Third-party merchants drive Amazon profit growth, besides cloud

August 02, 2018 15:54
Third-party merchants business is much more profitable for Amazon that its own direct sales. Photo: Bloomberg

Amazon, the world's second most valuable company, announced last week a whopping 39 percent rise in second-quarter revenue, at US$52.9 billion. The online behemoth booked US$2.5 billion in profit for the three months, up 12-fold from the same period last year.

Major earner was still the cloud unit. Amazon Web Services business generated US$6.1 billion in revenue in the second quarter, up nearly 50 percent compared to the year-ago period. Operating profit for the division came in at US$1.64 billion, against US$916 million a year ago.

The segment represents 11.5 percent of the firm's overall revenue but accounts for around 60 percent of the operating income.

Apart from cloud, third-party merchants business might be a key factor for the earnings surge.

Currently, Amazon sells goods directly to customers and also allows third-party merchants to sell products on its website. Compared to direct sales, it's the third-party business that is actually far more profitable.

Amazon has been expanding its direct retail sales over the last two decades. But it has failed to reap much profit from the activity, due to expensive costs in logistics and warehouses.

By contrast, the third-party merchants business is much more profitable since Amazon does not need to make much extra investment in that, and there is also no need to tie up the company’s funds on inventory.

Amazon booked US$27 billion in direct retail sales in the second quarter, up 14 percent from the year ago. Meanwhile, revenue from third-party merchants jumped nearly 40 percent to US$9.7 billion in the same period.

I believe continued expansion of third-party sales would generate far more profit in the future.

Shoppers are becoming increasingly reliant on Amazon, since it offers better prices, more convenience and an easy way to shop around for better deals.

US consumers have become used to online shopping, and Amazon is their natural platform.

Amazon holds one-third of cloud infrastructure market in the US and half of e-commerce transactions. From this, we get a rough idea of how mighty the internet firm has become and the potential for even bigger achievements down the road.

That said, stock investors need to bear in mind that Amazon shares have already doubled over the past one year. At its current valuation, the attractiveness has diminished.

In my opinion, it's better to wait for a meaningful correction before contemplating fresh investment.

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Columnist at the Hong Kong Economic Journal