Amazon as my company to valuate. Stock ticker is AMZN. Amazon is an online retailer selling
just about anything you can imagine. It sells items in combination from itself as a supplier and
from other 3rd party sellers that use the platform to sell their own products. Amazon is
organized into 3 segments, North America, International, and Web Services (SEC, 2018). They
have streaming services for music, books and television/video in addition to selling actual hard
goods. Amazon’s largest competitors are other online retailers (e-commerce) and other
streaming and technological services such as Netflix, Hulu, Spotify, and Apple Music. Amazon
also strives for quick, fast delivery and has created Amazon Prime service, where customers
enjoy free 2 day shipping and in some cases, same day delivery using their own resources and
assets to fulfill this.
Jeff Bezos, founder of Amazon, registered the company in Washington November 1, 1994.
Bezos originally started at hedge fund D.E. Shaw, where he was Vice President and in charge of
researching new business ventures. One of his ideas was to use the new up and coming
internet to sell products, to which he provided a list of 20 options to Shaw, but his ideas were
shut down. This event caused Bezos to go out on his own, and he started Amazon from his
garage, selling mainly books online for 3 reasons: books have universal demand, books aren’t
expensive, there were thousands of titles he could sell easily and conveniently compared to
other national book retailers such as Barnes and Noble (Capitalism, 2020). Today, Amazon
employs over 1 million full and part time employees in over 13 countries across the world
(Adock, P. 2022).
On the balance sheet, revenue is listed as the amount they expect to receive reduced by
estimates for return allowances, promotional discounts, and rebates. Their revenue’s exclude
amounts collected for 3rd party sellers, including taxes associated with those sales. Revenue is
broken into multiple categories, retail sales from online and physical stores, 3rd party seller
services, subscription services, advertising services, Amazon Web Services (AWS), and other.
Most of Amazon’s revenues are recognized when the product is either transferred to the
customer through direct amazon delivery, or to a 3rd party carrier. An exception to this is with
advertising services, subscription services, and AWS which are all valued variably based on
various factors. For example, Advertising revenue is recognized once the ad is delivered, but it
dependent on the clicks and impressions it generates for the advertised company. Subscription
services can either be paid up front for the year or paid monthly by the customer. However,
Amazon recognizes subscription income over the time period it is to be served. If a customer
pays $120 up front for prime for a year, that revenue is recognized at $10 a month for 12
months. If the subscription is paid monthly, it is also recognized at $10 a month for 12 months.
The different options of recording revenues for different aspects of Amazon seems
appropriate. Recognizing the sale of a bag of dog food on the date it is sold is a true and
accurate depiction of the cashflows related to that transaction. Cost of goods sold is
immediately increased and inventory is immediately decreased, resulting in actual amounts on
the financial statements. It would not be feasible for Amazon to sell a bag of dogfood each
month in a 3-month period (quarter) but only recognize the sales of those 3 bags at the end of
the quarter. In contrast, for subscription services, it wouldn’t be correct to recognize a full
year’s subscription revenue when it is paid, because that revenue has to cover a 12-month
period. As an example, if a customer subscribes in August of 2021, and Amazon recognizes that
full $120 in August of 2021, it overstates revenue for 2021 because only $50 of that
subscription was for 2021, an understates revenue for 2022 because $70 should have been
applied to the 7-month of the subscription in 2022. By allocating the revenue over the period
of the subscription, Amazon presents a more accurate picture of the income for both years.
References:
SEC. (2018). Amazon.com, Inc. Retrieved on July 7, 2022, from:
https://www.sec.gov/Archives/edgar/data/1018724/000101872418000108/amzn-
20180630x10q.htm
Capitalism.com. (202, August 19). History of Amazon: From Garage Startup to the Largest E-
Commerce Marketplace. Capitalism. https://www.capitalism.com/history-of-amazon
Adcock, P. (2022, January 5). How Many Countries Does Amazon Operate In? – A Full List.
www.sbxl.com https://www.sxbl.com/how-many-countries-does-amazon-operate-in/
