“If you’d invested $1,000 during Amazon’s IPO in May 1997, your investment would be worth $1,362,000 in 2018” according to CNBC.
Today, Amazon is a $1.5 trillion company, yet it hasn’t paid any dividends.
The Online Marketplace Dominator
Amazon (Ticker: AMZN) started selling books online. Today, it dominates online retail, and is considered the largest internet company by sales. It sold over $360 billion worth of gross merchandise value, or simply physical and digital products. Customers can shop on Amazon for almost anything, all using their smartphones or computers.
I’m not surprised here. Amazon sales growth is massive, rising at 26% per year since 2010. It hit record $280 billion of sales, up from $34 billion in 2010. While sales is almost half of Walmart’s (Ticker:WMT), Amazon’s market cap is already 3X of Walmart. And Amazon doesn’t just sells to the US market, but 26% of its sales come from international customers.
But sales doesn’t always mean it’s making a profit.
Despite its meteoric rise, Amazon only achieved its first annual profits in 2003, making a tiny $35 million on $5.3 billion of sales. Even then, it still records losses every few years.
Though Amazon carries thin net profit margins — averaging 1% to 4% over the past 10 years, it has improved to around 5% in 2018 and 2019.
Growing at the quickest pace may not mean there’s a sustainable profit.
“Obsess Over Customers”
What made Amazon grow so fast is this — it simply pays attention to its customers.
In his letters to shareholders in 1997, Jeff Bezos made it the first point of his investment philosophy: “we will continue to focus relentlessly on our customers.”
And he continues to say: “From the beginning, our focus has been on offering our customer compelling value… We maintained a dogged focus on improving the shopping experience… word of mouth remains the most powerful customer acquisition tool we have…”
Not many retailers have this laser focus on their customers. But Amazon puts all its resources to make sure customer experience is perfect.
And Amazon continues to invest it in a big way.
Since day one, Amazon has walked the talk. It expanded its value proposition and operational efficiencies. Growing from its 285,000 sqft distribution centers, to fulfillment capabilities, to building its digital product and streaming library.
All these to keep its customers happy.
Today, Amazon boasts more than 530 million global active users. Amazon Prime has more than 170 million subscribers globally.
And that’s not all. Amazon employs 840,000 people to help run its operations. In 2019, it added another 175,000 people across its fulfillment and delivery network.
Focusing on customers meant having a highly efficient delivery system, meeting customer needs for free and quick shipping.
Where Did All That Cash Go?
Customer experience doesn’t stop there.
Amazon is spreading its tentacles across different industries, trying to create a “one-stop-shop” to meet customers’ essential buying needs.
In 2017, Amazon spent $14 billion on buying Whole Foods Market.
This huge acquisition pushed Amazon into the high-quality, organic good business. It also puts Amazon as a credible fresh food provider, tapping on Whole Foods suppliers and their physical stores.
Now, suppliers can also leverage on Amazon’s delivery network, cross-selling each other’s own products.
You know, it’s not just food. Amazon has also set its eye on the $3.5 trillion healthcare market.
It teamed up with Berkshire Hathaway and J.P. Morgan to form Haven, a vehicle to disrupt the broken US healthcare system.
Haven has started offering products and services to customers. Its recent launched Amazon Halo — a healthcare monitoring service, provides customers a way to track their health. From measuring body fats, to monitoring sleep, eating habits and physical activities.
Just last year, Amazon also bought over PillPack, a $753 million medication delivery business. But the jury is out whether Amazon can successfully break into the healthcare market.
Amazon is not messing around. Other than grocery and healthcare, it built a giant media platform to serve its Amazon Prime members. Making original content is costly, even more so to compete with other streaming giants including Apple, Hulu, Disney and Netflix.
The Future of Amazon Lies in its Crown Jewel
The crown jewel of Amazon is, of course, its fast growing Amazon Web Service (AWS), launched in 2006 as a cloud service provider.
Over the last 2 years, AWS grew 47% in 2018 and 37% in 2019, much quicker than its traditional segments. Even though it contributed only $34 billion sales in 2019, it’s the second most profitable business for Amazon.
While Amazon burnt cash trying to expand across many industries, AWS is the profit driver. AWS’s operating profit margins are around 28%, but it’s expected to rise up to 30% over the long term.
You see, global cloud computing is expected to double to more than $300 billion by 2021. In 2017, Amazon already dominated 34% of the cloud market, crushing Microsoft, Google and IBM. Gartner, a research firm estimates Amazon’s cloud computing capacity is 4X bigger than the next 14 cloud providers.
Since 2018, Amazon has added 800 new services and features on its platform.
Here’s the thing. As more companies shift toward AWS, the more data Amazon has to improve its AI capabilities. With the recent Covid-19, it’s also going to accelerate companies’ migration into cloud, providing “work from home” needs.
Again, this feeds back to its obsession over customers.
All these investment are highly capital intensive, and still requires Amazon to reinvest its cash flows back into the business.
Here’s Amazon’s Numbers So Far
While Amazon collected $38 billion of operating cash flow in 2019, it spent almost half of it reinvesting into the business. And this amount is going to go up.
Bezos recently announced it’s also spending $4 billion on Covid-19 related expenses — that’s an entire quarter profits for Amazon.
Even if sales have grown at the quickest pace, shareholders are not expected to see signs of a strong profit anytime soon.
Its $258 billion balance sheet is well-managed. There’s sufficient cash and liquid securities of $70 billion.
But with Amazon’s push into new markets, it still needs both its existing cash and future profits to expand its business.
Will Amazon Ever Pay a Dividend?
With that said, I think Amazon will eventually join the ranks of tech titans like Apple, Cisco and Microsoft which already pays dividends on their earnings.
In theory, Amazon could pay a dividend today.
Say it declares a 25% dividend payout ratio — from its 2019 $23 earnings per share, that’s $5.75 of dividends per share. Amazon has to pay a total of $3 billion of dividends. And that’s merely a 0.2% yield on current share price. I’m not concerned with a tiny dividend yield.
What’s more important is this — While its current free cash flow can cover a dividend distribution today, can it sustain this in the near term?
Looking back, its one thing to have razor thing margins. But its profits have also been very bouncy over the last 10 years, considering its heavy capex on growing its market presence across industries — Amazon is still finding its foot across the healthcare and media industries.
I believe it still needs a couple more years before Amazon decides to declare its first annual dividends.
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