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Amazon's expansion masks enormous profitability

The conventional wisdom about Amazon is that its prices are so low that it earns no money. But Thomas Paulson, principal at Minneapolis-based Inflection Capital Management, points out that, when you strip out its enormous investment in itself, Amazon earns exceptional profits.

Data: Amazon's and Walmart's 10-Ks and 10-Qs, and Inflection Capital analysis; Note: Retail profit margin is before taxes, interest payments, and other adjustments including .com losses at Walmart. Amazon data only includes already developed markets, and not Prime Video, G&A or tech & content costs. Chart: Andrew Witherspoon / Axios

Why it matters: Walmart's gross revenue is far greater than Amazon's—$485.9 billion in 2016, compared with $136 billion for Amazon. And Walmart is earning big net profits now. But Amazon's higher margins — and its upward trajectory — are a signal for what could be coming down the road if CEO Jeff Bezos decides to start delivering more cash to shareholders.

By the numbers: After spending for expansion, such as developing its market in India, China and Europe, along with other costs such as taxes, Amazon earned about 16 cents on every dollar in 2016 sales, Paulson says. That is 140% higher than Walmart, Amazon's greatest competition at the moment, which compares with 6.8 cents of net profit before such costs (chart above).