AMZN: Amazon.com, Inc Analysis and Research Report

2018-04-25 - by Asif , Contributing Analyst - 163 views

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Overview

Amazon.com opened its virtual doors on the World Wide Web in July 1995. The company seek to be Earth’s most customer-centric company. Amazon is guided by four principles: customer obsession rather than competitor focus, passion for invention, commitment to operational excellence, and long-term thinking. In each of its segments, the company serve its primary customer sets, consisting of consumers, sellers, developers, enterprises, and content creators. In addition, the company provide services, such as advertising services and co-branded credit card agreements.

Amazon has organized its operations into three segments: North America, International, and Amazon Web Services (“AWS”). These segments reflect the way the Company evaluates its business performance and manages its operations. Additional information on its operating segments and its net sales is contained in Item 8 of Part II, “Financial Statements and Supplementary Data—Note 11—Segment Information.” The company's company-sponsored research and development expense is set forth within “Technology and content” in Item 8 of Part II, “Financial Statements and Supplementary Data—Consolidated Statements of Operations.” The financial results of Whole Foods Market, Inc. (“Whole Foods Market”) have been included in its consolidated financial statements from the date of acquisition on August 28, 2017.

The company's primary source of revenue is the sale of a wide range of products and services to customers. The products offered through its consumer-facing websites and physical stores primarily include merchandise and content Amazon has purchased for resale from vendors and products offered by third-party sellers, and the company also manufacture and sell electronic devices. Generally, the company recognize gross revenue from items the company sell from its inventory as product sales and recognize its net share of revenue of items sold by third-party sellers as service sales. The company seek to increase unit sales across its businesses, through increased product selection, across numerous product categories. The company also offer other services such as compute, storage, and database offerings, fulfillment, publishing, certain digital content subscriptions, advertising, and co-branded credit cards.

The company's financial focus is on long-term, sustainable growth in free cash flows1. Free cash flows are driven primarily by increasing operating income and efficiently managing working capital2 and cash capital expenditures, including its decision to purchase or lease property and equipment. Increases in operating income primarily result from increases in sales of products and services and efficiently managing its operating costs, partially offset by investments the company make in longer-term strategic initiatives. To increase sales of products and services, the company focus on improving all aspects of the customer experience, including lowering prices, improving availability, offering faster delivery and performance times, increasing selection, increasing product categories and service offerings, expanding product information, improving ease of use, improving reliability, and earning customer trust.

The company seek to reduce its variable costs per unit and work to leverage its fixed costs. The company's variable costs include product and content costs, payment processing and related transaction costs, picking, packaging, and preparing orders for shipment, transportation, customer service support, costs necessary to run AWS, and a portion of its marketing costs. The company's fixed costs include the costs necessary to build and run its technology infrastructure; to build, enhance, and add features to its websites and web services, its electronic devices, and digital offerings; and to build and optimize its fulfillment centers and physical stores. Variable costs generally change directly with sales volume, while fixed costs generally are dependent on the timing of capacity needs, geographic expansion, category expansion, and other factors. To decrease its variable costs on a per unit basis and enable it to lower prices for customers, the company seek to increase its direct sourcing, increase discounts from suppliers, and reduce defects in its processes. To minimize growth in fixed costs, the company seek to improve process efficiencies and maintain a lean culture.

Because of its model Amazon is able to turn its inventory quickly and have a cash-generating operating cycle3. On average, its high inventory velocity means the company generally collect from consumers before its payments to suppliers come due. The company expect variability in inventory turnover over time since it is affected by numerous factors, including its product mix, the mix of sales by it and by third-party sellers, its continuing focus on in-stock inventory availability and selection of product offerings, its investment in new geographies and product lines, and the extent to which the company choose to utilize third-party fulfillment providers. The company also expect some variability in accounts payable days over time since they are affected by several factors, including the mix of product sales, the mix of sales by third-party sellers, the mix of suppliers, seasonality, and changes in payment terms over time, including the effect of balancing pricing and timing of payment terms with suppliers.

The company expect spending in technology and content will increase over time as the company add computer scientists, designers, software and hardware engineers, and merchandising employees. The company's technology and content investment and capital spending projects often support a variety of product and service offerings due to geographic expansion and the cross-functionality of its systems and operations. The company seek to invest efficiently in several areas of technology and content, including AWS, and expansion of new and existing product categories and service offerings, as well as in technology infrastructure to enhance the customer experience and improve its process efficiencies. The company believe that advances in technology, specifically the speed and reduced cost of processing power and the advances of wireless connectivity, will continue to improve the consumer experience on the Internet and increase its ubiquity in people’s lives. To best take advantage of these continued advances in technology, Amazon is investing in initiatives to build and deploy innovative and efficient software and electronic devices. Amazon is also investing in AWS, which offers a broad set of global compute, storage, database, and other service offerings to developers and enterprises of all sizes.

The company seek to efficiently manage shareholder dilution while maintaining the flexibility to issue shares for strategic purposes, such as financings, acquisitions, and aligning employee compensation with shareholders’ interests. The company utilize restricted stock units as its primary vehicle for equity compensation because the company believe this compensation model aligns the long-term interests of its shareholders and employees. In measuring shareholder dilution, the company include all vested and unvested stock awards outstanding, without regard to estimated forfeitures. Total shares outstanding plus outstanding stock awards were 497 million and 504 million as of December 31, 2016 and 2017.

The company's financial reporting currency is the U.S. Dollar and changes in foreign exchange rates significantly affect its reported results and consolidated trends. For example, if the U.S. Dollar weakens year-over-year relative to currencies in its international locations, its consolidated net sales and operating expenses will be higher than if currencies had remained constant. Likewise, if the U.S. Dollar strengthens year-over-year relative to currencies in its international locations, its consolidated net sales and operating expenses will be lower than if currencies had remained constant. The company believe that its increasing diversification beyond the U.S. economy through its growing international businesses benefits its shareholders over the long-term. The company also believe it is useful to evaluate its operating results and growth rates before and after the effect of currency changes.

