Saturday, January 31, 2009 analysis

Amazon's business is as follows:

We seek to be Earth’s most customer-centric company for three primary customer sets: consumer customers, seller customers and developer customers. In addition, we generate revenue through co-branded credit card agreements and other marketing and promotional services, such as online advertising.

Consumer Customers

We serve our consumer customers through our retail websites and focus on selection, price, and convenience. We design our websites to enable millions of unique products to be sold by us and by third parties across dozens of product categories. We strive to offer our customers the lowest prices possible through low everyday product pricing and free shipping offers, including Amazon Prime, and to improve our operating efficiencies so that we can continue to lower prices for our customers. We also provide easy-to-use functionality, fast and reliable fulfillment through our global fulfillment center network, timely customer service, and a trusted transaction environment.

We fulfill customer orders in a number of ways, including through the U.S. and international fulfillment centers and warehouses that we operate and through co-sourced and outsourced arrangements in certain countries. We operate customer service centers globally, which are supplemented by co-sourced arrangements. See Item 2 of Part I, “Properties.”

Seller Customers
We offer programs that enable seller customers to sell their products on our websites and their own branded websites and to fulfill orders through us. We are not the seller of record in these transactions, but instead earn fixed fees, revenue share fees, per-unit activity fees, or some combination thereof.

Developer Customers
We serve developer customers through Amazon Web Services, which provides access to technology infrastructure that developers can use to enable virtually any type of business.

It is interesting that Amazon has added a new category of customers called "Developer Customers" for whom it provides technology infrastructure to enable any type of technology business.

Amazon's top line increased by 29.19% whereas the bottom line increased by 35.5% year over year before the dilutive effects of stock options. More importantly, the free cash flow increased by 15.5% year over year, a lower rate than EPS growth. Although free cash flow increased at a lower rate, Amazon has been able to retire debt ( almost 800 million ) and increase its assets.

46.6% of Amazon's sales come outside of north america. The remaining 53.4% come from within north america. While the north america margins declined year over year, the international margins increased.

From a growth perspective, Amazon's growth in media was 20%, growth in electronics and other goods was 45% and the other segment was 29%. The total other revenue was 542 million in 2008.

Also, Amazon's shipping costs are negative. It costs Amazon money to ship goods to the customers. In 2008, Amazon spent 1.465 billion in shipping costs of which it was able to recover 835 million from the customers.

While amazon is a well run business and is doing well, the total share count has increased by about 30% in the last ten years. Amazon also trades at a price/cashflow multiple of 19, which is higher than some better run businesses in this field. The trend of increasing in share count continues to go up. Also, in this environment, there are many cheaper alternatives available to invest one's money.

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