Amazon's Record Cash Flow and What's Next.
Q4 2024 ER Digest
Edited by Brian Birnbaum and an update of my original Amazon deep dive.
As I predicted in 2022, Amazon’s cash from operations continues to hit new records.
Amazon’s Q4 2024 earnings also suggest we’ll be seeing AI apps take off soon. This is bullish for all AI companies and for the economy in general.
As Amazon leverages its proprietary data to create its own AI models, its earning power is also set to continue growing fast over the next decade.
In my Mongo DB deep dive I learned that AI apps have not gained much traction in the marketplace at present. However, companies like Amazon offer a sneak peek into the future: whatever they’re doing with AI now, other companies will be doing in the near future. As of Q4 2024, internal AI applications have increased customer service satisfaction by 500bp and have yielded 20% better regional inventory predictions.
According to CEO Andy Jassy during the Q4 2024 call, this is just a fraction of what Amazon has going on:
For instance, if you look at customer service and you look at the chatbot that we've built, we completely rearchitected it with Generative AI.
It's delivering -- it already had pretty high satisfaction. It's delivering 500 basis points better satisfaction from customers with the new Generative AI-infused chatbot.
[…]
If you look at how we do inventory management and trying to understand what inventory we need and what facility at what time, the Generative AI applications we've built there have led to 10% better forecasting on our part and 20% better regional predictions.
So we have a number of very significant, I'll call it, productivity and cost savings efforts in our retail business. They're using Generative AI. And again, it's just a fraction of what we have going.
This points to AI apps gaining widespread traction in the marketplace in the near future, which would give continuity to the AI bull market. As we know, Amazon has a tendency to sell to the public whatever tools it builds to make its business more efficient. Thus, it seems like its only a matter of time before companies across the globe also see notable efficiency gains across the board by leveraging AI apps too.
According to Jassy, Amazon Q has saved Amazon teams $260M and 4,500 developer years. Amazon Q is a generative AI-powered assistant developed by AWS to enhance productivity across various business functions. Now AWS is testing Amazon Q on real customers and they’re seeing a 50% reduction in the time to migrate mainframes. This is another sign that we’ll be seeing AI applications take off soon.
Amazon is also working on leveraging AI to bring new experiences to the market. This includes Rufus, Amazon’s AI shopping-assistant, and features that augment live sports such as predictive analyses and others. In combination with applying AI to increase operational efficiency, I believe Amazon is set to increase its operating leverage considerably over the coming decade by leveraging its proprietary data moat.
Via AWS, Amazon is gathering data on how people build AI applications. Via its ecommerce business, Amazon is constantly gathering data on who likes to buy what and when. These two datasets are going to enable the roll-out of countless proprietary data AI models which are going to accelerate the growth of Amazon’s earning power. Amazon was already hard to disrupt and now that it’s creating AI models that others can’t, it’s going to be even harder to disrupt.
As I predicted in my Amazon deep dive in 2022, Amazon’s cash flow continues to reach new records. In the graph below you can see how Amazon’s cash from operations continues to trend up beautifully, way past pre-2022 levels. As I explain in my deep dive, this financial outperformance stems from Amazon’s ability to continuously deliver more competitive prices, a broader selection of products and higher convenience levels to end customers every year.
The investments Amazon made in 2022 are now paying dividends, by yielding a fulfilment network that’s almost impossible to imitate at this stage.
Operating income was up 61% YoY and Amazon delivered more than 9 billion items on the same day in 2024. Since 2022 Amazon has radically amplified its ability to deliver items on the same day by regionalising its network. This has broadened the range of products that customers can buy on Amazon and has ultimately increased the frequency of the network, making the whole operation harder to imitate.
In turn, as customers are promised higher deliver speeds, it seems that the conversion rate at checkout continues to go up. See Andy’s remarks about this during the last earnings call:
I would say on speed of delivery that we measure this very carefully and we measure both, what the conversion rate is of somebody who views a product detail page with a faster delivery promise versus those that are slower, as well as what we see downstream from customers once they bought with a fast promise and what they end up buying throughout the year.
And we have not yet seen diminishing returns and being able to continue to improve the speed of delivery. It doesn't mean that there won't be instances in which people are happy to take products later.
For this reason, Amazon continues to invest in increasing the performance of its fulfilment network. Allegedly, Amazon is now set to revamp its inbound network and infuse all of its infrastructure with a robotics upgrade. As I explain in my deep dive, so long as Amazon’s culture remains world-class I believe we will see them solving a growing volume of acute customer pains, in a way that’s increasingly harder to imitate.
Per Andy’s remarks during the Q4 2024 call, robotics promise to accelerate this equation. This is because as more robots are deployed, Amazon effectively gather more data which helps the robots get smarter and thus drive more efficiency. Unless you have a bigger infrastructure than Amazon with more robots deployed than them, you’re probably not going to generate sufficient data to outcompete them:
I'll also tell you that this group of, call it, a half dozen or so new initiatives is not close to the end of what we think is possible with respect to being able to use robotics to improve the productivity, cost to serve, and safety in our fulfillment network.
And we have kind of the next wave that we're starting to work on now.
But I think this will be a many-year effort as we continue to tune different parts of our fulfilment network where we can use robotics.
And we actually don't think there are that many things that we can't improve the experience with robotics.
As you can see in the graph below, Amazon’s CapEx continues to increase past 2022 levels. This is because Amazon’s CapEx isn’t cyclical: every time they reach a new level, it serves as a new operational baseline. Amazon expects CapEx in 2025 to come in at $100B with the “vast majority” of it being directed towards furthering AI efforts in AWS. Andy is as bullish on AI as Jensen was in Nvidia’s Q4 2024 earnings call.
See Andy’s comments on this during the Q4 2024 earnings call:
And so, when AWS is expanding its CapEx, particularly in what we think is one of these once-in-a-lifetime type of business opportunities like AI represents, I think it's actually quite a good sign medium-to-long term for the AWS business.
And I actually think that spending this capital to pursue this opportunity, which from our perspective, we think virtually every application that we know of today is going to be reinvented with AI inside of it and with inference being a core building block just like compute and storage and database.
If you believe that, plus that altogether new experiences that we've only dreamed about are going to actually be available to us with AI. AI represents for sure the biggest opportunity since cloud and probably the biggest technology shift and opportunity in business since the Internet.
Lastly, as I’ve said many times here and on X, stock prices track free cash flow per share over the long term. Studying Amazon in depth is a master-class on how to exponentiate free cash flow per share sustainably over the long term, driving a return of over 235,000% for shareholders since IPO. As you can see in the graph below, this metric has fluctuated for Amazon over the years: but ultimately, it’s up considerably over the past few decades.
Amazon’s playbook has been used successfully by Spotify and Hims, which are two companies that have made me a lot of money. I was able to spot them early because I perfectly understand Amazon’s playbook and I can spot early instances of it in the wild. To learn how to do this yourself, I offer you two options: read my Amazon, Spotify and Hims deep dives for free and/or buy my Tech Stock Goldmine course in which I break down the mental model for you in under 2 hours.
Until next time!
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