Amazon's expansion plans may squeeze margins
Wall Street cheered the retailer's fourth-quarter earnings, but a profit measure the company says is most important has been trimmed as it builds data and fulfillment centers.
If that's the case, then investors should be beating up the stock of the nation's eighth-largest retailer.
Free cash flow, which the company defines as operating cash flow less capital expenditures, rose steadily between 2004 and 2009, reaching a peak of $2.92 billion, or $6.61 a share. Then, it started to drop.
In 2012, free cash flow dropped to $395 million, or about 87 cents a share. Amazon suggests that's an outlier because part of the decline came as it paid out $1.4 billion for its new headquarters in downtown Seattle. It borrowed the money to pay for the complex.
Even if you add back the $1.4 billion, free cash flow would have been $1.8 billion in 2012, down from $2.09 billion in 2012 and the third straight year decline.
The reason free cash flow has been getting squeezed is that Amazon embarked on an aggressive capital spending program. The company spent $3.87 billion in 2012 adding new data centers and 20 fulfillment centers -- as well as the new headquarters -- to wall itself off from other online retailers and continue its assault on traditional retailers, such as Wal-Mart (WMT).
The assumption investors have made is that all that spending will mean rising earnings in years to come.
It's not clear, however, if the spending is winding down. Asked during Tuesday's call to quantify how many more fulfillment centers are coming in 2013, chief financial officer Thomas Szkutak would only say, "Just stay tuned and we will let you know as the year progresses."
If it isn't, the stock may get pressured. Amazon is often vague on details. It described its electronic-book business as "a multi-billion dollar category for us and growing fast." It said its 2012 sales were up 70% and then said its December book sales rose just 7%. But there no details. It says its Kindle e-book sales are strong but doesn't include data.
What cheered investors in Tuesday's earnings report was the expansion of the company's gross profit margin from 21% to 24%. Sales were up 22% in the fourth quarter from a year earlier to $21.3 billion and 27% year over year to $61.1 billion.
The shares climbed as much as 9% after hours. On Wednesday, the shares settled back and closed with a still-impressive 4.8% gain to $272.76. They're up 8.7% in January after rising 45% in 2012, 14th among stocks in the Nasdaq-100 Index ($NDX).
More on moneyNOW
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
[BRIEFING.COM] Just like the geopolitical environment, things could have been better today for the stock market and they could have been worse. They were worse in the early going as the major indices backpedaled quickly at the start of trading. The ostensible catalysts for the opening retreat were geopolitical concerns over Israel's ground assault in Gaza and the troublesome diplomatic dealings in the wake of Malaysian Air flight MH17 being shot down over eastern Ukraine last ... More
More Market News
Pipeline owners are making big profits on oil coming from North Dakota's Bakken fields. But a lot of natural gas continues to be flared due to low prices.
MUST-SEE ON MSN
- Video: Easy DIY smoked meats at home
A charcuterie master shares his process for cold-smoking meat at home.
- Jetpacks about to go mainstream
- Weird things covered by home insurance
- Bing: 70 percent of adults report 'digital eye strain'