5% Downside for Amazon if Spending Spree Continues

+13.47%
Upside
180
Market
205
Trefis
AMZN: Amazon logo
AMZN
Amazon

In its second-quarter earnings report, Amazon (NASDAQ:AMZN) reports a significant increase in capital expenditure (capex), for the first six months of 2010, from 1.5% of revenues to 3%.

The spending increases were driven primarily by the cost of new fulfillment centers to support retail and third-party seller operations, along with additional investments in data centers to improve Amazon’s cloud computing service. These initiatives suggest that Amazon will continue to incur high expenses for the whole of 2010.

If  capex spending continues to increase at recent rates we forecast a potential 5% downside to the $107 Trefis price estimate for Amazon stock. Our analysis follows below.

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The spending story

Amazon’s capex spend grew from $140 million in the first quarter of 2010 to $196 million in the second quarter. The company plans to spend more than $300 million in the third quarter. For 2010, Amazon’s capex is predicted to total 3% of revenue.

If  capex spending continues to increase at current rates, it will reach 6%  of Amazon’s total revenue by 2016, the end of the Trefis forecast period. You can drag the trend-line in the chart below to create your own capex estimate for Amazon and see how it impacts the company’s stock price.

Factors driving the spending increase include:

1.  Fulfilment center boom: Amazon stores the inventory of third-party sellers in its fulfillment centers. When customers place orders, Amazon packs the products and ships them to customers on the merchants’ behalf. Amazon charges sellers a fee for this service. Amazon currently has around 40 fulfillment centers and plans to open 13 more by the end of 2010.

2.  The hungry cloud: Amazon’s clients can deploy software applications over the Internet using the company’s cloud infrastructure service. Although Amazon’s cloud and web services revenues have been growing rapidly, it must keep spending on data centers in order to maintain a competitive service.

You can see the complete $107 Trefis Price estimate for Amazon’s stock here.