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What Underpins Amazon.com, Inc. (AMZN)’s Success?

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Amazon.com, Inc. (NASDAQ:AMZN) recently reported strong growth in quarterly revenue.  The increase in revenue is relatively lower than the same quarter previous year, yet the growth was nothing less than impressive, as the company posted $16 billion in revenue during the quarter.  I believe the recent jump in revenue is predominantly underpinned by an overall growth in the e-commerce channel. This coupled with a strong initiative by Amazon.com, Inc. (NASDAQ:AMZN) to promote Kindle in order to grow its merchandise sales further added to the growth.

Amazon.com, Inc. (NASDAQ:AMZN)Amazon.com, Inc. (NASDAQ:AMZN) recently made it clear that its prime focus going forward is to prop up the cash flows instead of margin expansion. This implies that Amazon will carry on offering steep discounts in order to bolster its sales. It is imperative to point out that Amazon’s web service will allow it to offset its aggressive discount strategy as, it is a highly profitable business, which operates on healthy margins. Below is my rationale on what will underpin Amazon’s success going forward.

Rapid expansion in the e-commerce market

According to research offered by Forrester, online retail sales are expected to escalate at a rapid pace and surpass sales from physical stores in the future. In addition, projections offered by Forrester, claim that the U.S. online retail market will stand at $262 billion by the end of this year, which is a 13% growth from the previous year.

Presently, online sales only contribute 8% to the overall retail sales in the U.S., nonetheless, future growth is expected to be on an exponential scale with Amazon.com, Inc. (NASDAQ:AMZN) leading by example. Furthermore, several retailers are now adopting the multi-channel strategy, which will compel traditional retail stores to invest in e-commerce business.

While growth in the U.S. exhibits high potential, international markets promises even more going forward. E-commerce penetration is relatively low in several emerging markets. This coupled with growing popularity of smart devices and increasing broadband penetration presents a huge opportunity for Amazon.com, Inc. (NASDAQ:AMZN).

According to a recent research published by eMarketer, business to consumer e-commerce sales in the Asia- Pacific region grew by 33% to reach $332 billion during 2012. This figure is expected to exceed $430 billion by the end of 2013, marking 30% growth from the previous year.

Increase in Kindle shipments can bolster internet traffic

The increasing popularity of Android-based devices can facilitate Amazon in publicizing and promoting its Kindle Fire range of tablets. Such Internet-enabled devices can aid the company in securing higher online traffic, as the platform makes a gradual shift from computer desktops to smart devices.

During 2012, Amazon launched a new range of Kindle devices with features very similar to Apple Inc. (NASDAQ:AAPL)’s iPad. Since 2009, approximately 200 million tablets have been shipped on a global scale. It must be noted, another $1 billion are estimated to be shipped by 2018. The ABI Research firm after performing deep and detailed research estimated that approximately 22% U.S. based tablet users spend $50 or more per month and 9% spend in excess of $100 per month on virtual goods. This enables us to conclude that spending levels of tablet users is relatively higher than Smartphone users.

Kindle devices are structured to function on Amazon’s services so the growing popularity of Kindle devices will result in a higher adoption of Amazon services. I believe business divisions such as eBooks, movie and music streaming will come out as huge winners with the success of Kindle Fire.

Competitive landscape

One of Amazon’s broad competitors is eBay Inc (NASDAQ:EBAY). The company has a well diversified stream of revenues with the highest percentage of its revenue generated through eBay marketplaces at around 43.2%. This is followed by PayPal and Marketing & Advertising at around 37% and 14.2% respectively. The remaining 6% is generates through GSI Commerce.

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