Concerns about over-spending at Amazon to attract customers have been around for a while. Table A shows how Wall Street sentiment and share price performance recovered briskly from the 2002 trough, but then stagnated as the spending worry hit.
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Yet there's some hint that the tide is starting to change. On Nov. 21, Amazon closed at 42.54 while the average analyst rating improved modestly to 3.00.
Perhaps the less-downbeat rating is just a short-term trend. Or perhaps we're seeing re-assessment of the spending at Amazon.
Table B shows that's technology & content [T&C] spending has, indeed, grown briskly. As a percent of sales, however, it's still below levels seen earlier in the decade.
A case could be made that the current level of spending isn't really all that high. Maybe the levels we saw in 2003-2005 were aberrantly low considering the still-young status of e-commerce. Note that in 2005, research and development expense for Google Inc. (NASDAQ:GOOG), the equivalent of T&C at Amazon, amounted to 7.88 percent of sales.
To assess the extent to which Amazon has been able to cash in on the platform it's been building, Table C shows the trends in sales and the retailing margin - this is a metric we derive by taking the retailing profit, which we define as sales minus cost of sales, fulfillment expense, marketing expense and general/administrative expenses and dividing the number by sales.
The table suggests two things. First, Amazon has been monetizing the platform it built. Second, the stagnation in margin progress we've seen in recent periods corresponds to the falloff in T&C as a percent of sales, raising a question of whether shareholders should be bothered about Amazon boosting outlays. Perhaps it wasn't such a good idea to have eased on the throttle in 2002.
Table D shows the ratio of retail profit [as we defined it] to investment. It's not as pure a measure of overall corporate performance as conventional return on investment based on net income. But by eliminating corporate items such as tax rates, interest expense, stock compensation expense and so forth, we get a clearer view of the extent to which investments in platform have paid off.
Note, too, that over the four most recent quarters, Amazon's return on investment, calculated by conventional methods, was 20.70 percent, well above the 12.85 percent and 12.30 percent levels achieved by specialty retailers in general and the S&P 500 respectively.
It does appear that Amazon got its money's worth out of the early spending spree, and, arguably, may have felt some consequences for having spent less aggressively since 2002.
Still, it's too early to say whether current projects will similarly pan out. Video downloading product Unbox has not been well received. That may have more to do with external constraints faced by Amazon, notably, usage restrictions imposed on the content by the production studios that own the intellectual property. It may turn out that Amazon's present spending blitz is something it really must do now to plant as strong a stake in the download ground as it can given contemporary constraints. Only time will tell. In any case, it's clear why holiday-season shopping trends are a back-seat issue for Amazon.
(Click here for a comparison between Amazon and other e-tailers.)
At the time of publication, Marc H. Gerstein did own not shares of any of the aforementioned companies. He may be an owner, albeit indirectly, as an investor in a mutual fund or an Exchange Traded Fund.
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