Summary
- Amazon pays no dividend and sports a $153 billion market cap.
- The company is innovating on many fronts, including the Fire phone and robotics.
- Investors must look at the balance sheet and cash flow statement to understand the advantages that a scalable business such as Amazon possesses.
The scope of this article is to quantify the competitive advantages of Amazon (NASDAQ:AMZN), explain certain growth initiatives and to look at the second quarter of 2014. To show the competitive advantage that AMZN has over competitors, I will utilize the cash conversion cycle.
The Second Quarter and Prior Years
Dollars in millions
|
FYE 12
|
FYE 13
|
Q2 2014
|
Employees (full time and part time;
excludes contractors and temps)
|
88,400
|
117,300
|
132,600
|
A/P Days
|
76
|
74
|
71
|
Property and equipment, net
|
$7,060
|
$10,949
|
$14,089
|
Cash and marketable securities
|
$11,448
|
$12,447
|
$7,986
|
Inventory turnover
|
9.3x
|
8.9x
|
9.1x
|
Return on invested capital
|
4%
|
13%
|
6%
|
Free cash flow (Operating cash flow less
purchase of Property)
|
$395
|
$2,031
|
$1,039 (NYSE:TTM)
|
Operating cash flow
|
$4,180
|
$5,475
|
$5,327
|
Investments and Initiatives
Amazon has invested in robotics, including the deployment of machines in its warehouses based on technology from its 2012 acquisition of Kiva Systems, as well as drone-based package delivery. The Amazon Web Services (AWS) cloud unit provides rentable information-technology resources to Amazon and developers worldwide.
AWS competes with rival products and services from Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and Microsoft (NASDAQ:MSFT), which have also identified cloud as a key growth area. The companies have cut prices for their cloud products this year in an effort to gain share, leading to slowing growth for AWS in Amazon's second quarter results.
The second quarter also saw the introduction of Sunday delivery coverage to 25% of the U.S. population and the launch of Amazon Prime Music with over one million songs. Amazon expanded Sunday delivery to 18 additional cities since launching in the Los Angeles and New York metro areas. Incredibly, Amazon Prime members, who receive unlimited two-day shipping on millions of items, can order as late as Friday and receive their packages on Sunday, for free.
The Fire Phone
Also in the second quarter, Amazon released the Fire phone to US customers. This includes software and extras including Firefly, Dynamic Perspective and one full year of Prime. The Fire phone is currently the only smartphone with Dynamic Perspective and Firefly.
Dynamic Perspective utilizes a sensor system to respond to the way customers hold, view and move Fire phone, enabling experiences not possible on other smartphones. Essentially, Dynamic Perspective runs algorithms that identify the X, Y and Z coordinates of the user's head, enabling a whole new class of apps and games. For example, Amazon could use this knowledge for future driverless car technology or role playing videogames.
Firefly quickly recognizes items in the real world, including web and email addresses, phone numbers, bar codes, movies, music and millions of products. The phone allows Fire users to research, price and purchase numerous products for sale on Amazon.
The Fire phone is available exclusively on AT&T (NYSE:T). The phone with 32GB is available for $199 with a two-year contract.
The Cash Conversion Cycle
The cash conversion cycle is the amount of time between a company spending cash and receiving cash per each sale. It is a measure of efficiency and how long cash is tied up in working capital. The metric is a great way to analyze the efficiency of the organization in managing cash to generate more sales.
Let's see how AMZN suppliers actually fund the growth of the company.
Six Months
ending6/30/14
|
FY 13
|
FY 12
|
$ in millions
|
$39,081
|
$74,452
|
$61,093
|
Sales
|
$4,125
|
$ 4,767
|
$3,817
|
A/R
|
19.3
|
23.4
|
22.8
|
(1) Days receivables {(Receivables/Sales)*365}
|
Six Months
|
FY 13
|
FY 12
| |
$ 38,175
|
$ 72,459
|
$59,425
|
Consolidated operating expenses
|
$ 6,644
|
$ 7,411
|
$6,031
|
Inventory
|
31.8
|
37.3
|
37.0
|
(2) Days inventory {(Inventory/Op. expenses)*365}
|
71.0
|
74.0
|
76.0
|
(3) Payable Days (from above chart)
|
(20.0)
|
(13.3)
|
(16.2)
|
Cash conversion cycle {1+2-3}
|
In 2013, AMZN held inventory for 37 days plus 23 days to collect receivables or 60 days in total. AMZN pays accounts payable in 74 days, thus achieving a negative cash conversion cycle. This metric strengthened in the first six months of 2014.
Conclusion
For AMZN, Accounts Payable is an unencumbered source of value, and it comes without any interest costs. AMZN can dictate terms to suppliers, and then invest the float in high return projects. Amazon needs very little capital to grow. Because AMZN's operations generate float, Amazon can simply move faster than its competitors.
Amazon is an incredible business with a high degree of scalability. A competitor such as Wal-Mart (NYSE:WMT) or Target (NYSE:TGT) must invest in new stores to significantly increase sales. I've analyzed Wal-Mart's cash conversion cycle in previous articles to understand the competitive dynamics of the retail industry.
Given the strong business model and focus on cash flow growth per share, the competitive advantage in converting sales into cash, I continue to believe in this company. I will accumulate this stock on further weakness. Amazon faces multiple risks in its business including intense competition from other websites that were not within the scope of this article.
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