I doubted it. For one thing, since its IPO Amazon has consistently said that the operating margins of its online retail business should at maturity be 10% to 13%.II For another, Walmart has more than 10,000 stores to maintain; Amazon has only 500 Whole Foods stores, a handful of Amazon branded stores, and fewer than 1,000 distribution centers. How could Walmart be three times more profitable than a company operating with less than 10% of a physical presence?
Either there was something structurally broken with Amazon’s online model, or the company was underreporting its true earnings power. It was clear to me, both from instinct and by making comparisons to comparable companies, that the latter was true. Other, less ambitious e-tailers such as eBay report 25% operating margins
At this point, I could have just slapped Amazon’s 10% to 13% long-term profitability goal on the entire e-commerce segment, or I could have imputed eBay’s 25% margin to Amazon. Instead, I decided to dig another layer deeper. The company had given me discrete revenue—but not profit—disclosure for five of its commerce divisions. If I worked through the numbers of these subsidiaries and tried to tease out a profitability profile for each one, perhaps I could generate a more accurate estimate of Amazon’s earnings power. So that’s what I did.