In addition, the remeasurement of its intercompany balances can result in significant gains and losses associated with the effect of movements in foreign currency exchange rates. Currency volatilities may continue, which may significantly impact (either positively or negatively) its reported results and consolidated trends and comparisons.

Consumers

The company serve consumers through its retail websites and physical stores and focus on selection, price, and convenience. The company design its websites to enable hundreds of millions of unique products to be sold by it and by third parties across dozens of product categories. Customers access its offerings through its websites, mobile apps, Alexa, and physically visiting its stores. The company also manufacture and sell electronic devices, including Kindle e-readers, Fire tablets, Fire TVs, and Echo devices, and the company develop and produce media content. The company strive to offer its customers the lowest prices possible through low everyday product pricing and shipping offers, and to improve its operating efficiencies so that the company can continue to lower prices for its customers. The company also provide easy-to-use functionality, fast and reliable fulfillment, and timely customer service. In addition, the company offer Amazon Prime, a membership program that includes unlimited free shipping on tens of millions of items, access to unlimited instant streaming of thousands of movies and TV episodes, and other benefits.

The company fulfill customer orders in a number of ways, including through: North America and International fulfillment and delivery networks that the company operate; co-sourced and outsourced arrangements in certain countries; digital delivery; and through its physical stores. The company operate customer service centers globally, which are supplemented by co-sourced arrangements. See Item 2 of Part I, “Properties.”

Sellers

The company offer programs that enable sellers to grow their businesses, sell their products on its websites and their own branded websites, and fulfill orders through it. Amazon is not the seller of record in these transactions. The company earn fixed fees, a percentage of sales, per-unit activity fees, interest, or some combination thereof, for its seller programs.

Developers and Enterprises

The company serve developers and enterprises of all sizes, including start-ups, government agencies, and academic institutions, through its AWS segment, which offers a broad set of global compute, storage, database, and other service offerings.

Content Creators

The company serve authors and independent publishers with Kindle Direct Publishing, an online service that lets independent authors and publishers choose a 70% royalty option and make their books available in the Kindle Store, along with Amazon’s own publishing arm, Amazon Publishing. The company also offer programs that allow authors, musicians, filmmakers, app developers, and others to publish and sell content.

Competition

The company's businesses encompass a large variety of product types, service offerings, and delivery channels. The worldwide marketplace in which the company compete is evolving rapidly and intensely competitive, and the company face a broad array of competitors from many different industry sectors around the world. The company's current and potential competitors include: (1) online, offline, and multichannel retailers, publishers, vendors, distributors, manufacturers, and producers of the products the company offer and sell to consumers and businesses; (2) publishers, producers, and distributors of physical, digital, and interactive media of all types and all distribution channels; (3) web search engines, comparison shopping websites, social networks, web portals, and other online and app-based means of discovering, using, or acquiring goods and services, either directly or in collaboration with other retailers; (4) companies that provide e-commerce services, including website development, advertising, fulfillment, customer service, and payment processing; (5) companies that provide fulfillment and logistics services for themselves or for third parties, whether online or offline; (6) companies that provide information technology services or products, including on-premises or cloud-based infrastructure and other services; and (7) companies that design, manufacture, market, or sell consumer electronics, telecommunication, and electronic devices. The company believe that the principal competitive factors in its retail businesses include selection, price, and convenience, including fast and reliable fulfillment. Additional competitive factors for its seller and enterprise services include the quality, speed, and reliability of its services and tools, as well as customers’ ability and willingness to change business practices. Some of its current and potential competitors have greater resources, longer histories, more customers, greater brand recognition, and greater control over inputs critical to its various businesses. They may secure better terms from suppliers, adopt more aggressive pricing, pursue restrictive distribution agreements that restrict its access to supply, direct consumers to their own offerings instead of ours, lock-in potential customers with restrictive terms, and devote more resources to technology, infrastructure, fulfillment, and marketing. Each of its businesses is also subject to rapid change and the development of new business models and the entry of new and well-funded competitors. Other companies also may enter into business combinations or alliances that strengthen their competitive positions.

Intellectual Property

The company regard its trademarks, service marks, copyrights, patents, domain names, trade dress, trade secrets, proprietary technologies, and similar intellectual property as critical to its success, and the company rely on trademark, copyright, and patent law, trade-secret protection, and confidentiality and/or license agreements with its employees, customers, partners, and others to protect its proprietary rights. Amazon has registered, or applied for the registration of, a number of U.S. and international domain names, trademarks, service marks, and copyrights. Additionally, Amazon has filed U.S. and international patent applications covering certain of its proprietary technology. Amazon has licensed in the past, and expect that the company may license in the future, certain of its proprietary rights to third parties.

Seasonality

The company's business is affected by seasonality, which historically has resulted in higher sales volume during its fourth quarter, which ends December 31. The company recognized 33%, 32%, and 34% of its annual revenue during the fourth quarter of 2015, 2016, and 2017. Fourth quarter 2017 results include revenue attributable to Whole Foods Market, which the company acquired on August 28, 2017.

Employees

The company employed approximately 566,000 full-time and part-time employees as of December 31, 2017. However, employment levels fluctuate due to seasonal factors affecting its business. Additionally, the company utilize independent contractors and temporary personnel to supplement its workforce. Amazon has works councils, statutory employee representation obligations, and union agreements in certain countries outside the United States and at certain of its studio operations within the United States. The company consider its employee relations to be good. Competition for qualified personnel in its industry has historically been intense, particularly for software engineers, computer scientists, and other technical staff.


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