We have updated our Terms of Use.
Please read our new Privacy Statement before continuing.

Burning up

27 April 2012 By Robert Cyran

Amazon’s investment habit is looking less healthy. The Internet retailer’s quarterly sales grew 34 percent to $13.2 billion and though net income fell by a third to $130 million, it was better than expected. That sent the shares spiking more than 13 percent in after-market trading. But Amazon’s returns on its heavy investment are turning more and more anemic. Investors should be wary.

Amazon has made no secret of its desire to invest for the long run. Its goal is to build the premier Internet retailer and then harvest the gains, even if it takes a lengthy time for them to materialize. So Chief Executive Jeffrey Bezos and his lieutenants have not worried much about operating margins. When faced with a choice of either increasing profits or one or more of lowering consumer prices to capture more of the growing e-commerce market, investing in new products such as the Kindle Fire and offering free shipping, black ink usually comes last. The first quarter offered more of the same. While sales jumped, the operating margin was cut in half to 1.6 percent.

So far, focusing on the long term has paid off for Amazon and its investors. But consider this worrying metric: Amazon’s return on invested capital over trailing 12-month periods has been steadily falling. By the end of the first quarter of 2010, it was 41 percent. Over the next year it dropped to 24 percent. The most recent figure halved to 12 percent. Yet investors don’t seem worried in the slightest. The company’s stock was already trading at well over 100 times earnings before spiking after the latest set of results. But with returns falling so sharply, it’s getting harder to justify such a lofty valuation.

 

Email a friend

Please complete the form below.

Required fields *

*
*
*

(Separate multiple email addresses with commas)