Amazon’s Margins: When Will They Improve?

Amazon (NASDAQ:AMZN) has a history of treading on wafer-thin margins, but it seems that in 2011, investor patience was tested to the limit. Adjusted EBITDA margins fell from around 7% in 2010 to around 5.2% in 2011. ^[1] While the stock suffered quite unsurprisingly, the big question is whether the company intends to put a brake on costs anytime soon. Amazon competes in the e-commerce and e-content space with companies like eBay (NASDAQ:EBAY) and Apple (NASDAQ:AAPL).

See our full analysis for Amazon’s stock here

Technology and Content Costs Might See a Decline

Source: Amazon's Quarterly Earnings

The main spikes in expenses for 2011 have clearly been fulfillment and technology & content. The fulfillment  increase has come about as Amazon invested heavily in setting up more warehouses, as well as to support the Amazon Prime feature, which guarantees free shipping within 2 days. Technology related costs have shown an expected increase as the company invested heavily in the Kindle Fire tablet, as well as by acquiring more content from publishers.

For the near-term, it is unlikely that fulfillment costs will show a significant decline since more Amazon Prime subscribers (which Amazon wants) means additional pressures to deliver products on time, and hence a bigger need for further storage centers. Technology & content costs however have shown a decline from around 6% to 4% of net sales from Q3-Q4 2011. This might be an indication that Amazon is easing on product development as the Kindle Fire reaps the desired media consumption. Having said that, CEO Jeff Bezos has usually prioritized a long-term growth vision for Amazon, which means that the company could continue investing heavily on Kindle Fire upgrades as well as content partnerships like it did in 2011. If that happens, one can expect margins to stay worryingly low.

We have a revised price estimate of $205 for Amazon’s stock. The updated price has been formulated based on the change in our forecasts for Amazon’s revenue and margins as well a change in the company’s net cash/debt position.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Amazon.com Announces Fourth Quarter Sales up 35% to $17.43 billion; Kindle Device Sales Nearly Triple During the Holidays, Amazon Press Releases, 31st Jan 2012 [↩]