revenue, advertising services, Prime fees, and digital media subscriptions. While some overlap exists, the key takeaway is that physical product sales aren’t Amazon’s top revenue source.
Amazon’s core competency lies in technology. It offers privileged access to its retail services via Prime, extends its cutting-edge retail platform to third-party vendors, and leverages its vast tech infrastructure through Amazon Web Services (AWS). This technological prowess underscores Amazon’s service-oriented focus, outweighing its traditional product sales.
Deciphering the True Amazon Experience
Amazon’s operational model is nothing short of stellar. In the second quarter alone, it amassed a net income of $6.75 billion. Notably, this success wasn’t propelled by website product sales but by service revenues. While the Amazon.com retail hub remains pivotal, it is merely the tip of the iceberg when considering Amazon as a holistic entity and investment.
Is Amazon Worth Your Investment?
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Apple, Netflix, and Walmart. The Motley Fool has a disclosure policy.