For over a decade, I have been tracking and analyzing every metric Amazon.com (“AMZN”) reports.  Supply chain competitors have to follow AMZN and WMT to understand the shifts that are occurring in the industry.

When other companies complain about their P/E relative to Amazon.com’s, highlight the need to review AMZN’s free cash flow.  Reviewing the prior 20 years of metrics, showcases the level of capex investment that AMZN has deployed (>$55B) to scale the fulfillment and AWS businesses.  Additionally, the investment in working capital was reduced as AMZN shifted to include fulfillment by Amazon (“FBA”).

The primary drivers of recent growth have been the International Segment, Prime membership growth, and the continued AWS strength.  I estimate AMZN’s Prime membership revenue will be ~$13.4B in FY18.  A massive high margin business (caution to Costco and SAM).

4Q’17 operating margin may be close to 3.8%.  While this seems low, the amount of fulfillment center capacity AMZN added in 2016 will be leveraged in FY18 and FY19.

There are interesting themes that will challenge the AMZN valuation and require management attention:

  • While making up a ~16% of the FY18 sales mix, I estimate AWS and Prime comprise 84% of AMZN’s pro-forma margin and the majority of the free cash flow.  I estimate AMZN will have ~90 million Prime members by FY18 year end (generating ~$13.4B in revenue). The profitability drivers are Prime and AWS. There are Prime members in 187 countries.  There are only 195 countries in the world!

AMZN operating income

Estimate of prime operating income

  • Unit Growth: I estimate that AMZN will ship >8.3B orders in FY18, or ~19.7 B units.
    • Basket size (~$31 per order)
    • Average order includes ~2.3 product units
    • ~50% of the orders are 3rd party sellers utilizing FBA (~31% of the units).  No inventory holding costs.

AMZN shipped units

  • AMZN’s shipping cost is underestimated and a challenge.  It is likely a major concern of Amazon.com.  AMZN does not report the above estimated units shipped.  Fulfillment by Amazon (“FBA”) is meant to decrease the shipping costs and eliminate inventory holding costs.
    • The per unit costs are below.
    • This area will see improvement as the fulfillment center utilization improves.

AMZN fulfillment costs for Mark Konyndyk

 

  • Fulfillment Centers have grown at an astonishing rate.  AMZN had 146 FCs at the end of FY16.  On average each FC is ~1.2M sq. foot.  The total footprint of these xxx FCs is approximately 6 Sq. Miles.  This is ~2,800 football fields.  Each day each fulfillment center will ship approximately 200K units.

AMZN fulfillment centers