Understanding Amazon’s Revenue Streams and Retail Challenges

Amazon.com (NASDAQ: AMZN) is widely known for its retail website, with its delivery trucks serving as a testament to its e-commerce dominance. However, a deeper look into the company’s earnings statement reveals a more complex financial picture.

Understanding Amazon’s financials is crucial before making any investment decisions regarding the company’s stock.

Amazon’s Impressive Sales Figures

In Q1 2025, Amazon reported nearly $64 billion in product sales, a staggering amount that underscores its role as a major retailer. Yet, a closer inspection of its income statement reveals noteworthy insights.

The company’s cost of sales encompasses not just the purchase price of products but also inbound and outbound shipping costs, as well as digital media content expenses. Cost of sales includes essential expenses associated with moving and managing these products, but it also includes costs related to digital media, which can obscure the actual performance of its retail operations.

The inclusion of these media costs makes sense in the context of Amazon’s Prime offering, which pairs free shipping with streaming. The streaming service attracts consumers to pay for subscription fees, grouping electronic costs in a single metric. However, in Q1, Amazon’s cost of sales hit nearly $77 billion, exceeding its product sales by over $10 billion.

This perspective raises questions about the retail aspect of Amazon’s business, casting it in a less favorable light.

The Strengths of Amazon’s Business Model

Fortunately, product sales are only one revenue stream for Amazon. The company also generates significant income from its services, totaling $92 billion in Q1. This category includes third-party seller fees, AWS sales, advertising services, and Amazon Prime membership fees.

Two major takeaways emerge: first, Amazon benefits considerably from being a platform for other sellers; second, its cloud services are pivotal to its overall revenue. Membership fees, counted under services, contrast with product costs, which could make retail performance appear weaker than it is.

Ultimately, the services division propels growth by allowing Amazon to invest in a single infrastructure while collecting fees from multiple customers, enhancing its role in both retail and technology sectors.

Amazon’s e-commerce model illustrates this, with external sellers leveraging its infrastructure, thereby boosting service income. The AWS cloud service exemplifies this well; after covering initial costs, additional customer revenue has little incremental cost.

While retail remains significant, Amazon primarily operates as a service company that presents itself as a retail entity.

Examining Amazon’s Financial Performance

Overall, Amazon achieved approximately $156 billion in revenue during Q1, with services contributing nearly 60%. Operating costs totaled $137 billion, of which over 55% were product-related costs. The operating income reported was a robust $18 billion.

Although Amazon began as a retail entity, its real strength lies in the expansion of its services, which are poised to drive future profitability much more effectively than traditional product sales. Therefore, investors should view Amazon more as a service-oriented company than a retailer.

Investment Considerations for Amazon

Before considering an investment of $1,000 in Amazon, keep the following in mind:

The analyst team has identified what they consider the 10 best stocks to buy now, and Amazon is not on this list. These selected stocks show the potential for substantial returns in the years ahead.

As an investment example, Netflix was recommended on December 17, 2004. If you had invested $1,000 at that time, it would be worth about $644,254 today! Similarly, an investment in Nvidia made on April 15, 2005, would be worth approximately $807,814 now.

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John Mackey, the former CEO of Whole Foods Market, is on the board of directors for The Motley Fool. Reuben Gregg Brewer does not hold any positions in the mentioned stocks. The Motley Fool has investments in, and recommends, Amazon.

The views expressed here are those of the author and do not necessarily reflect the views of Nasdaq, Inc.