Amazon.com (AMZN 3.20%) founder Jeff Bezos likes to bet on things that don't change:
I very frequently get the question: What's going to change in the next 10 years? And that is a very interesting question; it's a very common one. I almost never get the question: What's not going to change in the next 10 years? And I submit to you that that second question is actually the more important of the two -- because you can build a business strategy around the things that are stable in time.
It's a smart approach -- one that Amazon has used to deliver fortune-building gains to its long-term shareowners. Let's see how Amazon intends to keep that going.
The e-commerce juggernaut is built upon consumers' enduring desires for low prices, quick delivery, and a broad selection of merchandise. By identifying the core aspects of its value proposition to customers, Amazon can invest aggressively in these growth levers even if the payoff doesn't come for many years.
A wide competitive moat in online retail
Fortunately, for today's shareholders, Amazon has been doing so for decades. After spending heavily to expand its e-commerce fulfillment network, Amazon can now deliver items to its customers faster than many of its rivals.
Through the first two quarters of 2023, the online retail giant delivered four times as many packages to Prime members on the day they placed their orders or the next day compared to the equivalent period in 2019. To press its delivery-speed advantages over its competitors, Amazon plans to double the number of its same-day shipping facilities in the coming years.
Why is this important? Well, during Amazon's second-quarter earnings call, CEO Andy Jassy made clear that customers care a lot about faster delivery:
We have a lot of data that shows when we make faster delivery promises on a detail page, customers purchase more often, not just a little higher, meaningfully higher. It's also true that when customers know they can get their items really quickly, it changes their consideration of using us for future purchases, too.
Amazon's investments in its distribution network are also making its operations more efficient. These cost reductions are boosting the company's profit margins. Sales in Amazon's North American segment jumped 11% year over year to $82.5 billion in the second quarter. The division's operating income, in turn, improved to $3.2 billion, compared to a loss of $627 million in the prior-year period.
With worldwide retail e-commerce sales set to exceed $8 trillion by 2026, up from $5.7 trillion in 2022, according to eMarketer, Amazon's profits should continue to grow sharply in the coming years.
Ad sales should help propel earnings growth
Rising e-commerce sales are also fueling the expansion of Amazon's lucrative advertising business. Third-party merchants account for roughly 60% of the transactions on its marketplaces. These businesses are keen to get their wares in front of the more than 2 billion people who visit Amazon's sites each month -- and they're willing to pay up to do it.
Amazon's ad revenue leaped 22% to $10.7 billion in the second quarter. Better still, although it does not yet report operating income for this segment, Amazon's advertising-related profit margins are widely believed to be north of 50%.
Amazon is investing aggressively in machine-learning technology to help merchants place the right ad in front of the right people at the right time. Moreover, advertisers know that shoppers typically go to Amazon.com with the specific intent to buy something. By optimizing ad placements during times when people are already primed to make a purchase, Amazon is set to become an even more formidable force in the digital ad industry.
That's a valuable position to hold in a market that's on track to top $835 billion by 2026, up from $567 billion in 2022, according to eMarketer.
