This Friday, Amazon.com (AMZN)'s Jeff Bezos issued its annual letter to the shareholders. And it is a nice letter; after reading it I am thoroughly convinced to try out Kindle Direct Publishing (KDP) to publish a small market-related book and see how it goes. This I'll do when I find the inspiration. Plus, seeing as it's so appealing, I would expect that the traditional publishing businesses really are going to have a problem with this system.
Also covered in the letter, are the Amazon Web Services (AWS), receiving praise by a few customers, and Fulfillment by Amazon (FBA), also receiving praise and, together with the other two services, showing how efficient Amazon is. It's almost like Amazon is pulling a Google (GOOG) and having all these complex, innovative, services being self-service much like Google's AdWords or Adsense.
So why am I saying this marvelous letter is worrisome?
The letter is worrisome for what it doesn't say, and for what it doesn't cover. You see, the businesses covered by the letter are either rather marginal in size, or rather marginal in profits. The large $1.8 billion capex spending spree might have been prompted in part by AWS and FBA, but it's clearly not here that Amazon.com's bread is buttered.
And although these self-service products seem wondrously efficient, the reality is that Amazon had 56200 employees at 2011 year-end, from 33700 in 2010. A far-from-efficient growth of 22500 employees or 66.8%, well above the 40.6% revenue growth rate over the same timeframe.
So you have an entire letter that doesn't address the largest, most important segments the company acts in; it doesn't address the heavy investment; it doesn't address the supposed margin impact of that same investment. It simply tells you to read the 1997 letter (and, implicitly, pray that it all comes together down the road).
And this, in a shareholder letter, is worrisome. For it could tell a story, and it could hold a vision for the future - but should it completely ignore how the most important part of the business is doing, and not touch it in any way, when its been under heavy investment and margin pressure for two years? That doesn't bode well.
Before anyone says "the letters are always like that", I will preemptively say no, they aren't. The 2010 letter is close, talking mostly about technology but with a focus on the main business - but then again, 2010 was already a disappointment. The 2009 is filled with financial landmarks, because those were still worthy of mention. The 2008 worries itself with the economic situation and promises caution in spending. The 2007 letter was mostly on the Kindle, a pretty relevant device for the entire company. So a change occurred here, the letters have turned poetical and peripheral, just as the business saw huge margin pressure. This year's letter is thus probably a red flag.
Disclosure: I am short AMZN.