Insights on the Valuation of Amazon

Jeff Bezos, who is unquestionably one of the greatest businessmen of our generation, has built an online bookstore, which he started in 1994, into one of the largest, most revolutionary companies existent today which continues to push its way into new areas to provide its customers with the best experience possible. Amazon prides itself on being more focused on the customer then it is on the competitors and with this mindset it grew to a market cap of over 1 trillion dollars in 2019.

Segment Overview

While Amazon has operations in a wide range of different industries and markets, it categorizes its revenue into three distinct segments: North America, International, and AWS.

Both their North America and International segments include things like Amazon Prime, revenue from customer orders, ad revenue from Amazon’s online store, digital content that it streams through Prime Video, and a wealth of other areas. While their offerings have already been accepted by a large portion of the population they show no sign of slowing down in their expansion into new areas in order to attain more customers. As an example of this customer centric mindset, Amazon strived in 2019 to add more locations where one-day and same-day shipping are available and continue to push forward with this effort into 2020. In addition they have made immense efforts to expand their operations into India where they aim to bring the same customer-centric mindset. Still, North America remains their largest market and in 2019 over 60% of Amazon’s revenue came from their North America segment.

Their AWS segment however, is what allows Amazon to move into such a wide range of new areas and take financial risks that few other companies are willing to take. While only 11% of Amazon’s total revenue comes from AWS, over half of their operating earnings are from Amazon Web Services which just shows the power of a high margin business.

Their international segment is their smallest segment and still operates at a loss but there is little doubt that Amazon will strive to conquer market share overseas in the same way it has done in North America.

Financial Overview

In 2019 Amazon brought in total revenue of $280 billion which is 58% higher than what they were doing just 2 years earlier. They ended the year with operating income of $14 billion which on total revenue of $280 billion leaves them with an operating margin of just 5%. Because Amazon operates in a price competitive retail environment their cost of sales and fulfillment expenses ate up 73% of their total sales. However, they were still able to pour $53 billion into marketing and technology expenses which together took up 18% of Amazon’s total revenue.

Despite their low margins with their North America and International segments, Amazon was still able to end 2019 with a return on equity of 22% which far surpasses almost any other retailer of their size.


The main variables going into Amazon’s valuation are as follows:

  • Subscriptions to Amazon Prime

  • Subscriptions to AWS offerings such as cloud servers

  • Expansion into international markets

  • Consumer spending through online retail

Amazon’s year over year growth over the past many years has been nothing short of amazing. If they were able to maintain a 15% year over year growth rate over the next 10 years (a difficult feat) and maintain adequate earnings thereafter, a conservative investor would have no problem valuing the company at just over $600 billion or roughly $1,204 per share.

This valuation however, is based on assumptions of Amazon’s growth, market share, competitive position, and a number of other important factors.

To learn more about Amazon, both their Annual Report and Form 10-K offer much more detailed information that any investor should know before making an investment decision.