26 October 2016
Amazon is expected to face more competition from Walmart following the latter's acquisition of Photo: amazon
Amazon is expected to face more competition from Walmart following the latter's acquisition of Photo: amazon

Why Amazon may take more time to make big money

It seems that internet giant Amazon can do no wrong.

The company not only dominates the e-commerce industry and keeps expanding its online sales at double-digit pace, it also has a rapidly expanding cloud computing operation.

More than twenty years since the firm was founded, Amazon is still growing its revenue at more than 20 percent a year despite its already huge size.

Because of the strong business growth, Amazon continues to get the thumbs up from investors regardless of whether it is making any serious money.

So far, its best year was 2010, when the firm reported a US$1.15 billion profit, or US$2.5 a share. Last year the earnings stood at US$599 million, almost nothing compared to its colossal US$365 billion market value.

Metrics like price-earnings ratio continues to be meaningless in valuing the company.

Amazon’s biggest reason for not making much money is the continued need to invest, in order to build a bigger foundation to power future growth. Big investments entail big depreciation costs and will compress profit.

Investors are paying top dollar for Amazon shares on the assumption that one day when Amazon no longer needs to make hefty investments, profit will shoot up.

Also, assuming that Amazon can weed out its major competitors, it can start charging more for its products and services and reap bigger margins.

But how soon will this day come?

Following Walmart’s acquisition of fast-growing startup e-shopping site, Amazon may face a more protracted battle with its arch rival. That could mean a price war and continued pressure on margins.

On the cloud computing front, Amazon is the frontrunner. However, given the huge potential of the market, other IT giants are not going to sit idle.

Currently, Amazon, Microsoft, IBM and Google are the big four in the cloud computing business. As for the market share, Amazon leads with 31 percent, followed by Microsoft with 11 percent, IBM with 8 percent and Google with 5 percent, according to a Synergy report.

It is almost certain that the rivals will ramp up their efforts and fight for more business.

Amazon may continue to improve its service and grow the business well, but it is doubtful if it will be able to generate huge profits soon.

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EJ Insight writer

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