When did Amazon start making money?
“Cash flows more than any other single variable seem to do the best job of explaining a company’s stock price over the long term.”
If one reads all of the annual shareholder letters written by the Amazon founder Jeff Bezos, one would find out how diligently he tried to teach the financial community about his company’s priorities.
One prime example of that is the way he emphasises the importance of Free Cash Flow as a measure of the long term value of a company.
In the 14 letters between 1997 & 2010, the phrase “free cash flow” is mentioned 148 times. After the 2010 letter, it is not mentioned again.
One reason for the diligent explanation can be seen in the business model Amazon was building. In the late 1990s Amazon was a new kind of retailer to invest in for the investment community. It differed from the traditional bricks and mortar companies quite significantly in its cost structure. This is what Jeff Bezos diligently tried to convey to the public.
Is online hopelessly loss-making?
Especially after the Dotcom crash many regarded e-commerce companies as hopelessly loss making entities. For Amazon it was crucial to a) be able to generate positive cash flow and b) be able to communicate that to companies.
Amazon was also struggling to generate cash flow in the early years all the way up to 2001. Since 2002 Amazon has been generating Free Cash Flow every year. In 2007 the company broke $1 billion free cash flow and has grown. However, the bricks & mortar business was still seen as a superior way to be profitable in retailing.
This is one reason why Jeff Bezos has been so adamantly explaining the virtues of the Amazon model. In his 2002 letter he goes on to greta lengths in talking about the Free Cash Flow as a measure. According to Bezos “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.” And that they have done.
Walmart as the ultimate profit generator
Retail giants like Walmart were seen in the early 2000s (are still seen by many) as optimal business models in terms of profitability. In the early 2000s up to 2010 Walmart was generating almost 10x the amount of free cash flow to Amazon.
However, one has to note that Walmart was bigger in terms of revenues than in terms of the free cash flow (FCF) it could generate. Where it generated 10x more FCF than Amazon, it had 20-60x more revenue.
The 2010s and the successes of Amazon Marketplace and AWS brought about a change to that. Especially during the last three years Amazon has massively increased it’s free cash flow.