Dissecting Amazon’s 2016 Financial Performance

For years when Amazon failed to show a profit, financial analysts were unperturbed. Now that Amazon is profitable, it is taking a hit for not being profitable enough and missing analysts’ revenue predictions.

Amazon posted revenue of $43.7 billion in the fourth quarter of 2016, missing analysts’ estimate of $44.7 billion, and causing its stock to fall by 4.2 percent. However, that revenue figure is a 22.3 increase over the same quarter in 2015.

For the fourth quarter Amazon had net income of $749 million compared with $482 million in the same period in 2015, a 55.4 percent increase. Spending (expenses) on fulfillment increased 25.7 percent to $5.72 billion from $4.55 billion in the fourth quarter of 2015.

Fourth-quarter spending on shipping and marketing both increased by 43 percent over the same period in 2015 while general and administrative expenses grew a hefty 84 percent. Wall Street analysts believe Amazon’s operational expenses are too high but Amazon has never heeded calls to curb them.

2016 Full Year Results

For the full 2016 year Amazon realized $136 billion in net sales —a 27 percent increase over 2015 — with $94.7 billion, coming from products and the remainder coming from services. Net income showed robust growth of nearly 300 percent, increasing to $2.37 billion from $596 million in 2015.

As in 2015, international sales suffered a net loss, increasing from a $699 million loss in 2015 to a $1.3 billion loss in 2016. Amazon Web Services, the company’s cloud business, posted a 55 percent year-over-year increase in revenue to $12.2 billion.

While AWS contributed only nine percent of net sales, it provided more operating income — $3.1 billion — than products and other services combined. This is because AWS is not burdened with the expenses of product sales such as shipping and warehousing costs. Shipping costs were a major contributor to Amazon’s 24 percent increase in expenses last year.

Anthony Riva, an analyst with GlobalData Retail, a research firm, commented that, “Low cost and fast delivery are a fundamental part of Amazon’s appeal to consumers. However, they are also its Achilles’ heel.”

Amazon expects to keep spending heavily on faster delivery. Prime members can receive free two-day shipping on over 50 million items— up 73 percent over 2015.

Third-party Sales

Sellers on Amazon’s marketplace accounted for 49 percent of units sold during the fourth quarter, up two percentage points from the same time period in 2015.

Sellers on Amazon’s marketplace accounted for 49 percent of units sold during the fourth quarter, up two percentage points from the same time period in 2015.

Research firm Slice Intelligence reported that Amazon accounted for 43 percent of all the revenue generated online in the U.S. in 2016 and 53 percent of all growth in U.S. online sales. Amazon also garnered 38 percent of total U.S. online holiday sales in the fourth quarter. Spending on marketing increased 42.6 percent to $2.51 billion from $1.76 billion in the fourth quarter of 2015.

Fulfillment by Amazon delivered more than 2 billion items on behalf of sellers in 2016 and the number of active FBA sellers increased by 70 percent. Over 100,000 sellers achieved sales of more than $100,000 on Amazon in 2016.

Other Noteworthy Facts

• Sales in North America of books, music, and videos in the fourth quarter 2016 were $4.21 billion, a 7 percent increase, while sales of electronics and other general merchandise increased 25 percent to $21.57 billion. The popular Echo line of smart home devices was the main contributor to the surge. Besides electronics, home and kitchen goods drove most of Amazon’s growth.

• Fourth quarter spending on technology and content, including fees for licensing content for its Amazon Video service, increased 27.5 percent to $4.55 billion from $3.57 billion. Amazon is moving heavily into entertainment with its Amazon Studios, producing both movies for general theater release and other programs available for screening by its Prime customers.

Amazon’s Payment Business

Pay with Amazon is certainly not yet a threat to PayPal but it did double the amount of money it processed in 2016 over 2015. The service lets customers make purchases on other merchants’ websites using information stored in their Amazon accounts. In 2016, 33 million customers used Amazon Payments, up from 23 million in 2015. In comparison, PayPal has 197 million customer accounts.

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Going Forward

Amazon is trying to temper expectations for the first quarter of 2017, forecasting modest revenue growth. The company will focus more on artificial intelligence, entertainment, and services, which often have bigger margins. Delivery drones, same-day delivery, and smart home devices will be areas the company focuses on. To combat rising shipping costs, Amazon has already announced increases in FBA fees that will go into effect later this month.