Looks like amazons growth is slowing down and trying to grab valuation with its cloud offering. Aivars Lode avantce
Amazon’s Attention Deficit and Spending Spree
High Investment Spending Is Likely to Last
Amid its meteoric rise, Amazon.com hasn’t exactly showered attention on one key constituency: its shareholders. Suddenly, though, that reticence appears to be lifting.
Amazon is meeting this week with East Coast investors. This alone is notable, considering the company’s previously rather sparse involvement in such activities. It also follows January’s announcement that the company would begin to disclose some financial details for its Amazon Web Services business, while also saying it had spent $1.3 billion on streaming-video licenses.
Why this seemingly unprecedented level of hand-holding? One possible answer: Slowing top-line growth and its effect on Amazon’s valuation. The stock fell 22% last year—making it one of the worst performers among large-cap technology companies—at a time when Amazon is expanding rapidly and relying on its shares to lure talented employees.
The charm offensive seems to be working. Amazon’s share price has rallied more than 20% since the beginning of 2015, regaining last year’s lost ground.
Much of this seems to relate to the promise of new disclosures surrounding AWS, which has given Amazon a strong lead in the rapidly growing market for enterprise cloud computing services. According to one investor with a representative present, AWS featured prominently in a meeting with investors in New York on Monday. RBC Capital Markets estimates Amazon’s market share of the public cloud category at about 64%.
But it remains unclear exactly what Amazon will disclose about AWS when the time comes. And with the stock nearly back to its record highs, the risk is also mounting that the actual numbers could be a disappointment, or shed little additional light on the business.
To date, investors have used Amazon’s “other” segment in its financial reports as a proxy for AWS. That segment had revenue of $5.6 billion in 2014, up 42% from the previous year. That is the company’s fastest-growing category by far but the retail business still dwarfs it.
Amazon also hasn’t typically disclosed the profitability of its various segments. But it seems clear that cloud services isn’t a cheap business. Microsoft,Google and International Business Machinesare pushing hard to grow in this area and have the necessary cash flow to stoke an expensive spending race with the e-commerce giant.
Amazon’s capital expenditure last year of $4.9 billion looks low compared with Google’s $11 billion. But investors shouldn’t ignore another $4 billion of investment by Amazon under capital leases. As Robert Peck of SunTrust points out, simple measures of free cash flow don’t always capture outflows associated with capital lease payments, so investors may be missing the underlying capital intensity of Amazon’s business.
So Amazon’s shareholders will ultimately have to weigh the value of the company’s leading position in the cloud against the costs of staying there. Mr. Peck estimates the company will have to spend an additional $35 billion over the next five years to support its fulfillment infrastructure and AWS.
Investors spent last year worrying about Amazon’s big-spending ways. The company’s recent outreach doesn’t mean it plans to break that habit.
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