Novice Investing - Exploring the Amazon Jungle

Date: Monday 01st 2008f December 2008 04:59:44 PM

Exploring the Amazon Jungle - 12/13/2006

By: Novice Investing Staff

For most of you growing up in the age of internet, the name Amazon does not conotate with the wildest jungle found in Southern America. Rather, it brings up the vision of Amazon.com Inc. (AMZN), which is earth's biggest bookstore. Founded in July 1995, Amazon can brag to be earth's biggest selection for retailers. Exploring Amazon is not complete without looking at its 2005 annual report.

Straight on the very early page of its annual report, Amazon described its several business strategies which include: Price. Offering low everyday product shipping and in recent years, free shipping offers. Amazon tries to achieve this by achieving higher operational efficiencies which they pass along to the customers in form of lower price. Hmm.... sounds like a WalMart philosophy here. Convenience. What is more convenient than a virtual retail store like Amazon.com? You can visit the store in the middle of the night in the comfort of your bed. Go ahead. The store will never close. In hindsight, WalMart is not that convenient. Amazon.com also goes one step further by not only making its website accessible, but also by providing easy-to-use functionality, fast and reliable fulfillment, timely customer service, feature-rich content and trusted transaction environment. Selection. This is one of WalMart's tenet. By providing wide selection, in essence, Amazon is saving its customer time by not going to many different websites to fulfill their needs. We can mention several unique products that Amazon offered. We hope you don't get dizzy by the selections. They are: apparel, shoes & accessories, baby care products, beauty, books, camera and photography, cellular phones, computers, consumer electronics, DVDs, gourmet food , health & personal care, jewelry & watches, magazine subscriptions, office products, software and on and on.

Every business comes with rivalry and competitions, Amazon.com not excluded. Amazon divides its competitors into three categories:

Physical world retailers, catalog retailers and distributors of their products. This includes the like of consumer electronic retailer like Best Buy to WalMart
Other online e-commerce sites such as Overstock.com, bn.com, walmart.com, wirefly.com and so forth.
Indirect competitors such as media companies, web portals, comparison shopping websites and even web search engines.
Ecommerce services developers such as web hosting companies and third-party fulfillment

Amazon.com reported $ 8.49 Billion in sales during 2005. International sales now represents 44.5% of total sales, which provides the company with a considerable amount of diversification. North America still represents the bigger profit driver as Amazon derives 62% of its gross profit margin from North American operation while it only represents 55% of sales. Overall, gross profit margin is 14.9% of sales, which is lower than conventional retailers. Gross margin for conventional retailers stand at around 20-25%. This is understandable as Amazon strived to give customers lowest price and thus lower mark up.

Looking at Amazon's balance sheet, it reveals a $ 1.521 Billion in long term debt, the majority portion of it due on 2009 and 2010. Operational wise, Amazon.com reported a $ 529 Million of free cash flow which is a good enough ratio to pay down its debt when it is coming due. However, the majority of this debt has low interest rate with a 4.75% rate on $ 900 Million debt and 6.875% rate on $ 580 Million debt. Since Amazon.com's business is still growing, it is financially make sense for Amazon to use not pay this debt and expand its business for the time being.

Amazon.com has other websites assets but it does not contain many diversified web content portfolio ala CNet Networks (CNET). Amazon has the .jp, co.uk extension of its domain name and joyo.com which is a Chinese ecommerce website, imdb.com which contains movie reviews and recommendations and finally alexa.com which provides traffic statistics for webmasters. Thus, most of Amazon.com's business revolves around its e-tailer business.

Reading Amazon.com's annual report is full with information and the company seems to be making enough effort to reveal its strategy to potential investors. Amazon.com has reached its low following the terrorist attack on September 2001. It has since shown investors that it can grow large enough to be a major force in the retailing business.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Amazon.com Inc. (AMZN) or any other securities.

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