Amazon generated $30 billion in cash last year, but a top analyst says there's a good reason why it might start slashing prices
- Amazon's operations generated $30 billion in cash last year, and the company still had more than $11 billion left after investments.
- Those amounts were up significantly from 2017.
- At the same time, growth in its core e-commerce business has started to slow; sales grew just 13% in the most recent quarter from the same period last year.
- Amazon will likely take some of its swelling cash and invest it in boosting its retail business by cutting prices, Wolfe Research's Scott Mushkin said in a note.
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Amazon has leaned on technology to become a 21st century titan, but it might turn next to an old-school tactic to jumpstart its slowing e-commerce business.
The Seattle company has started to generate huge amounts of cash - it garnered $30 billion from its operations last year alone, thanks largely to its hugely profitable and fast-growing Amazon Web Services (AWS) business. Scott Mushkin, a financial analyst who covers the company for Wolfe Research, thinks Amazon will take a page from Walmart and invest some of that cash in cutting prices to boost its retail business and grab market share from competitors.
"We envision a day when Amazon not only provides unmatched convenience but also unmatched pricing," Mushkin said in a research note issued Sunday. "This, in our opinion, would be absolutely devastating to other retailers and likely result in a reacceleration of Amazon's growth rate."
Amazon spooked investors last week when it warned that it expected its first-quarter sales to grow more slowly than analysts had forecast. It also reported weak results from its retail business in the holiday quarter. Its direct online sales to consumers grew by just 13% from the fourth quarter last year, and sales through its Whole Foods chain and other physical stores actually fell 3% year over year.
Although the company's overall holiday results beat Wall Street's expectations, Amazon's stock fell more than 5% on Friday on investors' worries about upcoming quarters.
Amazon has become a cash machine
Mushkin lowered his earnings estimates and price target - from $2,350 a share to $2,200 - following the report. But he remains a bull on Amazon and thinks the markets fears about the company are overblown. A big part of his optimism about the tech giant has to do with how much cash it now generates.
From Amazon's earliest days until only a few years ago, many investors and analysts worried about whether it could ever become a significantly and sustainably profitable company. But in recent years, it's begun to erase those doubts as its cloud-computing arm has turned into a cash cow. Last year, AWS brought in $7.3 billion in operating income - well more than half of Amazon's total operating profit - up from $4.3 billion in 2017.
Those profits have translated into surging cash flow for Amazon. Even after subtracting the capital investments it made in property and equipment and the payments it made on capital leases, Amazon still generated $11.6 billion in cash last year, which was up from $3.3 billion in 2017 and $6.5 billion in 2016.
On a conference call with investors last week, Brian Olsavsky, Amazon's chief financial officer, cautioned investors and analysts that Amazon expects to step up spending and investments this year. It plans to increase its employee base faster than it did last year and ramp up investments in fulfillment and data centers, he said.
But Mushkin thinks the company will also invest some of its surplus in cutting prices. While Amazon has long offered competitive prices, it's tended to be a "price follower," essentially reacting to other companies' price cuts. Going forward, Amazon will likely make other companies react to its prices instead.
"With the massive growth in ... free cash flow, we think Amazon is positioned to take from Walmart's playbook, transitioning to a price leader in the marketplace," he said.
Amazon's stock closed regular trading Monday up $7.08, or less than 1%, to $1,633.31.
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