Amazon has built some great business. Kudo’s Amazon.
Yet the response of reporters, investors, and wide eyed tech enthusiasts to Amazon announcements is little short of appalling. There’s a race to cherry pick numbers to declare Amazon brilliance. (In the case of retailers, too many respond by racing rapidly to change business models based on Amazon’s fad of the quarter.)
I think of Jeff Bezos as the David Copperfield of CEOs… No. Not the little 19th century guy holding out a bowl asking for more. The magician – whose misdirections keep us away from looking with the critical eye and seeing what’s really happening.
Take this most recent Q4 2018 financials announcement. It’s remarkably uninspiring – yet the fawning headlines I’ve seen turn my stomach.
Here’s some good things:
- Brick and mortar retail is way up as we would expect after the purchase of Whole Foods.
- Amazon continues to have plenty of cash.
- Amazon reported increased profits (although they still run below 3% net profit).
- AWS continues to grow at an outrageous rate.
But what should we put a critical eye to?
Profit. Profit is even more skewed toward AWS. Where Amazon had been running at 60% to 70% of profit coming from AWS, a massive 85% of this quarterly profit came from AWS. So while the profit increase is good, this shows tremendous weakness in the entire rest of their business.
Fulfillment: Amazon does not have 40% margins. The headlines that carried that thought just happened to leave out Amazon’s massive sore spot: fulfillment costs. Adding in fulfillment costs, their margin drops to 25%.
But it’s worth looking at fulfillment further. While product sales increased 33%, fulfillment costs jumped by a massive 66% over last year. They’re losing their shorts on fulfillment costs.
Amazon Prime: Prime is one of the drivers of out of control fulfillment costs. In fact, while ALL subscription service income (Prime and any other subscription) increased by $1.163B, fulfillment costs increased by $3.095B.
Given that fulfillment costs increased by 66%, rather than the 33% increase of product sales, it would appear that the Amazon Prime give away creates an exponential growth in fulfillment costs.
International Sales: It’s striking that Amazon’s loss internationally GREW in this latest report. That’s a bad sign and it’s not clear why there’s a problem.
Missing the Most Critical Data: We continue to be missing the most critical data from Amazon. Amazon’s biggest single chunk of revenue reported is a combination of content, Amazon’s own devices, and “retail-like” sales. Because Amazon continues to obfuscate when it comes to this data, we don’t have an honest view of what’s happening.
It’s reasonable to decide that the tiny profit that came in addition to AWS profit came entirely from content and Amazon devices. In other words, Amazon continues to appear to lose money on every single retail-like order…and fulfillment is one of their larger problems in that cost equation. Increasing the amount of money lost through Prime won’t fix the problem.
Stagnant Cash Flow Growth: It may be momentary, but where Amazon has always crowed loudly about being a cash flow business, their cash flow growth was a measly 4%. Scanning their numbers I couldn’t see one issue that was driving this. I’m sure someone more sophisticated at cash flow analysis would be able to sort it out.
Critical Thinking is a Lost Art. When I put out these comments or make comments on Twitter, it’s incredible how many people choose to believe that I must hate Amazon. I don’t. I buy plenty through them.
The issue is: Success in business requires developing a smart critical eye – where critical means honest. That critical eye looks for the good while also looking to detect things that should be of concern.
Next time you see Amazon numbers, take a deep breath and think critically. I’ll bet the numbers are very similar: Big growth. Great AWS returns. Bad fundamentals in retail-like sales. Continued exponential growth of fulfillment costs.
I’ve been tracking this for a while and it’s always pretty much the same report every time – no matter where the magician directs our eye.
Copyright 2018 – Doug Garnett – All Rights Reserved