Amazon reported record profits in 2018, earning 10.1 billion in net income compared to just 3 billion in 2017.
Considering the company hardly had any annual profit until 2016, this represents significant growth whether that's gap earnings operating income free cash flow this company hit an inflection point at the beginning of 2018 is one of the reasons that the stock materially outperformed the market traditionally amazon has funneled most of its money straight back into the company itself leading to meager earnings compared to other tech giants like an apple or google. However, despite this strategy, Amazon has been making enough lately that there's still money left after all its expenses on inventory fulfillment centers. People's amazon still doesn't have the types of profits that other big tech companies.
Do say google or Apple or Microsoft, but significantly more than they ever have in the past. It allows them to do much more experimentation with the core business, so what's changed. However, amazon has long dominated the u.s e-commerce market. Online sales are not the biggest moneymaker for the company. Its e-commerce division isn't even profitable internationally. Instead, amazon web services or aws has generated the majority of the company's operating income since 2016.
As amazon's cloud computing division is comprised of a massive network of servers providing processing and storage solutions for companies, government agencies, and individuals, what that did for amazon is it turned amazon into a technology company as well as being an e-commerce and retailer its clients, which include netflix airbnb and yelp are charged for their volume of usage the features they subscribe to and the services they use as really started to grow about four or five years ago and became a significant force in computing amazon web services continues to get bigger as a percentage of overall revenue. It's a highly profitable uh business by amazon standards.
but by most corporate means it's doing something like 30 percent operating margins in 2018 was brought in 7.3 billion dollars in operating income and 25.7 billion dollars in revenue, which for reference is more than both McDonald's and Macy's in this last quarter was 58 of total operating profit for Amazon, so it's still clearly the profit driver for the overall company in fact in 2017 aws was more than 100 of amazon's operating profit so without as amazon would not have been making any money but thought it's a massive reason behind amazon's recent profitability
Other areas of the company are seeing significant growth as well the fastest growing division of amazon is its other category comprised mainly of the advertising business it grew 95 in the fourth quarter of 2018 and brought in 10.1 billion in revenue for the year overall as amazon has become the center of commerce for a lot of businesses it's become an extended advertising play as well they don't break out the profits of this but looking at comps like facebook and google it's almost certainly also in that 30 operating margin range if advertising continues to grow at this rate some analysts even predict it will be more profitable than aws by 2021.
The last segment experiencing significant growth is the third party marketplace well amazon traditionally buys products in bulk from wholesalers and sells them at a slight markup in the third-party marketplace outside companies pay Amazon to sell their goods using its platform amazon takes about fifteen to twenty percent cut of the sales while also collecting fees for things like storage and shipping while amazon generates significantly less revenue from third-party merchants than from products
it sales margins are much higher, making it more profitable than the traditional model. Suppose you assume even a small five percent margin. In that case, you're talking about potentially two billion dollars in profit just from the third party, uh contributing to overall amazon today more than half of all goods sold come from third-party sellers. More and more businesses are signing up sales of third-party seller services rose 34 in 2018 to 42.7 billion dollars.
You have to be on amazon unless you are going to go it alone Amazon is the only place where you can instantly get scale, uh, without having to do all of the marketing yourself. Amazon's smart speakers also have analysts excited; the last thing I find interesting is Alexa
So you now have an installed base of over a hundred million of these voice-activated devices. Over time you'll find yourself increasingly turning to Alexa and say Alexa order more coffee, and it's one of those things that'll accelerate the move of amazon in two places the pantry and into the refrigerator, the boom in all these categories from Alexa to cloud computing advertising and third-party seller divisions raises the question of how the company should be valued at the size of the company now over too well over 200 billion dollars in annual revenue
it's just tough to grow at 20 plus percent, so that means these investors who have expected high growth repeatedly every quarter are now looking at a company that with slowing growth but lots of profitability there's some consternation in the investor community as to how to value amazon businesses
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