Amazon: Beyond Retail - The Dominance of AWS Cloud Computing

Amazon: More Than Just an Online Store

If you are old enough to remember when Amazon.com (AMZN 1.44%) was a fledgling online bookstore, you know how much things have changed. Today, Amazon's online presence is so ubiquitous that it's the first place many consumers look when shopping for just about anything. But what's truly interesting is that Amazon's retail operations are no longer the most critical aspect of its business. Let's delve into the details.

What Does Amazon Do?

Amazon is an online retailer, and that's no surprise to anyone. In the second quarter, the company sold nearly $61.6 billion worth of goods. Amazon sells just about anything you can think of. There's a reason why consumers often head to Amazon.com before looking anywhere else.

Amazon: An Online Mall

Amazon's site has evolved into something of an online mall. It doesn't just sell goods on its own behalf; it also sells products for others. In its second-quarter earnings news release, Amazon noted that it had "announced a Nike storefront on Amazon.com where U.S. customers will be able to shop a range of footwear, apparel, and accessories." In addition, the company highlighted that it had expanded its selection with brands like Away, Aveda, Marc Jacobs Fragrances, Milk Makeup, and Origins. These brands all have their own identities, often with their own retail locations and websites, but being on Amazon is so crucial that they have willingly partnered with the online retailer. Furthermore, smaller companies also sell through Amazon.com. In this way, Amazon's retail operation is also a service.

AWS: Where the Big Money Lives

Amazon allowing others to use its retail presence to sell their products highlights the service business hidden behind the Amazon.com website. But the bigger story is entirely technology-related in the form of the Amazon Web Services (AWS) division. This is the company's cloud computing division, selling technology services only. There are two interesting ways to view the situation. If you look at the company's income statement, you will see that product sales were, as noted, around $61.6 billion in the second quarter. Service-based revenue came in at $86.4 billion. From that standpoint alone, Amazon looks more like a service provider than a retailer. However, another key figure to consider is the cost of sales, which is essentially the price of the items Amazon sold, totaled up to $73.9 billion. That's more than the revenue generated from product sales. It appears that selling things is a loss leader for Amazon. Still, there are many moving parts here. For example, Amazon Prime subscription revenue doesn't go into the product sales line, even though it is an important source of revenue.

How Does Amazon Break Down Its Business?

The company breaks down its business into three segments: North America, international, and AWS. North America's operating income was roughly $7.5 billion in the second quarter. International chipped in about $1.5 billion. AWS topped them all with an operating income of nearly $10.2 billion.

What Is Amazon?

If you buy Amazon stock thinking you are buying the world's most important online retailer, you aren't wrong, but you are missing the complete picture. The company's business is increasingly about services, with its AWS division clearly the most important operation it has. In other words, Amazon is more of a technology stock than a retail stock, a fact that can get lost due to the company's powerful online retail presence.