1] Will Amazon become cash flow positive by end of 2001?
We believe that Amazon will be cash flow positive by end of 2001. Our insights are based on the facts that upward trends in sales will far exceed the operating expenses. Income from operations depends upon net sales, cost of sales, and operating expenses. A close analysis of Amazon’s operating expenses from 1997 to 2000 indicates that the company has experienced significant increases in fulfillment, marketing, technology, and restructuring costs. The overall operating expenses increased from about $61M in 1997 to about $1520M in 2000. These expenses were necessary for Amazon’s growth. In 1998 and 1999, Amazon spent $429M to build “a state-of-the-art digital business infrastructure and operations that linked nine distribution centers and six customer service centers located across the US, Europe, and Asia” (pp. 148). The company now has about 70-80% excess capacity. This suggests that Amazon’s operating costs (especially technology and restructuring costs) are likely to level off in the future and the excess capacity should be able to accommodate growth.
As for net sales, Amazon has experienced a positive growth over the last 4 years and the upward trend is likely to continue in 2001. The company has almost 30M customers in 2000. In order to increase sales, we recommend that the company executives focus on improving the online buying experience for their customers and increasing marketing efforts (especially for the international segments) to attract new customers. This would ensure even higher sales growth rate. In addition to this, the new hosting business model (partnership with Toys “R” Us) is estimated to generate $22 M in gross profit for Amazon. Given the initial success of this new business model, we also recommend that Amazon executives explore other business partners for hosting services (especially