It is almost Christmas time, so I thought it would be fitting to choose Amazon as this weeks Capital Allocation snapshot. Pretty much everyone knows Amazon’s retail store side of the company, but less people may aware that Amazon makes much of the profits from their cloud computing segment. Amazon is currently trading around a $1.5 trillion market cap, making it one of the largest valued companies. In this post I will take a look at how much cash flow Amazon produces, and see where they are allocating this capital.
Cash Flow Summary
Before getting into how Amazon allocates capital, we have to look at how much cash the business generates. Amazon’s cash from operations has generally increased over the last five years, however not in a straight line. Cash flow steadily increased in 2018 and 2019. Then in 2020 cash flow increased by over 70%. The last two years saw cash from operations droop back down $46B, and there has been little growth.
Amazon’s large increase in cash from operations in 2020 is obviously from the COVID spending splurge. Also I do find it interesting that growth slowed in 2022, and I wonder how 2023 will turn out.
Cash from Investing
The first line item in Amazon’s cash from investing is their capital expenditures. The company spent around $15B in 2018 and 2019. Then capex spend dramatically increased in 2020 to $40B. The last two years saw another large increase in capex spend, coming in over $60B a year.
In 2018-19, AMZN capex was a bit less than 50% of their cash from operations. The large increase in capex lately has put this ratio over 100%. At first glance, it would seem like tech company like Amazon would not be very capital intensive. However, they are investing a lot in computer and networking infrastructure for their cloud computing services. Additionally, Amazon has been massively scaling up their shipping and distribution capabilities.
I would venture to guess that capex spend that goes towards cloud computing would generate an attractive return on investment for Amazon. As far as the transportation and logistics business goes, typically these are not known for generating high returns. Amazon would say these investments are needed because their competitive advantage is quick shipping. However, it is still possible these perceived benefits do not pan out, mean Amazon allocating their capital to this area could be a bad idea.
Next, turning to Amazon’s acquisitions we see that for the first four years of our analysis they spend about $2B a year acquiring companies. Last year, AMZN was busier buying companies, spending $8B. In most years these acquisitions amount to around 5% of Amazon’s cash from operations, and minuscule to Amazon’s $1.5 trillion market capitalization.
Lastly, Amazon is active in buying and selling marketable securities. From 2019 through 2021, the company on net bought bonds. Then last year, Amazon sold more bonds than they bought, raising $29B in cash. Amazon has about 10% of its assets in bonds, which is not even counting their cash balance. These bonds produce low yields, so it would be optimal if this capital was directed towards high returning investments within the business, or returned to shareholders.
Cash from Financing
During the first two years of the analysis, Amazon’s debt balance did not change much. Since then, debt issuance has grown from $9.5B to almost $24B. To put these debt figures in context, Amazon’s debt to equity ratio is 0.46, and their debt to EBITDA ratio is 1.7. Both of these figures are fairly low, indicating that Amazon is pretty conservative when it comes to debt.
Lastly, we have Amazon’s shareholder returns. This section is pretty light because Amazon does not pay a dividend, and only bought back shares in 2022. The buyback amounted to $6B, which is about 13% of Amazon’s cash from operations. Given the lack of buybacks and dividends over the years, it is clear that Amazon is focusing on investing profits back into its business instead of returning the cash to shareholders.
Conclusion
Amazon has grown their cash from operations over the last five years, with an extra boost during 2020. The company is light on acquisitions, pays no dividends, and has barely done any share buybacks. The main capital allocation knob Amazon is turning is the large capex spend. Amazon’s capex spend in 2018 and 2019 was high compared to their cash flow, but still mild compared to the capital expenditures the last few years. This ramp up in capital expenditures probably indicates it is for growth, not maintenance of existing equipment and facilities. Investments in cloud computing and logistics can be a good capital allocation move if they provide high returns. However, I would need to do more research into their logistics business because I am pessimistic that these investments can provide a return higher than Amazon’s cost of capital.