Amazon has adopted various strategies to bolster its growth as an e-commerce retail leader both locally and internationally. Part of the investment strategy employed by Amazon includes diversifying its business interests by pumping a big part of its cash in different business areas like the Alexa voice-computing platform, the Amazon Web Services, and the Amazon Prime. Amazon’s broad financial strategy gives priority to growth as opposed to net income. This strategy is evident in the manner in which Amazon has penetrated various industries with fast past paced growth. The value of Amazon’s share price had grown 600 times in May 2017 when compared with the share price floated at the company’s Initial Public Offering 21 years ago. This is a clear mark of the company’s priority in attaining growth as opposed to improving net income.
Chart 1: Amazon stock price
The market value for Amazon shares has been soaring since 2015 when the AWS attained success as Amazon Prime established dominance within its industry. Amazon has now attained a double market cap value for Walmart although it started much earlier than Amazon did. The revenue growth for Amazon is still on the upsurge. Its investment strategy does not focus much on the bottom line; this enables it to grow its market share against competitors who focus on attaining growth in net profits instead of focusing on improving their long-term growth.
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The company’s CEO relies on the operating cash flows to finance the company’s competitive strategy in the market. The rest of the company’s equity is channeled towards investments and acquisitions as part of the company’s growth plans. The growth strategy employed by Amazon has yielded great results, as evident in the company’s dominance in the world’s e-commerce market. Today, Amazon is a lead internet retailer in the US that controls 33% of the e-commerce market. If it sustains its current growth trends, it might attain a 50% control of the e-commerce market by the year 2021.
Amazon also uses cost leadership as one of its business strategy in the industry. It strives to minimize its operational costs through networking technologies that bring operational efficiency. The automated e-commerce processes lower the operational costs for Amazon’s online retail services. Amazon has acquired major startup tech companies to improve its Amazon Web Services platform. This is a strategic way of investing in research and development with the goal of upsetting other competitors in the e-commerce business.
To achieve intensive growth, Amazon also applied market development as a key strategy. In recent years, it has been making many acquisitions for startup companies as a strategy to enter into diverse markets and grow its presence. It was only retailing in the US market but has since expanded its presence to other countries over the years.
Some of the tech companies that Amazon acquired to grow the Amazon Web Services in 2017 include Goo Technologies, Do.com, Harvest.ai, Blink Home, Wing.ae, Thinkbox Software, GameSparks Graphiq, Body Labs, and Souq. Amazon Company is set to maintain a 16% CAGR growth owing to its string of acquisitions.
The company’s future growth is pegged on the new acquisitions made under Marketplace, Amazon Web Services, and Amazon Prime. The company acquired Whole Foods in 2017 at $13.7 billion with a huge potential to raise its transactions. It acquired Ring at $1 billion in early 2018 and bought Zappos shoe retailer in 2009 at $1.2 billion. The company bought Twitch – a streaming site for e-sports – at $970 million in 2014. It also acquired Kiva Systems in 2012 at $775 million. This expansionist strategy has enabled Amazon to establish a robot system across its warehouses, with some 45000 robots currently active.
The profitability levels for Amazon Company in the past five years can be determined from various financial ratios such as the Return on Equity, Return on Assets. For the years 2012-2016, it had a ROE of 0.49%, 3.06%, -2.35%, 4.94%, and 12.29% respectively. An ROE value below 3% is commonly used as a bottom line for identifying a business that is struggling. Investors use ROEs above 3% to build confidence whenever they want to make investments to specific companies.
Amazon is keen not to perform the stock split, as evident in its high share prices. The company focuses on making massive investments in diverse industries to raise its overall Return on Assets. In the five years 2012-2016, the cumulative ROA growth was 103.99%. The adjusted leverage figures for Amazon Company expose their high preference for financial leverage as compared to other large tech companies like Alibaba and Apple. It had a high capital structure leverage of 4.53 in 2016 and adjusted leverage of 3.77 for the same year. The company focuses on financing its assets acquisition strategy using the funds raised from the common shareholders. Amazon is a capital-intensive firm that takes up high financial leverage.
Amazon now has e-commerce websites in China, the United Kingdom, Canada, and India. It sees growth potential in every new market that it sets up its e-commerce platforms. The growth and expansion of the European market promise to increase the profits and current earnings. Its e-commerce platforms in the UK and other European nations have a significantly large market share, making Amazon a potential big beneficiary in profit growths whenever the European market experiences overall sustained growth.
References
US Securities and Exchange Commission (2012). Amazon.com, Inc. Form 10-K . Retrieved from https://www.sec.gov/Archives/edgar/data/1018724/000119312513028520/d445434d10k.htm
Louis C., (2018). 5 Acquisitions That Will Fuel Amazon's Next Growth Phase. Forbes . April 22, 2018. Retrieved from <https://www.forbes.com/sites/louiscolumbus/2018/04/22/5-acquisitions-that-will-fuel-amazons-next-growth-phase/#76c3219465ba>
