How Amazon Is Losing Money To Make Money

When is it okay for your business to lose money? Amateurs will say never, but the big guys know that's not exactly true. Amazon is bleeding money on Prime, and they're pleased about it. Here's why.

Welcome to a Lux. Now, before we dive into what's been going on with Amazon Prime and explain its business strategy, it's only fitting that we first take a look at how Amazon and its stock have been performing in 2022. We'll try to keep things as simple and clear as possible, so here's some context. A quick look at the AMZ stock over the last year shows clearly the company had quite a bumpy ride to say the least, but not in the direction that most investors expected.

Things look quite messy right now for Amazon, but you could easily argue that this is a reality for most publicly traded companies nowadays. The stock is down more than 37 percent on a one-year basis at the time of producing this video. So, if you were to put 100 into Amazon one year ago, congratulations, you are now left with 63 dollars. That's a pretty big drop.

Now, some might use the current market conditions as an excuse for that, which is fair enough, but there are competitors like Walmart who are doing pretty well. So, was Amazon a good investment in 2022? Well, from a short-term perspective, the logical and simple answer is no. But let's not jump to conclusions just yet. Let's see what their financial statements have to say.

Amazon stock currently has a market cap of 945 billion dollars. The company generated 513.98 billion in revenue in 2022, yet still somehow managed to lose money. So, is this part of their long-term strategy, or is it just bad management? Well, it's a little bit of both. In 2021, they made a profit of 33.36 billion, but in 2022, they actually lost money—2.72 billion to be exact. That's not good news for the company or its investors.

One thing that's worth noting, though, is that all the money they made from operating their business in 2022 actually came from a part of their company called AWS, which stands for Amazon Web Services. So, while their other ventures might not have been doing so well, at least they had one area that was still making them some money. In fact, in 2022, AWS was responsible for all of Amazon's overall operating income, which is the money they make from running their business. They generated a whopping 22.84 billion dollars, which is a huge amount of money.

By contrast, in 2021, the combination of North America and international, which are other parts of Amazon, only generated 6.35 billion in operating income. This is a smaller amount when you look at it in terms of their total revenue. That's all the money they brought in. It means those branches only made a profit of 1.56 percent, so overall, it's good that AWS is doing so well, but the rest of Amazon has some work to do to catch up.

One thing to keep in mind here is the operating income—that's the money they make from running their business of the subsidiary AWS is much higher than that of their other business segments. This is because AWS has really high operating margins, which means they're making a lot of money relative to the cost of running their business. In 2021, their operating margin was almost 30 percent, and in 2022, it was still really impressive at almost 29 percent.

On the other hand, the North America and international segments of Amazon had much lower operating margins, which means they're not making as much money relative to the cost of running the business. This is a problem for Amazon as a whole because they're burning through a lot of cash—over 26 billion dollars in 2022. They're also spending a ton of money on capital expenditure— that's the money they're putting into things like buildings and equipment to grow their business.

All of this spending has led to a lot of debt for Amazon, and you don't have to be a genius to realize that taking on a lot of debt is not a good idea. By the end of 2022, their total debt had increased by over 20 percent and their long-term debt had increased by over 34 percent. So, things are definitely not looking great for Amazon's finances. In fact, some investors are starting to worry that Amazon might be in a financial bubble, even after the recent correction.

And while the AWS branch is doing really well, Amazon can't rely on it alone to keep them afloat; it's just not enough. So, what are they relying on? How does Amazon plan to become profitable again in the long run? Well, the answer to this question could be Amazon Prime. So, let's dissect their business model to see if, in the long term, it could serve as their lifeline.

For those who've never used their services, in short, Amazon Prime is a subscription-based service. It includes free shipping, access to streaming services like Prime Video, Prime Music, Prime Reading, and other benefits. Having launched in 2005, Amazon Prime has become one of the most popular subscription services globally, with over 200 million members as of 2022.

So, Amazon's business model for Prime is to provide customers with a comprehensive range of services that make it easier for them to shop and enjoy digital content, which, in turn, is expected to create loyalty and drive sales for a longer time horizon. Over the years, the company has invested heavily in technology and logistics to ensure fast and reliable delivery of products to customer doorsteps, which is a significant selling point for the service.

Additionally, Prime provides access to a range of digital content, which creates an ecosystem that keeps customers within Amazon's platform and encourages repeat purchases. So, is this business model profitable for Amazon? Well, let's take a look at the following table. In the most recent quarter of 2022, the company reported an impressive 17 year-over-year growth in its subscription business, excluding foreign exchange fluctuations.

