Last time we finally saw a tech-giant entering the 3D-graph. It was Apple, behaving very differently from the others as over the last decade it came from nowhere (well in comparison to the traditional set of giants like oil-majors that is) but still entered the gallery of the largest companies on earth.
This time we add Amazon and it’s even more extreme. So extreme that I had to put a red circle in one of the screenshots to make sure the readers won’t overlook the 2008 building in the graph!
Photo by monsieur_raddar on Pixabay
But first things first: Jeff Bezos told an interesting story right at the start of the annual report of 2018 and I liked it. It started with a short sentence: “To our shareowners: Something strange and remarkable has happened over the last 20 years. Take a look at these numbers:”
Then a series of years and percentages is shown. I converted the percentages to an old fashioned flat 2D-graph. Yes, really! Even I use these old technologies as they can be handy.
After all those numbers it goes on like this: “The percentages represent the share of physical gross merchandise sales sold on Amazon by independent third-party sellers – mostly small- and medium-sized businesses – as opposed to Amazon retail’s own first party sales.Third-party sales have grown from 3% of the total to 58%.
To put it bluntly:Third-party sellers are kicking our first party butt. Badly.
And it’s a high bar too because our first-party business has grown dramatically over that period, from $1.6 billionin 1999 to $117 billion this past year. The compound annual growth rate for our first-party business in that timeperiod is 25%. But in that same time, third-party sales have grown from $0.1 billion to $160 billion – acompound annual growth rate of 52%.”
Then it goes on and compares Amazon to eBay and explains how the ongoing adaptation of Amazon and its fullfilment contributed to the success. Knowing this you won’t be surprised by the 3D-graph at all!
Double-clicking the screenshot will open the 3D-graph in your browser. For maniputalion of this 3D-graph: Clicking the right mouse-button and moving the mouse up and down at the same time, will zoom the graph in and out. Clicking left while moving the mouse will tilt the graph in different directions. Double clicking in the graph translates it and readjusts the centre at the same time. Just try it – If you don’t know how to get the normal position back, refresh the page in your browser.
Wait, in the graph we see a little bit more than only growth. If we look at the revenue and profit (height and green roof), Amazon is similar to the others. The total assets and the equity however, are less then for the others. For 2018 both are about half of the average value in this graph. Looking back to the beginning of this post, we can understand why the total assets are rather low. Amazon is more and more a platform rather than a shop itself. For third parties less capital is needed. Only one question remains: if the (platform) software is so valueable, why is the value of the equity not much larger? It wasn’t in the annual report or, to be more precise, it was mentioned that the software-development was just expenses. I had to check why and to be honest; I was surprised to read that US-GAAP does not allow tech-companies to activate their in-house developed software, although it actually holds the real value of the company.
I didn’t realise that the only software at the balance-sheet are bought licences – and even booked as tangible assets in a lot of cases.
Photo by hamburgfinn on Pixabay
Imagine that a new company would be founded to fulfil let’s say Amazon’s Alexa–service and had to buy the necessary software from Amazon. It would have to pay a huge amount of cash or equivalents and Amazon’s equity would certainly get a boost. Yet in reality nothing would have changed because valuable assets (invisible from an accounting point of view and therefore not in the balance-sheet) would only be swapped for money. The difference would only be the way Amazon’s balance-sheet looks. After reading this, I think we have a real issue on the valuation of tech companies!
I still wasn’t fully convinced. Knowing that software is very important for Volkswagen as well, I had a look at the annual report 2019 and read:
“INTANGIBLE ASSETS Purchased intangible assets are recognized at cost and amortized over their useful life using the straight-line method. This relates in particular to software, which is normally amortized over three years. In accordance with IAS 38, research costs are recognized as expenses when incurred. Since the fourth quarter of 2019, development costs for future series products and other internally generated intangible assets are capitalized at cost, provided the cash-generating unit to which the respective intangible asset is attributable is not impaired. If the criteria for recognition as assets are not met, the expenses are recognized in the income statement in the year in which they are incurred.”
Photo by GoranH on Pixabay
Slide 14 of this presentation says that the share of in-house developed software has to go from 10% to 60%. The presentation is rather recent (end of 2019), so we can assume that currently 90% of Volkwagen’s software is bought. If so, al those costs can be recognised on Volkswagen’s balance-sheet as “assets” and until now it is very different from companies like Amazon or Facebook, with their in-house developed software being invisible in their balance-sheets!
For more background on the 3D-graph generator, download our white-paper together with the 3D-graphs (html-format, available as zip). Or go to our website and download the free demo-package to try the 3D-graph generator yourself. New posts will be announced on Twitter: @AnRep3D and our Youtube-channel offers short explanatory movies on the 3D-graphs and the generator creating them.