Company that probably invested most in the last years has a fascinating results



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Company that probably invested most in the last years has a fascinating results

There are many reasons why Amazon has become what it is today, but certainly one of the reasons is the clearly communicated vision of the founder focused on the future of the company and the willingness to bear short-term losses in order to achieve greater value later.

Few companies on Wall Street have the ability to suffer short-term losses in order to make long-term profits. Although, it should be admitted that a part of technology companies, inspired by the success of Amazon, is exclusively focused on revenue growth, while leaving the question of profitability for the future.

One should be fair here and say that surely some companies will be able to repeat Amazon's success, but the vast majority will turn out to be failed investment stories.

An uncertain future


Accordingly, the main question that arises for investors is how to recognize the situation when a company invests in order to maintain a narrative, that is, which companies invest in their future and, based on these investments, will have a return on capital above the cost of capital, and which companies maximize their present.

It is easiest to look at historical data and draw a conclusion on the basis of who was successful and who was not. Let's say, in the case of Amazon, in the last 10 years or so, revenues have grown from a level of about 60 billion dollars to more than 470 billion dollars, while gross profit has increased from a level of about 15 billion dollars to just under 200 billion dollars.

These numbers are fascinating, and accordingly Amazon's share price has achieved a CAGR of around 34% over the same period. The future is much more uncertain and the fact that something worked in the past does not mean that it will work again in the future.

Regardless, here we can again use the example of Amazon and the fact that it is a company that probably invested the most in the world in its business in the last two years (2020 and 2021). If we take into account R&D costs and capital investments, we arrive at a figure of almost 200 billion dollars.

For example, Amazon has been investing in its delivery network for 25 years, doubling its capacity in the two years mentioned above. These investments have another side of the story, which is about sacrificing short-term profitability.

In order to exclude the influence of inflation from Amazon's results, it is best to look at the free cash flow trend in 2020 and 2021. This dynamic of free cash flow is interesting for many reasons. So it takes into account costs that are not capitalized, then the dynamics of the movement of working capital, but what is most important, it contains capital investments.

Additionally, Amazon's focus on free cash flow per share is widely known. In his letter to shareholders from 2004, Jeff Bezos clearly wrote that free cash flow per share is the ultimate measure of Amazon's success and that the company is focused on growing that figure in the long term.

Now we come to an interesting situation. As stated above, if a company has significant investments, it will automatically reduce its free cash flow. Specifically, in the case of Amazon, free cash flow was around $22 billion in 2019, then $26 billion in 2020, negative $15 billion in 2021, and negative in the first six months of this year.

25 billion dollars. It is difficult to find a fully comparable company for Amazon, but here we will look at companies with which it is often compared in the market. These are the components of the acronym "FAANG" plus Microsoft.

So we are talking about Facebook (Meta), Apple, Amazon, Netflix, Google (Alphabet) and additionally Microsoft.

No one even close


If we compare the investment trend of the mentioned companies, we can see that none of them is even close to the investments made by Amazon in 2020 and 2021.

The closest is Google (Alphabet), which in 2020 was at the level of about 60% of the investments that Amazon made in that year. Of the other companies, none exceeded the level of 50% of Amazon's investment. On the other hand, all the mentioned companies, except for Netflix, had a positive and growing free cash flow.

In the case of Netflix, the negative free cash flow can be partly explained by the problems the company has been facing lately. The above comparison has certain disadvantages because we are not talking about completely similar business models.

Amazon generates most of its income from retail business, while the companies we compared it with are more asset-light business models.