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Breaking Down How Amazon Makes Money

Published

5 years ago

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‘Tis the season for shopping.

For many of us, that means buying things online – and if you are like most internet denizens, you’ll be picking up at least one item this holiday season through the the world’s largest e-commerce giant, Amazon.

The company’s sales numbers are growing at a staggering pace. Last year, Amazon had $136 billion in sales, and the company is projected to finish at the $177 billion mark this year.

What are the exact sources of Amazon’s revenue, and how does it all break down?

How Amazon Makes Money

Today’s infographic comes to us from Sellbrite, and it dives into the company’s success, and how Amazon makes money:

Breaking Down How Amazon Makes Money

To the chagrin of many investors, Amazon has traditionally spent a lot to make a little.

In 2016, for example, the company brought in $136 billion in net sales, but it spent $131.8 billion on operating expenses. That gave the company an operating income of $4.2 billion.

However, that high-growth strategy seems to be paying off.

During the same period, e-commerce revenue jumped 25%, AWS revenue increased 55%, and net income skyrocketed 302%. The growth has continued through 2017 and it’s why Jeff Bezos is now the richest person in the world.

A Closer Look

Here’s how Amazon makes money, according to the company’s last annual report for 2016:

Revenue StreamNet Sales (2016)% of Total Revenue
Retail products$91.4B67.2%
Retail 3rd party sellers$23.0B16.9%
Amazon Web Services (AWS)$12.2B9.0%
Subscriptions (Amazon Prime, etc.)$6.4B4.7%
Other (ads, co-branded credit cards)$3.0B2.2%
Total Revenue$136.0B100.0%

Which areas of Amazon’s business are growing the fastest – and where is the company investing in the future?

Here are just a few directions in which the Jeff Bezos Empire is expanding:

Ads
In 2017, the size of Amazon’s advertising business (forecasted at $1.65 billion) has already surpassed those belonging to Twitter ($1.21 billion) and Snapchat ($642 million). Of course, Amazon is still a longshot from impacting the Google and Facebook ad oligopoly, but the two leaders would be wise to take the emerging threat seriously.

Why would Amazon ads work well? The company has a vast database of user info to allow for effective targeting, as well as high margins.

Prime Video
In 2017, Amazon is spending $4.5 billion on creating original content. It has fewer dollars allocated to content than Netflix, but it’s still more than double what HBO spends each year. By the way, Amazon Prime Video is now live in an impressive 200 countries.

International
With 65% of U.S. households having access to Amazon Prime subscriptions, a focus on international sales is the biggest lever that Amazon can pull for future growth. The company is eyeing obvious countries, but less obvious ones as well. In India for example, Amazon’s marketplace is the fastest-growing in the country.

B2B
Amazon is also leveraging its strong logistics platform to provide goods for small businesses, rather than just consumers.

Shipping and Logistics
Fulfillment by Amazon (FBA) is already a booming business that allows small businesses to tap into the scale of Amazon. Investing in shipping also betters the customer experience – a key objective for Amazon. However, it’s still possible that the company could take shipping and logistics a step further: domination in the $200 billion parcel shipping market would be a strategic and attainable prize.

With many other ways for the e-commerce giant to grow, it’ll be interesting to breakdown how Amazon makes money in 2018.

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Technology

Nvidia Joins the Trillion Dollar Club

America’s biggest chipmaker Nvidia has joined the trillion dollar club as advancements in AI move at lightning speed.

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1 day ago

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May 30, 2023

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Nvidia Joins the Trillion Dollar Club

Chipmaker Nvidia is now worth nearly as much as Amazon.

America’s largest semiconductor company has vaulted past the $1 trillion market capitalization mark, a milestone reached by just a handful of companies including Apple, Amazon, and Microsoft. While many of these are household names, Nvidia has only recently gained widespread attention amid the AI boom.

The above graphic compares Nvidia to the seven companies that have reached the trillion dollar club.

Riding the AI Wave

Nvidia’s market cap has more than doubled in 2023 to over $1 trillion.

The company designs semiconductor chips that are made of silicon slices that contain specific patterns. Just like you flip an electrical switch by turning on a light at home, these chips have billions of switches that process complex information simultaneously.

Today, they are integral to many AI functions—from OpenAI’s ChatGPT to image generation. Here’s how Nvidia stands up against companies that have achieved the trillion dollar milestone:

Joined ClubMarket Cap
in trillions		Peak Market Cap
in trillions
AppleAug 2018$2.78$2.94
MicrosoftApr 2019$2.47$2.58
AramcoDec 2019$2.06$2.45
AlphabetJul 2020$1.58$1.98
AmazonApr 2020$1.25$1.88
MetaJun 2021$0.68$1.07
TeslaOct 2021$0.63$1.23
NvidiaMay 2023$1.02$1.02

Note: Market caps as of May 30th, 2023

After posting record sales, the company added $184 billion to its market value in one day. Only two other companies have exceeded this number: Amazon ($191 billion), and Apple ($191 billion).

As Nvidia’s market cap reaches new heights, many are wondering if its explosive growth will continue—or if the AI craze is merely temporary. There are cases to be made on both sides.

Bull Case Scenario

Big tech companies are racing to develop capabilities like OpenAI. These types of generative AI require vastly higher amounts of computing power, especially as they become more sophisticated.

Many tech giants, including Google and Microsoft use Nvidia chips to power their AI operations. Consider how Google plans to use generative AI in six products in the future. Each of these have over 2 billion users.

Nvidia has also launched new products days since its stratospheric rise, spanning from robotics to gaming. Leading the way is the A100, a powerful graphics processing unit (GPU) well-suited for machine learning. Additionally, it announced a new supercomputer platform that Google, Microsoft, and Meta are first in line for. Overall, 65,000 companies globally use the company’s chips for a wide range of functions.

Bear Case Scenario

While extreme investor optimism has launched Nvidia to record highs, how do some of its fundamental valuations stack up to other giants?

As the table below shows, its price to earnings (P/E) ratio is second-only to Amazon, at 214.4. This shows how much a shareholder pays compared to the earnings of a company. Here, the company’s share price is over 200 times its earnings on a per share basis.

P/E RatioNet Profit Margin (Annual)
Apple30.225.3%
Microsoft36.136.7%
Aramco13.526.4%
Alphabet28.221.2%
Amazon294.2-0.5%
Meta33.919.9%
Tesla59.015.4%
Nvidia214.416.19%

Consider how this looks for revenue of Nvidia compared to other big tech names:

For some, Nvidia’s valuation seems unrealistic even in spite of the prospects of AI. While Nvidia has $11 billion in projected revenue for the next quarter, it would still mean significantly higher multiples than its big tech peers. This suggests the company is overvalued at current prices.

Nvidia’s Growth: Will it Last?

This is not the first time Nvidia’s market cap has rocketed up.

During the crypto rally of 2021, its share price skyrocketed over 100% as demand for its GPUs increased. These specialist chips help mine cryptocurrency, and a jump in demand led to a shortage of chips at the time.

As cryptocurrencies lost their lustre, Nvidia’s share price sank over 46% the following year.

By comparison, AI advancements could have more transformative power. Big tech is rushing to partner with Nvidia, potentially reshaping everything from search to advertising.

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