Amazon Continues to Invest Heavily to Grow Top Line

By Trefis Team,

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Amazon ( AMZN ) recently announced its Q4 2010 earnings in which it indicated that it will continue to invest more to support the company's fast revenue growth. Amazon achieved year-over-year revenue  growth of 40% in 2010 over 2009 to around $34 billion, and has grown faster than its competitors eBay ( EBAY ), Wal-Mart ( WMT ), Costco ( COST ) and Best Buy ( BBY ) in the overall retail market.

However, in achieving this growth, its operating margins declined from around 5.3% in 2009 to 4.7% in 2010, and its capital expenditures (capex) grew by more than 300%. Here we analyze the various investments that Amazon is making in order to boost its top line growth. Our price estimate for Amazon stock stands at $181 .

Amazon's Capital Expenditures on the Rise

The company's capex grew from around $373 million in 2009 to $979 million in 2010. As a percentage of revenues, capex increased from 1.5% in 2009 to 2.9% in 2010, and we expect it to continue to remain at that level throughout our forecast period.

See our full analysis and $181 price estimate for Amazon

According to Amazon management, the company had approximately 52 fulfillment centers at the end of 2010, of which it added 13 in 2010 alone. Amazon's fulfillment program is designed to benefit third-party sellers.  Sellers send their inventory directly to Amazon, which keeps these inventories in fulfillment centers.

The company is also adding plenty of infrastructure capacity (data centers and servers) to support its fast growing cloud and web services business. Amazon's cloud business has grown rapidly from $650 million in 2009 to around $1 billion in 2010 .

Amazon's Margins on the Decline

Amazon's fulfillment program involves handling of the storage, packing and shipping of products that third-party sellers send to Amazon. In addition to this, Amazon also provides customer service and return programs. Though attractive to the sellers, the fulfillment program is more expensive for Amazon, and the program's growing popularity could further affect the company's margins. Other programs like Amazon Prime (a free shipping program) and Subscribe & Save (offers discounts to regular shoppers) are also meant to attract more customers, but are dilutive to its margins. For example, the company's media (books, DVDs and music) business' margins declined from 6.1% in 2009 to 4.8% in 2010.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas , Stocks , US Markets
Referenced Stocks: AMZN , BBY , COST , EBAY , WMT

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