I hear these words a lot: “I just don’t get it, how can Amazon keep going up when it loses money every year?”
That’s a reasonable question to ask.
Amazon (AMZN) is an extraordinary business, but perhaps not for the reasons you might think. Yes, you can order just about anything you might need, and have it shipped to you just about anywhere in the world.
In some major cities, you can receive your package in less than 24 hours. Where I live, in Tokyo, if I order something at 8 a.m. it arrives usually by 5 p.m. the same day. While impressive, that’s not what makes Amazon special.
The company is so unique because it has never strayed from its core operating principle. Build scale… Be ruthless on operating expenses. Deliver a fantastic customer experience… Plow any earnings right back into the business… Continue to innovate…
Amazon has never allowed itself to get caught up in the quarterly earnings game on Wall Street. CEO Jeff Bezos understood from the beginning that as long as the company stayed true to its principles, the stock price would take care of itself. He most certainly has been right.
That last piece of Amazon’s operating principle – continue to innovate – is what drives the company’s success as a business and an investment.
What many people don’t know about Amazon is that it is more than the world’s e-commerce site. It is also the largest cloud service provider in the world.
The company’s Amazon Web Services (AWS) division rents out computing power, data storage, and servers to people and companies that want to deliver a service or application in the cloud. Companies that use AWS benefit greatly as they do not have to build out and manage their own data centers. Instead, they can simply lease AWS services for a fraction of the cost.
AWS was established in August 2006, but Amazon didn’t start breaking out the segment’s revenues until 2014. What the market learned at that time was extraordinary. AWS revenues were already at $1 billion a quarter. Today, they’re more than $2 billion… and still growing (see chart below).
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