Amazon.com, Inc. (AMZN): Newer Highs Await?

Amazon.com, Inc. (NASDAQ:AMZN)’s strategy has always been to forego current margins for building up scale and dominating a market category. The company has and will be dominating newer product categories based on its relentless customer focus and a firm belief in the long run.

Going in the Right Direction

The recent run-up and increased optimism by investors has been due to margin improvements and strong top line growth. Amazon’s revenues in the most recent quarter grew at a healthy rate of 22% on a year-over-year basis and ended Q4 2012 at $21.27 billion. This clearly demonstrates the strong performance of the company during the busy holiday season as compared to the Q4 2011 when it had sales of $17.43 billion.

However, the major positives of Amazon’s financials were the ~348 bps increase in gross margin in Q4 2012, which stood at 24.13% compared to the Q4 2011 gross margin of 20.65%. The gross margins of Amazon.com, Inc. (NASDAQ:AMZN) were greatly benefited due to the lower transportation costs arising from the locations of newer fulfillment centers.

Heavy Investment Phase Continues

Amazon has stated that its investment phase is ongoing and as a result its operating and net income margins were negatively impacted in 2012. For the full year, operating margin decreased 22% on a year-over-year basis and stood at $676 million, and it also recorded a net loss of $39 million which is a steep decline from its 2011 net income of $631 million. From a geographical standpoint, North America continues to grow rapidly and grew 30% and the International segment grew 27% in 2012.

Amazon.com, Inc. (NASDAQ:AMZN)’s Cash flow from Operations portrayed a decent grow rate of 7% on a year-over-year basis and ended 2012 at $4.18B. However, due to the on-going investment cycle  of the company, its Free Cash flow declined substantially which is down 81% on a year-over-year basis and ended 2012 at $395 million. Free Cash flow generated in 2012 is much lower than the Free Cash flow of $2.09 billion the company generated in 2011.

Closer to the Customer Equates to Lower Shipping Costs

The real exciting story surrounding Amazon is the increased number of fulfillment centers which brings the company closer to customers. However, the expansion of the fulfillment center network is aiding in not only positioning the company closer to the end customer but also lead to a further decline in net shipping costs, which represented 4.5% of worldwide sales in Q4 2012. The global net shipping costs as a % of global sales is down from the 5.4% in Q4 2011.

Making Inroads into Newer Product Categories

The incremental benefits of having fulfillment centers near customer locations are manifold. Amazon.com, Inc. (NASDAQ:AMZN) will be able to sell more product categories that are perishable which takes a big aim at Consumer Staples items through the Amazon Fresh initiative. Amazon’s product unit sales will likely get a major ramp from the Amazon Fresh segment in the second half of 2013 and into 2014.