If you are buying a stock, the first thing you need to do is understand the business. This may seem obvious, but let me give you a not obvious example. What business is Amazon.com in? Well of course! Retail online sales, plus Amazon Prime right? Let’s see.
You start with the company’s 10k or annual report and see what businesses they say they are in. For Amazon, they break it down into North America sales, International sales and AWS. AWS? Amazon Web Services. You may have heard recently that AWS kicked Parler off their service and it crippled Parler for weeks.
If you look at the sales, it seems pretty clear. Last year Amazon had North American sales of 236 billion, International sales of 104 billion, and AWS sales of 45 billion. Ok makes sense. Amazon is making their big bucks from selling stuff on their sites in the US and Canada. But are they? If we look at the Operating Income, it tells a very different story. Operating Income from North America was 8.6 billion, From International 717 million (that’s not much income from 104 billion in sales) and AWS Operating Income of 13.5 billion. It’s surprising. Amazon’s big profits come from their web services, not from that 340 billion in retail sales.
So it turns out, if you’re buying Amazon, to a great extent you’re buying a cloud computing service company, not a retailer.
The Moral: If you’re buying a stock, you really do need to do that basic dive into the company’s business so that you understand what the heck they really do, and how they make their money.