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What is Amazon doing?!

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If I told you that a company loses money on its core business, and that the stock is at all-time highs, would you buy?  Take a look at the following table, which Market Ticker compiled from Amazon’s 10-Q reports.  After looking at this, why anyone would bet money on the Amazon retail business is beyond me.

Date Sales COGS Sales/Cog % Fulfillment Net % Profit
2013/Q1 13271 11801 12.46% 1796 -326 -2.46%
2013/Q2 12752 11209 13.77% 1837 -294 -2.31%
2013/Q3 13808 12366 11.66% 2034 -592 -4.29%
2013/Q4 21072 18806 12.05% 2918 -652 -3.09%
2014/Q1 15705 14055 11.74% 2317 -667 -4.25%
2014/Q2 15251 13399 13.82% 2382 -530 -3.48%
2014/Q3 16022 14627 9.54% 2643 -1248 -7.79%
2014/Q4 23102 20671 11.76% 3424 -993 -4.30%
2015/Q1 17084 15395 10.97% 2759 -1070 -6.26%
2015/Q2 17104 15160 12.82% 2876 -932 -5.45%
2015/Q3 18463 16755 10.19% 3230 -1522 -8.24%
2015/Q4 26618 24341 9.35% 4546 -2269 -8.52%
2016/Q1 20581 18866 9.09% 3687 -1972 -9.58%
2016/Q2 21116 19180 10.09% 3878 -1942 -9.20%
2016/Q3 22339 21260 5.08% 4335 -3256 -14.58%
2016/Q4 30629 28958 5.77% 5719 -4048 -13.22%
2017/Q1 23734 22440 5.77% 4697 -3403 -14.34%
2017/Q2 24745 23451 5.52% 5158 -3864 -15.62%
2017/Q3 28768 27549 4.42% 6420 -5201 -18.08%

They are running lower and lower gross margins on their products.  Since they are an online store, part of the supply chain is delivery, which means they are losing 18% on each sale of the product.

When you contrast this to Walmart and Target, the latter two are running positive operating margins.  The price pressure on the latter two retailers is immense to compete with an online retailer that is losing money.  For Walmart and Target, you can consider the item shipped “half-way” to the customer, so the cost of delivery is built into the supply-chain cost.  Amazon breaks this cost out separately.

Which begs the question, what is Amazon doing?  Nobody would invest in a business where you lose 18% per sale, on average.

Perhaps, Amazon’s foray into buying brick-and-mortar stores is a capitulation in the idea that a retailer can be “online-only”.  Clearly, Amazon is no longer this, when you consider groceries, at least.

Refer to the table in this article — note how Amazon is turning nearly a negative 20% margin on goods sold not including SG&A (that is, their sales and administrative expenses, such as the buildings and their employees) but only counting the cost of goods sold and their fulfillment.

Source: The United States of SCAmazon