The investment community appears to be confident that these heavy capital expenditures have paved the way for rapid growth going forward. Thus far, there is not much evidence to support that contention. Amazon’s sluggish growth in operating cash flow can perhaps be blamed upon the rapid addition of distribution centers, which generate operating expenses upon opening, but may not be fully utilized for years. However, Amazon’s slowing revenue growth is more troubling.
Amazon Revenue Growth, data by YCharts.
While revenue grew 39.6% in 2010 and 40.5% in 2011, growth dropped off to 27% in 2012 despite the increasing pace of investment. Revenue growth hit a multiyear low of 22% in the fourth quarter, and Amazon projected a similar level of growth for the current quarter.
Competitors fighting back
Slowing growth at Amazon can probably be attributed to competitors finally fighting back. Several retailers experimented with price-match strategies during the holiday season, and Target Corporation (NYSE:TGT) announced last month that it would match prices from Amazon and other top online retailers year-round. Best Buy Co., Inc. (NYSE:BBY) followed suit with a year-round price-matching policy earlier this month. While discount leader Wal-Mart Stores, Inc. (NYSE:WMT) has avoided price-matching, the company’s current long-term strategy involves reducing operating expenses by 100 basis points and then “investing in price”: i.e., lowering prices to attract more customers.
Discount retailers like Wal-Mart, Target, and Best Buy are thus stepping up price competition with Amazon. As I discussed in a previous article, these three companies are equivalent in scale to Amazon (and Wal-Mart is nearly eight times larger) and have competitive operating expenses. Amazon thus has little or no inherent competitive advantage versus Wal-Mart, Target, or Best Buy. With these discounters having now implemented better strategies for competing against Amazon, the latter will have a tougher time gaining market share in the future.
Conclusion: The jury’s out
There are good reasons to doubt that Amazon will produce as much profit as investors seem to expect. Competitors are fighting back, and Amazon’s heavy investments over the past three years have not borne fruit in the form of better sales or earnings trends yet. It is possible that Amazon will eventually hit a tipping point, leading to a rapid rebound in profitability and accelerating revenue growth. However, until that happens, it is too early to crown Jeff Bezos the greatest CEO alive.
The article Is Jeff Bezos the Greatest CEO Alive? originally appeared on Fool.com and is written by Adam Levine-Weinberg.
Fool contributor Adam Levine-Weinberg owns shares of Apple. Adam Levine-Weinberg is short shares of Amazon.com. The Motley Fool recommends Amazon.com and Apple. The Motley Fool owns shares of Amazon.com and Apple.
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