With a market capitalization of $195.59 billion, Amazon (AMZN, Financial) is a Wall Street darling. The company has in the past 10 years taken giant strides towards growth and expansion. The market price of its stock has over the past five years grown by an impressive 236%. The total assets of the company have increased by 68% and total revenues by 45% in the last three years. Amazon’s sales have increased beyond the $60 billion mark in recent years. The reasons behind the impressive growth rate, which the company has successfully maintained in the past decade, are not hard to see. The company’s impressive financial performance can be attributed to its founder Jeff Bezos’ aggressive expansion and growth strategy. He founded the corporation in 1994 and has taken almost all the investment decisions of the company. Bezos, the master financial strategist, in his letter to the shareholders, described that the company’s ability to delight customers was the key to the success of Amazon. He is a believer in devising and implementing an aggressive growth strategy aimed at attracting the highest possible number of customers into buying from Amazon. Bezos termed the market in the short run to be a voting machine and in the long run a weighing machine. His focus has invariably been on building a heavier company, which he has been successful in doing so far.
The strategy that Amazon is pursuing with a view not to let its impressive growth rate thwart, is focused on attracting more customers, offering lower prices, availing itself of the economies of scale, enhancing its infrastructure and increasing usage. Factors that have helped the company expand markedly over the past few years are listed as under.
Ecommerce market: Amazon has successfully availed itself of the recent unprecedented rate of e-commerce market growth worldwide. According to Forrester, a leading market research firm, consumer demand in the U.S. is continually growing, having a favorable impact on the sales of online retailers. Physical stores are fast losing ground against the ecommerce stores. The online retail market in the U.S. alone increased to $262 billion thus recording a substantial 13% increase. Albeit, at present, online retailers have only 8% of the total market share, but their sales are expected to increase at a rate of approximately 9% annually.
Lower prices: With a view to attracting as many customers as possible, Amazon continually strives to keep the prices of the products, which it offers for sale, competitive and as low as possible. Amazon wants to generate the highest possible cash in order to maximize free cash flow per share. Percentage margins, currently, seem to be of little interest to the management.
Growth in the sale of Kindle Fire: Since 2009, when the device was first launched, Amazon has so far been able to sell 200 million Kindle Tablets. In the next 5 years, more than 1 billion tablets are expected to be sold.
Economies of scale: The bulk buying discounts and other economies of scales have helped Amazon operate efficiently and offer lower prices to the customers. Amazon right now is less concerned with optimizing its percentage margins as it intends to enhance its sales and capture a heavy chunk of the growing ecommerce market. Economies of scale have allowed the company to achieve its targets on a successful note.
Amazon's financial performance has been impressive so far and is expected to improve further in the coming days and months. The improved economic conditions in the U.S. will help the company increase its sales. Lately, consumer confidence in the U.S. has improved considerably and is assuming historic peaks. Increasing consumer confidence and demand for discretionary goods coupled with a growing job market is expected to enable Amazon to generate huge amounts of revenues in the months ahead.
