Amazon E-Commerce Is A 'Loss-Leader' … Its Real Money Is In 'Services,' Says Analyst

Amazon.com Inc. AMZN may be regarded by consumers primarily as an e-commerce company, given its blue delivery trucks are constantly dropping off packages at people’s doorsteps, but an analyst begs to differ.

“Our view is that eCommerce does NOT drive AMZN’s share price,” Needham analyst Laura Martin wrote in a note Thursday.

“We believe AMZN is a Services company (ie, Advertising, Cloud, Prime Video, etc), NOT a products company, and eCommerce is all about products. Every quarter, we calculate a sum-of-the-parts valuation, and in most quarters we conclude that investors are paying almost nothing for AMZN’s eCommerce.”

She noted Amazon’s net revenue for this year’s second quarter grew 15% year-over-year to $86.4 billion, accounting for 58% of the company’s revenue of $148 billion in a three-month period and growing four timers faster than product sales revenue.

She said that quarterly product sales have stagnated at around $61 billion for every quarter since the first quarter of 2021, excluding the fourth quarter of every year.

“AMZN’s services revs have been higher than its product sales for the past 11 quarters, and the gap is widening,” Martin wrote.

“We believe that eCommerce is where AMZN came from, but high margin businesses such as Advertising, Cloud, GenAI and other Services are where AMZN is going,” she added.

Martin pointed out that Amazon’s eCommerce business is very adaptable to meeting customer needs and is committed to constantly shortening delivery speeds with its “enormous” logistics network, but the company realizes significant costs in maintaining same-day delivery.

She attributed the higher costs to fewer items getting sent in a single box, running empty delivery trucks and requiring more gas and trips to pull off the same-day delivery.

“We believe the financials support the view that AMZN uses its eCommerce business as a loss-leader,” she said.

“This notion was supported by several experts who mentioned that AMZN’s retail strategy has historically centered around maintaining low margins for both 1P and 3P eCommerce business, and then adding higher-margin revenue streams such as Prime subscriptions and advertising, in order to improve profit margins.”

AMZN Price Action: Amazon gained 0.18% to $184.86 Thursday at publication.

Exchange traded funds that hold the stock mostly trended upwards on Thursday.