After rebounding over 20% to start 2023, Amazon (AMZN 0.81%) stock sold off following mixed results from its fourth-quarter earnings report. The company beat analysts' estimates on revenue, but profits came in below expectations.
Slowing revenue growth put more focus on the bottom line, where higher spending on retail infrastructure and technology caused a whopping $18 billion operating loss last year. Does this mean Amazon is overspending in this weakened consumer spending environment?
Amazon spends more to get more
Amazon's capital expenditures, which primarily go toward expanding its retail and cloud services businesses, more than doubled over the last three years, which erased Amazon's profits during 2020 and 2021.
In 2021, Amazon reported a net profit of $33 billion on $469 billion in revenue. But higher operating expenses last year to support fulfillment services in retail, technology, content, and marketing wiped out those profits.
AMZN Net Income (TTM) data by YCharts
Investors new to following Amazon may wonder where the value is in a company that sees its profits perform this erratically. The one thing going for Amazon is its long record of generating outstanding returns on incremental increases in capital expenditures.
From 2012 to 2022, Amazon's capital expenditures increased from less than $4 billion to nearly $64 billion. These expenditures drove an incremental increase in revenue of $452 billion. In other words, Amazon generated $7.56 of additional revenue for every dollar spent on fixed assets, including fulfillment centers, data centers, and technology.
It's Amazon's ability to generate high returns on incremental capital that has delivered phenomenal returns to shareholders over the last 10 years.
Consistency wins
It's easier to appreciate Amazon's business when you look at how similar its communication with investors is today compared to 10 years ago.
In the 2012 annual report, the company said it spent $3.8 billion on capital expenditures that year, including "additional investments in support of continued business growth due to investments in technology infrastructure, including [Amazon Web Services], and additional capacity to support our fulfillment."
Here's how that compares with the language in the 2022 report:
Cash capital expenditures were $55.4 billion, and $58.3 billion in 2021 and 2022, which primarily reflect investments in technology infrastructure (the majority of which is to support AWS business growth) and in additional capacity to support our fulfillment network. We expect to continue these investments over time, with increased spending on technology infrastructure.
Not much has changed in Amazon's capital allocation strategy -- only the stock price is much cheaper than it was a year ago.
Data by YCharts
Greatness in any endeavor comes from consistently doing one thing very well. Amazon has a very focused corporate culture, and it continues to follow the same growth strategy with CEO Andy Jassy, the former head of Amazon Web Services who took over for founder Jeff Bezos in 2021.
These qualities explain how Amazon built such a wide competitive moat and why it now has the world's most valuable brand, according to Brand Finance.
Investing in the future
E-commerce is forecast to grow from $5.5 trillion in 2022 to $7.4 trillion by 2025, according to eMarketer. With so much opportunity around the world, investors should expect Amazon to continue delivering returns on its investments as before.
Amazon's spending is not out of control. It's still following the same course Bezos laid out more than 20 years ago. In his 1997 letter to shareholders, Bezos said, "We have invested and will continue to invest aggressively to expand and leverage our customer base, brand, and infrastructure as we move to establish an enduring franchise."
It's all about the long term. With literally trillions of new dollars yet to shift over to e-commerce, the market sell-off would be a great time to start an investment in Amazon.
Editors note: The spelling of Amazon CEO Andy Jassy's name has been corrected in this article.
