Amazon (AMZN -0.94%) is best known for its massive e-commerce business, and to most consumers, the company is a convenient way to get almost anything delivered to your front door.
But as a business, Amazon is more complex than just e-commerce. Most investors are familiar with Amazon Web Services, the cloud computing juggernaut that brought in more than $22 billion in operating profit last year. However, there are a number of other revenue streams at Amazon that also deserve attention, as you can see below.
Image source: The Motley Fool.
As you can see, Amazon has seven different revenue streams that contributed at least $1 billion in revenue in the fourth quarter. Of those, its online stores represent the lion's share of revenue, bringing in more than 40% of revenue in the fourth quarter. The online stores segment is sometimes called Amazon's first-party sales. These are the sales it generates from the products it sells directly on its platform, as opposed to those sold by third-party sellers on its marketplace.
Not only is the online stores segment by far its biggest source of revenue, it also underpins the rest of the business. Without the first-party e-commerce business, the marketplace wouldn't exist, and therefore there would be no third-party seller services. Amazon wouldn't have an advertising business, as there would be no product listings to advertise next to.
Its subscription services, which is largely made up of Prime, would also be non-existent since the key Prime benefit is free delivery and returns. Even AWS wouldn't exist today without the online stores. The cloud infrastructure business was initially an in-house project that served the e-commerce business, allowing Amazon to grow and fine-tune it before opening it up to outside customers.
Image source: Amazon.
Why it's a brilliant business model
You'll notice that sales from the online stores segment actually declined in the fourth quarter, but that's not the only thing that makes Amazon unique. The online stores business also operates at narrow margins and likely generated a loss in the fourth quarter, as the company had an operating loss of $2.4 billion outside of AWS in the fourth quarter.
Amazon doesn't break out profits in the segments above, but investors have long believed the first-party e-commerce business to be a low-margin one as it is for most online retailers. After all, selling online goods online is highly competitive and consumers are price sensitive. While Prime may give Amazon some competitive advantages, the company's strategy is to use the online stores business to drive growth in more profitable connected businesses.
For example, Amazon's third-party marketplace is by far the biggest in the U.S., making it a vital platform for millions of e-commerce businesses. Amazon makes money on the marketplace from sales commissions and the Fulfillment by Amazon program because many sellers choose to ship their wares to Amazon and have it handle the rest. By doing so, Amazon leverages its logistics infrastructure, including its last-mile network, and creates competitive advantages that enable a more profitable business than straight first-party online retail.
Similarly, the advertising business, which was introduced more recently, also leverages the valuable digital real estate created by the first-party retail business. Amazon's ad business is so robust that it brought in nearly $40 billion last year, making it the third-biggest advertising platform in the U.S. behind Alphabet and Meta Platforms.
Even more impressive, Amazon's advertising business just grew 19% during a quarter when both Alphabet and Meta's declined. That speaks to the power of Amazon's advertising platform, which is particularly attractive to marketplace sellers since it's at the bottom of the marketing funnel. Customers come to Amazon with purchase intent.
What the smartest investors know about Amazon
Amazon has always invested for the long term, and those investments can make it difficult to discern the health of its business. Its most recent results, for example, were marred by the company's overexpansion during the pandemic, and don't represent the strength of its business model.
However, smart investors know that layering high-margin businesses like the third-party marketplace and advertising on top of Amazon's massive online stores business is a recipe for success -- especially when those two businesses just grew revenue by nearly 20% in a tough quarter.
Amazon isn't without its challenges, given the macro headwinds and the overexpansion during the pandemic. CEO Andy Jassy recently tamped down expectations for a recovery.
However, the company's business model and competitive advantages (like Prime and its logistics network) should ensure that Amazon eventually gets back to profitable growth. The chart above shows how well that model has already worked -- the company generated more than $500 billion in revenue in 2022, second in the world behind Walmart.
Investors will have to be patient, but even though the stock has stumbled, Amazon's business model remains a valuable source of strength.
