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Panos Mourdoukoutas
Panos Mourdoukoutas
Articles (10) 

Prime Day Reveals How Entrepreneurs Make Amazon's Stockholders Rich

Amazon profits from helping small and midsize businesses expand their online presence

October 16, 2020 | About:

Prime Day revealed how Amazon.com Inc. (NASDAQ:AMZN) grows its top line and make its stockholders rich by helping small and midsize businesses expand their online presence.

The company didn't tell markets how much this year's Prime Day contributed to its top line, but it did disclose how much merchandise small and midsize businesses sold on its marketplace: more than $3.5 billion worth. That's a 60% increase from last year's sales.

Referred to as "third-party sellers," these small and midsize businesses are in a "collective entrepreneurship" with Amazon—sharing the risks and the rewards from the discovery and exploitation of new business opportunities.

How it works is these vendors commit the capital to develop, produce and brand products. Amazon provides the rest, including a vision, e-shop space on its platform, warehousing and fulfilling services. Then there's search engine optimization (SEO)—the benefits of a large network of users that provide third-party sellers the opportunity to reach a mass online market.

And then there's the execution, a horizontal organization that allows third-party sellers to nurture and grow their online businesses.

Finally, support, state-of-the-art logistics and business practices that create the right mindset for third-party entrepreneurs, the morale for remaining focused and executing the business.

In short, Amazon has developed a platform that allows third-party sellers to share in its dream and contribute their own resources and energy to it.

That could perhaps explain how third-party sellers contributed 53% of Amazon's online sales in 2020, up from 26% in 2007, according to Statista.com.

It could also explain how Amazon's management is effective in managing capital. As of Oct. 15, Amazon's return on invested capital was 10.01%, close to two points above its weighted average cost of capital, according to GuruFocus.

That means that Amazon will continue generating positive excess returns on new investments in the future and see its value increase along with growth.

Wall Street has taken notice, making Amazon's long-term stockholders rich.

Disclosure: I own shares of Amazon.

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About the author:

Panos Mourdoukoutas
I’m a Professor of Economics at LIU Post in New York. I also teach at Columbia University. I’ve published several articles in professional journals and magazines, including Forbes, Barron’s, The New York Times, Japan Times, Newsday, Plain Dealer, Edge Singapore, European Management Review, Management International Review, and Journal of Risk and Insurance.

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