Amazon
Shows Potential Revenue Growth, But It May Not be Enough
Amazon raised all of its expenses to
innovate, expand, and satisfy international countries and its current Prime subscribers
while gaining revenue.
Amazon’s cost of goods sold is the largest portion of
its expenditure, but its operating expenses are rising at a faster rate.
By:
Brandon Peng
Date: March 23, 2015
Amazon reported a net loss of $241 billion and operating
expense rose 20.5 percent for year 2014, yet it continued raising its capital spending;
analysts switched to “hold” position.
For more than six years, Amazon’s annual operating
expense kept on rising, from $3.4 billion in 2008 to $26.1 billion from 2014. Because
Amazon never paid dividends, most of its earnings were reinvested on
improvements instead of paying it to its shareholders. Amazon’s Chief Financial
Officer Tom
Szkutak said it’ll continue spending more on developing new products, building more
fulfillment centers and improving customer service.
Analyzing its operating expense, Amazon constructed over
15 fulfillment centers, equipped with 15,000 robots to U.S. centers, vision
systems and developed software. For spending on these improvements, technology
and content expense rose to $9.3 billion, up 41.3 percent. It also included
cost to improving Amazon Web Service: Amazon’s online service that assisted in
managing database for clients with cloud. New software such as Amazon Aurora,
AWS Lambda, and Amazon WorkMail were integrated to serve over one million
active users.
In its online retail side, fulfillment expense rose to
$10.8 billion, up 25.4 percent: the cost spent on fulfilling orders for outside
sellers’ products using Amazon platform, operating fulfillment centers and
expanding fulfillment capacity. With its higher annual Prime membership fee to
$99 from $20 on March 2014, fulfillment expense included cost to innovate its products/services
to over 40 million Prime subscribers, such as its new one-hour delivery and
Prime photo.
Despite Amazon adding more equipment, Morningstar Director
of Equity Research R.J. Hottovy is concerned about Amazon’s volatile spending
pattern; it could lead to poor decisions in capital allocation, despite its
potential growth. Products fulfilled by Amazon sold were up 50 percent and
revenue was up 42.5 percent to $29.3 billion in the last quarter. However, the $170
million spent on Amazon’s new Fire Phone and 2014’s net loss made Hottovy
questioned Amazon’s priority in its long-term investment strategy.
Along with Amazon’s questionable expense allocation, JPMorgan
Internet Analyst Doug Anmuth said he was concerned about Amazon not making enough
net profit in 2015. With Amazon following its plan, Anmuth sided with a “hold”
position on Amazon’s stock. “We think Amazon remains a share gain story in media
and electronic gaming monthly. However, we expect continued investments in
international, AWS, and content to negatively impact near-term profitability.”
said Anmuth.
Amazon still didn’t post the release date of its 2015
first quarter earnings report. About two months after releasing its annual
earnings report, Amazon’s stock price opened at $378.89 compared to its $354.53
closing price on Jan. 30.
