It is becoming obvious that both suppliers and sellers are becoming irritated with Amazon's (NASDAQ:AMZN) rate increases and strong arming on payable terms. A recent lawsuit filed in Washington state by Amazon marketplace sellers highlights the issues Amazon is having. This will prove to be a troubling trend for Amazon, as they have depended on the cash generated by timing of payments to fully fund operations. Over the past five years Amazon has generated a combined $9.3 billion in Free Cash Flow (Operating Cash Flow less Capital Expenditures). During that same time frame Cash Flow from payment timing (Payables plus Accrued Expenses less Receivables) has been $10.7 billion. This means that since 2008, Amazon has generated $10.7 billion through its "banking" business, and lost $1.4 billion selling products and services.
Amazon has steadily increased its Accounts Payable to 76 days in 2012 from 62 days in 2008. Compare this to 39 days for Walmart (NYSE:WMT) and 27 days for eBay (NASDAQ:EBAY). 76 days is an extremely large number and while impressive, it is most likely not sustainable based on the complaints it is receiving from its sellers. The Risk section of Amazon's 10K sites "shorter payable and longer receivable cycles and the resultant negative impact on cash flow" as a major risk. This article by Alistair Barr describes how the competitive pressures from marketplaces at eBay, Walmart and Google (NASDAQ:GOOG) will make it easier for sellers to switch over and leave Amazon. Amazon's success has been based on revenue growth driven through great customer service, low prices and broad product selection. The broad product selection has expanded due to third party sellers (3P) now representing 40% of Amazon volume. A reduction in 3P activity will certainly slow Amazon revenue growth, and therefore I believe they will need to reduce Accounts Payable days and seller fees to a more competitive level.
Figure 1: Amazon Cash Flow from Payments Timing
Accrued Expenses include cash received from gift cards not yet spent (plus unrealized AWS and Prime revenue). Accrued expenses basically provide cash today on future revenue. A small move back to 60 days of Accounts Payable for 2013 would cost Amazon more than $3 billion in Cash Flow during the year and place both their balance sheet and net cash in a weak position.
Not all Cash Flow is created equal. When company operations struggle to generate the cash needed to support growth, companies typically move to generate cash through squeezing suppliers and pushing programs such as gift cards and Amazon Prime. Amazon has been very aggressive on both fronts, but it appears that these actions are coming home to roost, as the critical 3P partner sellers are beginning to complain in large numbers and may initiate an exodus to Amazon's competitors. If Amazon cannot continue to generate large amounts of cash through its "banking" operation, growth will need to be funded through additional financing activity such as more debt or a secondary security offering. Either of these actions would undoubtedly place significant pressure on a stock priced for perfection.