So, this marks a faster growth rate in comparison to the previous four quarters. The subscription segment, which provides a recurring revenue base, is characterized by a high renewal rate for Prime membership. This presents the company with an opportunity to invest in logistics, fulfillment, video streaming, and other innovative services. For the fiscal year 2022, the subscription segment's revenue stood at 35.2 billion dollars at a low double-digit growth rate.

This revenue base could potentially reach 100 billion dollars by 2030. The substantial revenue base of the subscription segment provides the company with a robust competitive advantage against other market players, locking customers within Amazon's ecosystem of services. A competitive analysis of Amazon's subscription business with other membership-based businesses like Costco, Spotify, and Netflix reveals that this business line is likely to be a key driver of Amazon's overall valuation growth.

The subscription business, with its recurring revenue base, is widely regarded as one of the most advantageous segments for the company. Initially, there were concerns among analysts and investors regarding the impact of the Prime membership fee hike on renewal rates; however, the recent growth numbers indicate the increase in fees did not have a substantial negative impact on the renewal rate of Prime membership.

This suggests that customers perceive the value of the service to be higher than the fee increase, further bolstering the potential for the subscription business's growth. As per the earnings report, the company has disclosed it has raised its investment in video and music streaming to 16.6 billion for 2022, up from 13 billion in 2021.

This increase signifies that Amazon has allocated a significant portion—47 to be exact—of its subscription revenue to streaming services. The company's e-commerce business serves as an anchor service and provides Amazon with an added advantage over its video streaming competitors such as Netflix, Disney, and Apple.

So, although Amazon is technically losing money by reinvesting all of this revenue into its services, over time, it could compound into much bigger profits. As a result, Amazon enjoys a more robust position in the market which further supports its ability to make sizable investments in streaming services. But there is an important catch: all of this looks good on paper given a long enough time horizon, but there's a lot of fuss about market saturation for Prime membership.

According to e-Marketer research, currently over 60 percent of households in the United States have a Prime membership, indicating the remaining addressable market within the U.S. is relatively low. However, the company is adopting an aggressive strategy of expanding its Prime membership to international regions to further encourage growth. The company is front-loading benefits, allowing customers to access similar Prime services at competitive prices.

This strategy enables Amazon to tap into new markets effectively while also gaining a competitive advantage over local competitors, and as a result, Amazon is well-positioned to continue expanding its Prime membership base globally, which would drive its revenue growth in the long run.

Upon reviewing the table, it's evident that none of Amazon's competitors offer a membership plan that encompasses video streaming, music streaming, e-commerce, and other delivery options in a single subscription, and this gives Amazon a substantial competitive advantage over other companies in the market. Furthermore, as we mentioned earlier, Amazon is allocating almost half of its subscription revenue to video and music streaming. This enables the company to increase its investment in the streaming business and surpass other major players like Netflix in terms of investment.

As a result, Amazon is well-equipped to capitalize on its unique offerings and strong financial position to enhance its streaming services and further bolster its competitive advantage in the market. So, assuming the company achieves a modest double-digit growth rate of between 13 to 15 percent in its subscription business over the next few years, it's likely the annualized revenue will reach the impressive 100 billion dollar level by 2030.

This projected revenue number is significant and would further solidify the company's competitive advantage and valuation. A revenue base of this magnitude would enable the company to continue investing and expanding its ecosystem of services, ultimately driving its revenue growth and market share in the long run.

This is even indicated by the recent success of the latest original series Amazon put out that netted 500 million dollars in the first season. Of course, we're talking about the controversial The Lord of the Rings: The Rings of Power series. The first season of The Lord of the Rings: The Rings of Power attracted over 100 million viewers globally, making it the most watched Amazon original series across all regions.

Moreover, the series has been streamed for over 24 billion minutes, which is a significant accomplishment to say the least. Additionally, during its launch window, The Rings of Power drove more Prime sign-ups worldwide than any previous Prime video content. This impressive performance reflects the series's popularity and underscores its potential to drive engagement and increase Prime membership, which could lead to significant revenue growth for Amazon in the long run.

So, all of this considered, yes, Amazon might be in a bad spot right now. They might be losing money, but in the long run, it could compound into much bigger profits, and this is why they're happy with it.

And that's all for today. Hey, Luxor! We hope you had as much fun watching this video as we did making it. We went down a lot of rabbit holes in order to pull this all together in a video, so we won't mind if you show your appreciation by returning the favor and tipping us with a like and a share.

And with that being said, it's time for the regular question, which today is: Have you ever used Amazon Prime, and do you think paying 15 a month is worth it? Drop your answer in the comments below— we're so curious to see how you guys feel about the topic. And as always, thanks for watching. If you're curious to learn some more, check out this video next. We'll see you back here tomorrow.