Amazon.com (AMZN) recently reported its third quarter results, wherein its revenue soared 24% year over year. Over the past five years, the company has witnessed revenue growth of approximately 28%, which is very significant. The reason behind this revenue growth is its diversification strategy, which has opened various revenue streams for the company. Currently, Amazon is focusing on globalization of its tablet, Kindle, which will also add to its top line going forward.
Expansion in tablet market
As Kindle is a dominant player in the U.S., Amazon is engaging in international expansion of Kindle to open more revenue streams. Recently, the company launched its Kindle store in China, Brazil, Mexico, and India. These four new geographic locations will help Amazon boost its revenue from Kindle.
Along with the globalization of its Kindle stores, Amazon recently launched the third generation of its Kindle Fire -- Kindle Fire HDX. This new device is 34% lighter than the previous generation and has the newly launched latest version of its operating system, Fire OS. With all the new features in its third generation, its Kindle Fire sales are expected to upsurge. Although the company has never disclosed the exact number of sales of its Kindle units, according to analyst estimates, Kindle sales are expected to witness a growth of approximately 5%, bringing the total number of Kindle sales to 11 million units in 2014.
According to an analyst from RBC capital market, on an average, Kindle buyers purchase four times more hard books and e-books from its stores after they purchase its device. So, the company is also focusing on the sale of e-books from Kindle devices. The company recently launched a Kindle Matchbox program, which will contain 70,000 discounted book titles. Under this program, all the books will be available in the price range of free to $2.99, which is significantly less than traditional pricing. Amazon's strategy will lead to higher content consumption, which should enhance its revenue. We believe this program will capitalize on the trend shift towards e-books from hard copies. According to PWC research, revenue from this market is expected to reach $22.7 billion globally by the end of 2017, up 9% from 2012.
Another company that launched the next generation of its tablet is Microsoft (MSFT). The company launched its tablet in 2012, and it currently has 4.5% market share in the tablet market, which is less than Amazon's market share of 37% in tablet market. To increase its penetration, Microsoft recently launched the next generation of its tablet, known as Surface 2 and Surface Pro 2. These two tablets will be available in 8-inch display. In contrast, Amazon's newly launched Kindle is available in two screen sizes, 7-inch and 8.9-inch, which gives the customer a choice in selecting a tablet in accordance with their needs. Along with this, Kindle's newly launched operating system offers features that allow IT managers to easily integrate Android applications on kindle Fire, and it is better suited for the workplace than Microsoft's Surface 2.
With this, Microsoft surface is expected to attain merely 1% market share in 2014, which isn't very significant.
Healthy revenue, what about its net income?
Trailing twelve months revenue
With the adoption of various strategies, Amazon's revenue from its operations are increasing as shown in the chart above. The company recently posted third quarter results, reporting revenue growth of 24% year over year to $17.1 billion and beating analysts' estimate of $16.8 billion. Amazon generated $48.87 billion of revenue as of the third quarter of 2013. With the assumption that its fourth quarter revenue will be $16.29 billion, an average of its prior three quarters of this year, its full-year revenue for this year is expected to be $65.16 billion. With this, over the past five years, its revenue has grown 27.69%. By applying this growth rate for the year 2014, we get revenue of $82.99 billion.
The reason behind this tremendous revenue growth rate is its diversification strategy into various businesses and expanding its presence. However, with this robust revenue growth, it is interesting to analyze how much of its revenue is converted into net income that is available to shareholders after deducting various company cost.
Amazon's net income is witnessing a downturn because it provides huge discounts to its customers. There are minimal barriers to entry in e-commerce business, which is creating immense competition in this industry. Several brick and mortar stores like Wal-Mart (WMT), Target (TGT), and Walgreen (WAG) have entered the online business. To overcome the competition, Amazon provides its customers with the best in order to gain market share, which is increasing the company's costs. This is putting pressure on its net income available for its shareholders, causing it to decrease. In the third quarter results, it posted an operating loss of $41 million.
If we go back to 2004, Amazon and eBay (EBAY) were the dominant players in the e-commerce business. How has eBay managed its costs in this immense competition? eBay has net margins of 17.80% as compared to Amazon's margins of merely 0.31%. The reason behind eBay's high margins is the company's expansion in its core business, which is PayPal and Marketplace. Both these segments are high margin and are performing well.
Moreover, eBay's business model is different from Amazon's business model. eBay is an auction site where the buyer and seller bid for the price of the product, whereas Amazon is a fixed price sale website, where the product is sold at a fixed price. eBay doesn't need to keep product inventory but instead acts as an intermediary to facilitate the commerce between two parties. The company charges fees in the form of PayPal transaction fees and on its marketplace platform, thereby managing its cost.
Amazon's diversified business provides a robust revenue growth rate, leading towards stock price upsurge. Its next generation tablet is expected to enhance its revenue growth, but its bottom line is struggling despite its strong fundamentals. Nevertheless, Amazon's soaring revenue has caused its stock price to move upwards. Its year to date stock price has moved upwards by around 40%. Currently, Amazon's stock is trading at around $360, and various analysts are expecting its share price to reach $400 with its strong fundamentals. Henceforth, this stock is a buy.
Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Shweta Dubey, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.