Uncovering Amazon: The Technology-Driven Titan Behind Online Retail
Amazon (NASDAQ: AMZN) seems to be the face of online shopping, but there’s more beneath the surface. Understanding its primary revenue source is crucial for current or potential investors.
The Giant of Online Shopping
Amazon has firmly established itself as the leader in the online retail market. According to estimates, its market share in the United States is over five times larger than that of its closest competitor, Walmart, and more than ten times larger than Apple. Many shoppers begin their quest for products on Amazon, and a significant number make purchases there.
Image source: Getty Images.
In the second quarter of 2024, Amazon reported product sales reaching $59 billion. This impressive figure comes from an extensive range of offerings, from groceries to electronics. Additionally, Amazon’s Prime membership includes a popular video service, providing numerous benefits that entice consumers to shop with them.
To maintain its top position, Amazon continuously explores new avenues for growth. Recent initiatives include expanding its medication sales, bundling a Grubhub+ subscription with Prime, and enhancing delivery options across various markets—these are just a few examples of Amazon’s robust efforts in the second quarter of 2024.
Retail Sales Don’t Drive Profit
While it’s undeniable that Amazon’s retail presence is vital to its brand recognition, there is a downside. In the same quarter where it generated $59 billion in product sales, its cost of sales hit $69 billion. This discrepancy highlights that the retail sector does not significantly contribute to profitability. Costs encompassed in this figure include shipping, handling, and product sourcing expenses.
This leads us to Amazon’s service sales, which reached about $75 billion during the same period. As noted in the company’s 10-K annual report, “Service sales primarily represent third-party seller fees, which includes commissions and any related fulfillment and shipping fees, AWS sales, advertising services, Amazon Prime membership fees, and certain digital media content subscriptions.” There is some overlap between these figures, as Prime membership revenue is categorized under service sales while related costs fall under cost of sales. However, it is essential to recognize that Amazon earns more from services than from retail sales.
Amazon’s strength lies in its technology-driven services. It offers Prime access to its vast retail marketplace, enables third-party sellers to reach customers through its platform, and leverages Amazon Web Services (AWS) to provide tech solutions. Although its retail operations attract consumers, Amazon’s true value stems from its technology offerings.
Know What Amazon Really Offers
Amazon’s business model shows no signs of weakness. In the second quarter, the company earned $6.75 billion in net income, primarily from its service offerings rather than product sales. While the retail platform is foundational to Amazon’s identity, it only scratches the surface when assessing the company’s full scope and investment potential.
Thinking of Investing $1,000 in Amazon?
Before making a decision on Amazon stock, it’s worth considering the following:
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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.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
