#6: Amazon & profitability: the changed narrative
There is a rumour that Tesco’s former CEO Terry Leahy has compared Amazon to a non-profit because it is not generating any profits. For the first years of its existence, Amazon produced many losses. However, after the dotcom bust, Amazon forced the company to turn profitable. Jeff Bezos also started using his annual letters to explain to the investors how the company should be assessed as an investment.
In a 2005 annual letter to shareholders, Jeff Bezos went to lengths to explain why Free Cash Flow is the ultimate metric for Amazon and how investors should approach Amazon as an investment.
“Since we expect to keep our fixed costs largely fixed, even at significantly higher unit volumes, we believe Amazon.com is poised over the coming years to generate meaningful, sustained, free cash flow.”
In 2002 Amazon turned to positive Free cash flows. Since then, the company generated positive and increasing free cash flows until 2021. During this 19 year growth run, Amazon’s Free Cash Flows surpassed the industry giant Walmart’s Free Cash Flows. In 2019 Amazon generated 75% more Free Cash Flow than Walmart, the biggest and one of the most profitable retailers in the world.
The growth in Free Cash Flow was reversed when the colossal capital expenditures dragged the Free Cash Flows negative. The massive increase in the logistics capacity (discussed in the previous post) has eaten the Free Cash Flows in the form of Capital Expenditures.
During the last 12 months Amazon has invested almost $66 billion in building out new logistics centers and server buildings. This is more than triple the Capital Expenditure levels during the last 12 months before the pandemic.
The next posts will be covering the more profitable aspects of the business.
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