3 Is Finally Ready to Create Big-Time Profits, Without Hurting the Consumer’s Wallet

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For the last decade (NASDAQ: AMZN  ) has been the quintessential example of a company that's unfazed by the typical wants of Wall Street to boost profits. The company has said time and time again that it is focused on the future, making investments to become larger long term. But with $80 billion plus in 12-month revenue, the future is now, and investors want profits, as evidenced by the company's 10% stock decline during its last quarter. Thankfully, Amazon appears ready to give investors a solution, coming at the expense of Google (NASDAQ: GOOG  ) (NASDAQ: GOOGL  ) and Facebook (NASDAQ: FB  ) , without hurting the consumer's wallet.

The Amazon problem
Amazon customers have grown to expect the lowest prices combined with the fastest and most convenient shipping options. But in an e-commerce segment that continues to grow more crowded, Amazon must keep making investments to ensure that it stays one step ahead of the competition.

The problem with building new fulfillment centers, investing in drones, and offering free shipping on many of its products is that costs remain high. During its last quarter, Amazon's revenue grew 23.2% to $19.3 billion, but selling, general, and administrative costs rose nearly 33% while research and development costs increased more than 40% year over year, thus driving margins lower.

The Amazon solution
So, Amazon must find a way to keep making these investments to maintain growth, but it also needs a large high-margin segment where it can earn profits to satisfy investors. With that said, The Wall Street Journal reported last Friday that Amazon is preparing its own online advertising platform that will be used on both its own site and for third-party sites.

Source: 30 Lines via

Those who use Amazon have likely noticed suggestions and advertisements on the site. In the past, Amazon has used Google's platform for this service; Amazon is one of the search giant's largest customers. Therefore, it makes sense that Amazon would cut the costs associated with using Google's platform, create new revenue by allowing advertisers to use an Amazon advertising platform, and expand to third-party sites if the demand exists.

Why will this lead to profits?
While it is impossible to know how significant Amazon's new advertising platform will become relative to its e-commerce business, investors do know there is a big difference between margins in both industries. Specifically, Amazon has an operating margin of only 0.76% during the last 12 months, with nearly 95% of revenue coming from its core business.

Meanwhile, Google and Facebook, which earn the majority of their revenue from advertising, have operating margins of 23.4% and 43.5%, respectively. In fact, Amazon has created only $180 million in net income during the last 12 months, despite $81.7 billion in revenue. On the other hand, Facebook has net income of $2.37 billion with only $10 billion in revenue. Therefore, this would be a wise move on behalf of Amazon, a company with a lot of site traffic, to enter a high-margin low-cost business.

Foolish thoughts
Already, we know there is great advertising demand on Amazon's platform, judging by it being one of Google's largest customers. However, let's just say it creates revenue of $2 billion by 2016 from advertising with a profit margin of 20%. This theoretic example would earn $400 million in profits, and would increase the company's overall margin three-fold!

Amazon could very likely grow into an advertising juggernaut, with many billions in quarterly revenue from the segment, which would clearly be great for shareholders. However, the big winner here is the consumer, who can be assured that Amazon can continue to keep prices low, make its services even better, while at the same time satisfying Wall Street's recent demands.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


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Brian Nichols

Brian Nichols is the author of "5 Simple Steps to Find the Next Top-Performing Stock: How to Identify Investments that Can Double Quickly for Personal Success (2014)" and "Taking Charge With Value Investing (McGraw-Hill, 2013)". Brian is a value investor, but emphasizes psychology in his analysis. Brian studied psychology in undergrad, and uses his experience to find illogical value in the market. Brian covers technology and consumer goods for Motley Fool. Brian also updates all of his new and current positions in his Motley Fool CAPs page. Follow Brian on Twitter and like his page on Facebook for investment conversations and recent stories.

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