Amazon Annual Report Analysis: Ask The Disruptor

Amazon Annual Report Analysis: Cash Flow Show us where the largest money go
Where The Money Go. source: Amazon Annual Report for FY 2020

Amazon has a reputation as the most disruptor company in history – it transforms bookstore, retailer, cloud computing. Now telemedicine is on its prey list. When we compose the Amazon Annual Report analysis, we little bit surprised that its largest cash spending isn’t for its business expansion.

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In This Issue

  1. The 70 Billion, Predator’s Weapon
  2. The 2 Billion, Efficient Acquisition
  3. The 40 Billion: Sophisticated Warehouse
  4. Buyback and Dividend
  5. Investor Key Takeaway

Amazon Annual Report Analysis: Predator Weapon, The Dry Powder

As the largest spender of Research and Development on this planet – Amazon is fully armed to disrupt anything it wants. Jeff Bezos-led company has the largest access to million Prime subscribers and supported by cloud computing technology. Looking back to its history, none won’t be surprised when Amazon takes another business line and dethrone the incumbent.

None doubt Amazon’s capability in this game.

But, its cash flow statement tells a little bit different story – at least in our version. According to its annual report for FY 2020, the most cash goes to short-term investments like bonds or stock – as you can see in the figure in the opening of the article. The cash spent for short-term investment is more than 72 B, far exceeding the budget for CAPEX with 40 Billion.

This trend has begun in 2019. The largest retailer spends its 31.8 Billion cash for buying bonds and stock but “only” 16.8 Billion goes to CAPEX. There are several ways to interpret this condition.

Where The Money Go. source: Amazon Annual Report for FY 2019

The first is – by looking also at its cash inflow – Amazon doing this for preserving its cash. In 2020, Amazon got 50 Billion cash from its sale of short term investment and spend 70 Billion on the same things. In comparison, Amazon got 66 Billion cash from its business and spend 40 Billion on CAPEX. In other words, Amazon is piling up the cash.

And as you guess, the motivation for holding this amount of cash is to make a cushion against uncertainty and to prepare for the right acquisition – if any. It is a little bit defensive for Amazon, but it is powerful. Once opportunity knock, Amazon needs no external resource to fund it. And FYI, the largest acquisition by Amazon is Whole Foods – worth 13.7 Billion. 70 Billion that Amazon hold makes it easy.

Screenshot of Amazon annual report 2020, Cash Flow section.

Amazon Annual Report Analysis: Smart Acquisition

Another interesting point is, how small its acquisition outflow compared with the rest. In our perspective, this is good news since Amazon doesn’t need to spend more to expand its business.

In 2020, Amazon acquired Zoox, a self-driving vehicle company for just 1.3 Billion. For us, it isn’t a trivial acquisition. One of the largest cost components for Amazon is its logistics and shipping, according to Morgan Stanley, it could exceed 90 Billion per year in the near future. By having its own auto-delivery, Amazon could rid its human cost. Interesting to note that, if this plan works, Amazon will have three business components that operate automatically – (or semi): Cloud computing, RObotics in the warehouse, and auto-delivery. The best case is it will cement Amazon’s competitive advantage in the retail business for so long.

Another acquisition is Cloudendure, a disaster management company that specializes handle cloud service. This will boost the reliability and security of AWS. Cloudendure is acquired in 2019 for just 250 Million.

Despite all of the brilliance, not all Amazon acquisitions become key components of its business. The acquisition of Scout is cool, but we doubt it will be part of Amazon’s success in the future. Another not cost-efficient acquisition is Whole food, it is too expensive and Amazon seems doesn’t care about it today – Whole Food is underdeveloped under Amazon, just like LinkedIn for Microsoft.

Amazon Annual Report Analysis: Efficient Capital Expenditure

Amazon’s competitive advantage is its digital-physical network. Digital, Amazon has access to millions of customers and supported by advanced cloud technology. Physical, Amazon has a network of fulfillment and distribution centers with the most sophisticated technology: robotics – efficient sorting machine. This digital-physical duo combination allows Amazon to deliver a great shopping experience for customers: convenience at its e-commerce, quick delivery, good value for money membership.

In 2020, Amazon spend 40 Billion to capitalize on this strength. Digging deeper, some of us may be surprised knowing that Amazon has no its own fulfillment center – they rent. Last year, this 40 Billion goes for rent cost, human investment, and mostly for building facilities. The detail is in the figure below.

In our Amazon Annual Report Analysis, we find that the retailer spends a large amount of money to expand its fulfillment centers
Amazon expansion in 2020

Dividend and Buyback Policy

Glad you ask. We don’t find dividend and stock buyback in its 2020 Annual report.

Amazon doesn’t pay dividends and stock repurchasing seems not a priority for Bezos. The last time Amazon buyback its share is in 2012, almost ten years ago. Though shareholders don’t mind – and we too, by compiling this Amazon Annual Report Analysis we know that the retailer is in its hyper-growth phase.

Yet, it is questionable for us that the piling cash play by Amazon doesn’t end up with buyback in March 2020, when the stocks around the world hit by the coronavirus effect. Apple, for instance, spends around 70 Billion on buyback programs in 2020 – this number could be capped by Amazon if they want. Thus, it is not overthinking if we feel that Bezos sees something big in the future, something Whole Food – like acquisition that comes once in a life. And we are enthusiasts to hear that (hopefully it doesn’t turn flop).

Key Takeaway

  1. Following the money, connecting the dot that backed up by historical data gives us a picture that Amazon has an efficient strategy. They are in expansion mode, building their superior channel: cloud infrastructure and warehouse with advanced technology supporting their e-commerce business.
  2. We don’t mind they hold the cash, they retain the earning, – as long as they keep growing. With regard to this, we encourage readers to visit our income analysis of Amazon.
  3. We may think that if Amazon begins to pay a dividend, it means that the growth is decelerating, keep growing, but with slower speed.
  4. Further, we didn’t see (doesn’t mean it not happen) that Amazon spends a lot for its telemedicine ambition. So we don’t need to make this hype.

Have a great investing.