's Investment In Fulfillment Can't Be Much Slower

Dec.19.12 | About:, Inc. (AMZN)

Yesterday's news regarding (NASDAQ:AMZN) was dominated by RBC Capital's raising of its price target from $250 to $300. As always, this was motivated by the impeding slowdown in's investment cycle and its imminent return to profitability. Such has been the case with most upgrades in the last 2 years, as's EPS plunged all the way from $2.50 to zero.

The question here, however, is: Can really slow down the investment in fulfillment centers? As it turns out, it can't. Not if it wants to keep on growing revenues at a pace that's consistent with the consensus revenue estimates. Let me show you why.

I've gone through's 10-K's since 2004 and put together a table. This table shows's square footage of all its facilities, its revenues, its revenues per square foot and the increase in the square footage. The numbers for 2012 and 2013 are estimates. The table looks like this:

Click to enlarge

So what do we see here? We see that except for 2005 and 2006, where the square footage got well ahead of revenues, leading to a low revenue/sqf ratio,'s revenues per sqf have been rather stable within a narrow $936-$1206 range. So contrary to what happened during 2005 and 2006, where square footage got so ahead of revenues that could slow down investment for most of the next 4 years, now can't take the foot off the accelerator for long if it's to keep with the consensus revenue estimates.

Indeed, by considering a $1000 per sqf revenue, which is close to the historical average ($986) for, one can see that the implied square footage added during 2013 would be similar to what was added during 2011.

What we conclude from this exercise is that's huge investment cycle is doing nothing more than keeping up with its physical growth. It's not getting ahead of it meaningfully so there's no reason to expect a lull in the investment. Besides, most of this investment in fulfillment centers is outside the balance sheet, it's being done by third parties and is picking up the tab through operating leases.

Conclusion leads brokers from myth to myth in trying to justify the unjustifiable. Many of the theories that get advanced have no bearing in reality. That's investment in fulfillment centers can slow down a lot while keeping up with the revenue consensus estimates is yet another one of those myths.

The only reality is that is trading at 148 times forward 2013 fast-falling estimates and 3100 times TTM, realized, earnings. This while facing a huge number of different threats, from a change in how digital goods are sold (through apps and OS-integrated stores), to the collection of sales taxes, to the increased cost of delivery. basically carries the highest valuation among all the large capitalization stocks, while also having one of the worst earnings records among all those stocks. is a sell.

Disclosure: I am short AMZN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.