Amazon.com (NASDAQ: AMZN) Slowly Transforms Into A Mature Company With Focus On Cash Flow And Maximizing Value


Amazon.com, Inc. (NASDAQ: AMZN) has always been a force that reinvests vigorously in the business at a high cost to profit margins. This policy had the effect of making the company riskier, as it embarked on rapid expansion, both through capital investments in their own business and through acquisitions. At the same time, this policy is responsible for Amazon’s growth in the United States and internationally in the online retail and Cloud segment (AWS).

In this article, we’ll take a look at Amazon’s latest investment and expansion plans, as well as their transition to an online business model with more mature companies.

Check out our latest review for Amazon.com

It’s always a pleasure to watch Amazon’s investments in their fulfillment centers, cloud capacity and the like. Their strategy can be seen as beneficial for a company, an investor, and contrary to popular belief – from an employment perspective. In short, the arguments for each perspective can be summarized as follows:

  • The commercial interest benefits as capital flows into their operating capacities instead of being paid to the government, and thus the company manages to grow and innovate, offering even more services that give customers the choice to a lower price.
  • Shareholders also benefit because the company has managed to invest effectively in turnover (revenue growth) and peaked in its high growth phase. This growth enables stock price appreciation and lowers the cost of equity for the company, creating a benevolent feedback loop where growth allows for even more reinvestment, resulting in stock price appreciation.
  • Stakeholders are the main beneficiaries. Employees and customers benefit from Amazon operations. It’s pretty straightforward to recognize that consumers are exposed to a wide variety of products with low margins, review-based quality control, and highly efficient shipping. Amazon is also a large-scale employer, which has gained media attention for some time recently. In fact, Amazon has over 1.3 million full-time employees. The interesting part is that this number was around 150,000 in 2015, it’s a 8.6-fold increase in 5 years. You can check the details HERE.
NasdaqGS: full-time employees of AMZN

We can see that the company has even more ambitious plans for the future, and just as non-farm wages are used as an indicator of market performance, the ever-increasing number of employees is showing us the direction in which the company is heading. is heading. .

Over the past three months, Amazon has announced several expansion plans:

The list does not include some of the more important acquisition procedures and product updates. With this, we can feel the pulse of Amazon’s expansion strategy in action. It is this type of activity that has generated the massive growth of investors and the development of the predominantly American economy.

Arguably, with a large, efficient, and flexible distribution center, Amazon can help the United States reduce reliance on manufactured goods from China, allowing small businesses to participate in their distribution and sourcing. locally.

In their last presentation of the results (T2), Amazon stressed that the company’s long-term goal is to optimize free cash flow.

It’s a central point, and it marks a possible change in the way Amazon operates. When businesses are looking to optimize or increase their cash flow, they focus on maximizing value. This means that the business will look more inward and focus on efficiency and quality of operations and products.

This is a sign that Amazon is entering a phase of maturity, and there are some things investors might want to be aware of.

Amazon will increase spending for general corporate administrative purposes and seek to implement process optimization. This can already be seen in their spending structure, as the company has grown from small administrative expenses, US $ 6.6 billion in 2020, to US $ 34.1 billion in the past 12 months ending in the second. quarter 2021.

Another sign of maturity is an increase in debt levels, which is precisely what we can see for Amazon.

debt-equity-historical-analysis
NasdaqGS: AMZN History of debt to equity 23 August 2021

As you can see from the graph above, at the end of June 2021, Amazon had $ 52.3 billion debt, compared to US $ 35 billion a year ago. This is a substantial jump, and if we only looked at the debt-to-equity ratio, they might be worried. But on the other hand, he also has $ 89.9 billion in cash, leading to a net cash position of US $ 37.6 billion. So it’s safe to say that Amazon is getting more debt, but has enough capacity to handle it. In addition, interest expense related to debt payments is recognized as an expense item and helps reduce a company’s effective tax rate. This gives the double advantage of fresh capital for expansion or optimization of margins, and a reduced tax rate for the company.

Finally, we will see a downward trend in the growth rate, but Amazon will continue to invest to increase its margins. It’s hard to estimate, but it’s a key factor in the intrinsic value of the business, and future margins can make the difference between investors who buy 1 US t, 1.5 US t or 2.47 US $ of stock, currently, Amazon has a market capitalization of 1.66 t US.

Abstract

Amazon is still reinvesting heavily in its business and laying the foundations for a sustainable growth rate above 10%

The company is showing signs of maturity, which means it will begin to focus on maximizing value through operational optimizations. They will also make larger provisions for debts and administrative costs, as these factors help to improve the efficiency of the business.

Margins and free cash flow will be a big factor going forward, and investors should be aware that small fluctuations will cause big changes in a company’s market capitalization.

Amazon has increased its workforce by 8.6 times since 2015 and employs more than 1.3 million people. Their dedication to consumers helps multiple stakeholders and makes the company attractive to investors.

But at the end of the day, every business can contain risks that exist off the balance sheet. To this end, you should inquire about the 2 warning signs we spotted with Amazon.com (including 1 that shouldn’t be ignored).

At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.

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Simply Wall St analyst Goran Damchevski and Simply Wall St have no positions in any of the companies mentioned. This article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material.
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