) 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
), Wal-Mart (
), Costco (
) and Best Buy (
) 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
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
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
$650 million in 2009 to around $1 billion in
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.