Risky? Maybe not
Investors in Amazon Inc. have valid reasons to feel unsteady about the company’s future. From all appearances in the stock market, the company is a risky choice.
Their shares are rising without any reports of major earnings. However for a company like Amazon, net income is not the only determining factor.
Wrong set of metrics
Though most people pay attention to earnings, as they rightfully should, companies like Amazon actually generate more money through cash flow.
Net income refers to a company’s earnings which is a compilation of their profits minus their interest expenses and corporate taxes. On the other hand, cash flow is what is left of income once non-cash adjustments have been made.
In other words, it is money that does not need to reported in the same way net income, or earnings, has to be.
At the end of each quarter, the online retail giant has been able to earn an exorbitant amount of cash flow, which in general, is how their finances work. In 2016, Amazon reported a $2.4 billion net income while their free cash flow was $9.7 billion.
The reason behind their expertise at earning cash is because they function differently than other companies. As an e-commerce site, they do not have as huge of capital expenses and can better predict how they will spend their money.
For those thinking that Bezos’ company is soon headed for a financial meltdown, it is important to realize that Amazon is making a large amount of revenue outside of the income and taxes they report.
Their own web service
At this rate, it seems as if Amazon’s glory days have yet to come. In addition to being the largest online retailer, they also offer cloud services through their own Amazon Web Services (AWS).
Since it’s launch, AWS has become a place where the e-commerce site earns a majority of their operating profits.
Long live Amazon
In the scope of all retail opportunities, online retailing makes up only 3% of the industry. This leaves them with a series of endless opportunities.
This, coupled with an ambitious CEO and the downfall of brick-and-mortar retailers, has created the perfect situation for Amazon to dominate even more in the future.