In 2015, Indian Internet and e-commerce companies received funding worth $5.8 billion from private investors, according to research firm Venture Intelligence. In the same period, Amazon.com Inc. reported operating cash flow of $11.9 billion. Free cash flow (FCF), after deducting capital expenditure, stood at $7.3 billion.
And while funding from private investors has decelerated considerably since the fourth quarter of 2015, it looks like Amazon has upped the tempo with cash flow generation. In 2015, its free cash flow jumped 284%.
Should Indian e-tailers just throw in the towel? According to an analyst with a domestic institutional broker, it’s an uneven playing field. Cash is becoming a scarce resource for home-grown companies, while Amazon appears to be flush with cash.
But appearances can be deceiving. Amazon’s FCF, on a closer look, is nowhere near $7.3 billion. More than half of its capital expenditure is done by purchasing property and equipment using leases. If the purchases had been made outright, FCF would reduce by $5.2 billion. At the least, principal repayments for these leases should be reduced, in which case FCF would reduce by $2.6 billion. Then, the company regularly makes acquisitions, and adjusting for this would reduce FCF by another $800 million.
A look at the chart alongside shows how far removed Amazon’s adjusted FCF is vis-à-vis FCF derived from the traditional calculation. In 2015, free cash amounts to only around $1.3 billion after making these adjustments, less than a fifth of what headline numbers suggest.
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Some analysts also suggest adjusting for stock-based compensations ($2.1 billion), stating that this should be viewed as normal cash wages, which is how employees see them. But that may be taking things too far. The fact remains that stock-based compensations are a non-cash expense, and thanks to Amazon’s premium valuations ($336 billion), they result in negligible equity dilution.
Even so, Amazon isn’t as flush with cash as some perceive. Why else would its long-term debt and other long-term liabilities (leases etc.) rise to $18.2 billion at the end of December 2015, from $15.7 billion a year before that. The value of cash and marketable securities rose from $17.4 billion to $19.8 billion; but adjusted for long-term liabilities, there’s not all that much cash left to speak of.
Besides, the company continues to invest heavily in established markets, largely on its cloud computing services initiative, Amazon Web Services. So it’s not like Amazon has firmly rooted itself in developed markets, and now has the luxury of using all its cash to conquer emerging markets such as India. Indeed, a clear sign that it is far from being well established in its main markets is the widening deficit between its shipping revenue and shipping costs. The deficit stood at $5 billion, $4.2 billion and $3.5 billion in the past three years—5% of net sales in each of the years. This is hardly a sign of a company raking in the money. Instead, Amazon continues to underprice some of its services even in markets where it is well established. In the process, it is sacrificing profit margins as well as cash flow in order to grow revenues and establish customer loyalty.
Yet, having said all this, Amazon India is still miles ahead of counterparts such as Flipkart when it comes to funding. The latter are utterly dependent on private investors to fund their cash burn. If the current ebb in funding continues, they will struggle to survive. Amazon, on the other hand, can raise $6 billion—more than what all Indian e-commerce and Internet companies raised last year—by selling less than 2% of its equity.
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One hope for Indian e-tailers will be that public investors start acting tough with Amazon, and force it to be less profligate, just as private investors have with them. In end-2014, Aswath Damodaran, a professor of finance at the Stern School of Business at New York University, wrote in his blog, “I would argue that markets have been extraordinarily forgiving of Amazon’s long loss-making history and have given (Amazon CEO) Mr (Jeff) Bezos breaks that very few companies have received through time."
But there are hardly any signs of Bezos facing any significant investor ire. Investors are still buying into his pitch of building revenues now and profits coming in later. Some of them are clearly buying into the cash flow generation story.
As pointed out earlier, Indian e-tailers needn’t be overawed by Amazon’s seemingly huge free cash flow. But they sure have a tough fight on their hands.