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.
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.
Increased Tablet Sales Paves the Way for Incremental Content Sales
Amazon’s tablet device, the Kindle Fire HD was the most popular and best-selling item in Amazon’s e-commerce ecosystem. In fact, the top four best-selling items in the platform are the four Amazon Kindle device collections. Amazon’s Tablet sales just trails Apple Inc. (NASDAQ:AAPL) and Samsung, according to IDC estimates as of Jan 2013.
Amazon has always been very open about its razor-blade business model of making margins on content, unlike its hardware rival, Apple which enjoys hefty margins on hardware. In the most recent quarter, Apple’s operating margins have been 31.6%, which is significantly higher than Amazon’s low single digit margins.
Not surprisingly, Amazon’s digital media content selection consisting of songs, magazines, books, TV show, audio books and apps saw an healthy increase of 21% 2012 with more than 23 million items, which is up from the 2011 year-end offering of 19 million items.
Amazon offers the “Earth’s biggest collection,” and likely has a lot more content than Apple’s iTunes. In early 2013, the iTunes division of Apple boasted more than 500 million active accounts, compared to Amazon’s 200+ million active customer accounts. However, Amazon’s e-Commerce platform paves the way for customers buy a lot of additional content from its entire ecosystem.
Cloud Business Has Immense Growth Potential
Amazon’s other business segment, which includes the cloud computing business makes up only 4% to the revenue mix amounting to $2.53 billion. But Amazon’s Web Services business continues to gain momentum and should grow well over time due to newer initiatives.
It is reasonable to believe that Amazon Web Services (AWS) will maintain its growth trajectory primarily due to more innovative product offerings and the reduced pricing in the pay-as-you-go model. In addition, it is also expanding its foot-print in the global market with newer locations
Amazon Reigns Supreme
Amazon has evolved into a hardware company, as well as an e-Commerce disruptor. Its cloud computing platform has immense long-run potential and only widens the company’s moat. The key to assessing Amazon is to focus on the firm’s “technological empire” which it is slowly carving out. The ability of that empire to churn out very high amounts of free cash flow while doing good for the end-consumers is exactly how Amazon should be assessed. Meaningless numbers like P/E multiples can be easily ignored.
The article Amazon: Newer Highs Await? originally appeared on Fool.com and is written by Ishfaque Faruk.
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