Tag Archives: Amazon

Last quarter we looked at the financials and underlying product & service portfolios of four of the biggest technology companies in the post “Side by Side: Apple, Microsoft, Google, Amazon“. With the recent reporting of results for Q1 2012 it is a good time to revisit this subject.

Comparison of Financials Q4 2011 and Q1 2012 for Apple, Microsoft, Google, and Amazon.

Market cap has grown roughly by 25% for both Apple and Amazon, whereas Microsoft and Google only added 5% or less. A sequential quarter comparison can be misleading due to seasonal changes, which impact different industries and business models in a different way. For example, Google’s ad revenue is somewhat less impacted by seasonal shopping than the other companies.

Sequential quarter comparison of financials

Apple and Microsoft seem to be impacted in a similar way by seasonal changes. For Amazon, which already has by far the lowest margin of all four companies, operating income decreased by 40% while it increased its headcount by 17%. This leads to much lower income per employee and with increased stock price to a doubling of its already very high P/E ratio. I’m not a stock market analyst, but Amazon’s P/E ratio of now near 200 seems extraordinarily high. By comparison, the other companies look downright cheap: Apple 8.8, Microsoft 10.5, Google 14.5

Horace Dediu from asymco.com has also revisited this topic in his post “Which is best: hardware, software, or services?“. What’s striking is that all three companies (except Amazon) now have operating margins between 30-40% – very high for such large businesses – with Apple taking the top near 40%. Over the last 5 years, Apple has doubled it’s margin (20% to 40%), whereas Microsoft (35-40%) and Google (30-35%) remained near their levels.

(Source: Asymco.com)

Long term the most important aspect of a business is not how big it has become, but how profitable it is. In that regard Amazon is the odd one out. Their operating income last quarter was about 1% of revenue. Amazon needs to move $100 worth of goods to earn $1. They employ 65,000 people and had revenue of $13.2b last quarter, yet only earned $130m during that time! Apple earns more money just with their iPad covers! Amazon’s strategy is to subsidize the initial Kindle Fire sale and hoping to make money on the additional purchases over the lifetime of the product. In light of these numbers, do you think Amazon has a future with it’s Kindle Fire tablet against the iPad?

But what really struck me about the extreme differences in profitability is this comparison of Apple and Microsoft product lines (source: @asymco twitter):

(source: @asymco twitter)

This shows what an impressive and sustained success the iPhone has been. And the iPad is on track to grow even faster. Horace Dediu guesses that Apple’s iPad will be a bigger profit generator than Windows in one quarter, and a bigger profit generator than Google (yes, all of Google) in three quarters. We will check on those predictions when the time comes…

Ed Bott at ZDNet.com wrote a post with the title: Microsoft, Apple, and Google: where does the money come from? He looked at the quarterly reports of these companies (links to sources in the article) and displayed a pie-chart of the revenue mix for each of them. Inspired by that, I added a fourth company – Amazon (source: 10-K for 2011) – and aggregated those pie-charts into one graphic.

Revenue Mix for Apple, Microsoft, Google, and Amazon

All four are large consumer-oriented technology companies; like millions of customers, I use many of their products and services every day. They each operate with different businesses models:

• Microsoft: Software
• Apple: Hardware
• Google: Advertising
• Amazon: Retail

Yet as a consumer I rarely think about these differences. All of them use state-of-the-art technologies like cloud-computing and mobile devices to achieve integrated end-to-end experiences geared to increase revenues in personal computing (Microsoft), smart mobile devices (Apple), online search (Google) or shopping (Amazon). And arguably all of them derive major competitive advantage from their software, such as Apple’s iOS which introduced the touch interface.

Perhaps most surprising is Google’s almost singular reliance on advertising, which makes it a very different business model. They offer all their technology for free – from search to mapping to operating systems and social media – to grow and retain online attention as enabling condition for advertising revenue. For a business this big the near complete dependence on one source of revenue is unusual; perhaps its time for Google’s leadership to seriously consider a diversification strategy? Without it Google is arguably more prone to disruption (such as from Facebook) than the other companies. Speaking of disruption: Apple derives almost 3/4 of its revenue (73%) from iPhone and iPad, neither of which existed 5 years ago. As Ed Bott points out, those two products now drive an astonishing $33.5b revenue per quarter!

To compare the companies by their absolute numbers, here is a bar chart of market capitalization, revenue and profit: (all in billions of Dollars and for Q4 2011, market cap as of 2/3/12)

Market Cap, Revenue and Profit for Apple, Microsoft, Google, and Amazon

Market cap of these four companies combined is approaching $ 1 trillion. Much has been written about the differences in market valuations relative to revenue and most importantly profit. The markets undervalue Apple and overvalue Google and Amazon. Let’s compare these dimensions (and number of employees) in the following radar plot:

Relative business performance for Apple, Microsoft, Google, and Amazon

The plot shows the relative performance of all with the highest in each dimension normalized to 100%. Amazon shows by far the smallest profit in the last quarter. Given it’s retail nature, it’s profit margins have always been smaller; and CEO Jeff Bezos has long emphasized the strategy of investing in future growth at the expense of present profits. Microsoft continues to enjoy very solid profit margins in a large, well diversified business. Google has incredible talent and for now is the undisputed king of online advertising. But Apple leads in all three factors, and it achieves 2x Microsoft’s results with less than half the number of employees! Apple’s profit is 1.5 times that of the other three combined! And it makes more than 60% of the profit with less than 20% of the employees. In fact, Apple’s market capitalization is now higher than $10m per employee! It must feel pretty special to be one of them these days…

Postscript: On Feb-13 analyst Horace Dediu at Asymco.com published an article with time-series data for the above companies (except Amazon) over the last 18 quarters (since 2007). It shows the evolution over time as depicted in this chart:

Apple Microsoft Google - Revenue and Operating Income 2007-2011

The article is called “The World’s Biggest Startup“. It’s main point is this: Microsoft and Google both grew their businesses steadily, but did not change their type of business. Apple did some of that in its established business segments, but more importantly and disruptively it added new categories (iPhone and iPad) for dramatic growth. That’s what startups do. Just so happens that Apple – whose stock today for the first time hit $500 – is also the most highly capitalized company in the world (around $460B). If Apple is a startup now, what will they look like when they are fully established?