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What’s Driving Alibaba’s and Amazon’s Operating Margins?

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What led to Alibaba’s operating margins?

Alibaba’s (BABA) income from operations has grown at a three-year CAGR (compound annual growth rate) of 44% to 69.3 billion yuan ($11.1 billion) in the fiscal year ended March 31, 2018. The impressive growth in revenue and gross profit was affected by its rising cost of revenue and operating expenses.

Income from operations fell 7% in 2015 and grew 44% in 2018. Its operating margin declined from 30% in 2015 to 28% in 2018.

Alibaba’s income from operations declined 54% to 8 billion yuan ($1.2 billion) in the quarter ended June 30, 2018. Rising costs of revenue and operating expenses had a negative effect on growth in revenue and gross profits.

Its operating margin decreased from 35% in the June 2017 quarter to 10% in the June 2018 quarter.

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What drove Amazon’s operating margins?

Amazon’s (AMZN) operating income grew at a three-year CAGR of 185% to $4.1 billion in the fiscal year ended December 31, 2017. Its cost of sales and operating expense growth were in line with net sales and gross profits, as we saw in the previous parts of this series. Its operating income improved 1,154% in 2015 and fell 2% in 2017. Its operating margin improved from 0% in 2014 to 2% in 2017.

Amazon’s operating income improved 201% to $4.9 billion in the six months ended June 30, 2018. Sales and gross profits were affected by the rising cost of sales and operating expenses. Its operating margin increased from 2% in the six months ended June 30, 2017, to 5% in the six months ended June 30, 2018.

Operating income for peers

JD.com (JD) had a loss from operations of 835.5 million yuan and 1 billion yuan in 2017 and the six months ended June 30, 2018, respectively.

Walmart (WMT) had an operating income of $20.4 billion and $10.9 billion in the fiscal year ended January 31, 2018, and the six months ended July 31, 2018, respectively.

Let’s look next at net income and margins for Alibaba and Amazon.

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