Trade The Journey

Trade The Journey

Amazon Analysis Part 2

Reading Amazon’s 10-k has been quite an interesting experience and it becomes even more interesting when you begin to learn the language. Most of what you’ll see in the 10k revolves around the companies strategy and the accounting involved in executing the strategy. It takes a strong understanding of accounting language and concepts to move smoothly through the 10k.

Learning about Accounting isn’t the most exciting task but it can be beneficial for company evaluation and for your life in general. I was able to move through the report at a moderate pace. I stopped every now and then to digest the information. Before reading the annual report, I was quite sure I understood what Amazon did. However, after reading the annual report, I would say my understanding was foggy at best.

Most definitely not suited for investment. Before pouring through the numbers, I’d thought it would be best to list some interesting notes. Hopefully this helps you in understanding more about Amazon. This is not a signal to invest in Amazon but more of a way to show that some of notes that are of interest to me, may not be to you. Forecasting as I am learning is about understanding the company as a venture capitalist would try to understand it. But the difference between you and a venture capital is that your stock’s value is heavily dependent on more than the markets reception of the company but the public sentiment about the company.

This where investing/trading takes its most difficult turn. Just think Warren Buffett has read hundreds of annual reports.

Amazon operates not only here in the US but very much abroad, in fact, it listed  30% of its revenue is coming from international waters.  It is subject foreign exchange risk among other risks that affect international businesses like political and economic policies.  As the US dollar weakens relative to local international currencies it means the consolidated net sales and operating expenses will be higher.

They are expanding into new markets and services with varying levels of experience within the markets which can be good or bad depending on the market it is entering. A significant portion of their expenses and investments are fixed and they have forecasted that within the year they will be able to meet its cash flow demands.

Although Amazon has been able to turn a profit within the last couple of years, they have a lot of skillets on the oven and increasing their expansions into new territories at a speedy pace. For instance, the acquisition of Whole Foods can be seen as Amazon’s way of entering into the grocery industry known for its high markup. Whole Foods also known as Whole Paycheck was not doing well suffering from new entrants into the market like Sprouts and other small grocery chains.

A bulk of Amazon’s profits comes in the fourth quarter during the holidays when they also experience an increase in operating cost required to make sure purchases are efficiently made and delivered.

It separates its Net sales into two sections which are Product Sales and Service Sales.

Product Sales: Revenue from the sale of products, related shipping fees, and digital media content.

Service Sales: Third party seller fees earned (Commissions), related shipping fees, Amazon web services, certain digital content subscriptions, certain advertising services, and co-branded credit card agreements.

Amazon Prime- Allocated between product sales and service sales (Amortized over the life of Membership)

The 2017 tax act will have an impact on the company requiring them to complete more complex calculations to satisfy their tax payments. The well-known fact about the act is the decrease in the corporate tax rate from %35 to 21%.

Amazon pays no dividends.

Amazon mostly has short-term arrangements with most of their suppliers. Their operating cycle allows them to turn over inventory quickly before payments to it suppliers. They use the First-In-First-Out method of detailing shipping which is what most companies use.

Some of their risk:

  • Intense Competition
  • Fluctuations in Operations results/Growth Rate
  • Expansion into new Markets, new competitors, capital requirements.
  • Business operations maintenance and innovation.
  • International Operations and countries. China and India pose threats to Amazon current method of operations because of their tight control of domestic issues.
  • Optimization & Efficiency in the Fulfillment Network and Data Center especially during the Holiday Season.
  • Maintaining strategic partnerships, successful acquisitions, and investments.

Stay Tuned.

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