Amazon: Impact of Operational Efficiency on Stock

NEW YORK ( Trefis ) -- A few months back, Amazon ( AMZN), which competes with eBay ( EBAY) (NASDAQ:EBAY), Wal-Mart ( WMT), Overstock ( OSTK) and Blue Nile ( NILE), announced that its working capital management continues to do well. Amazon has been able to maintain its inventory days, while its Account Payable Days has continuously been increasing in the past. In other words, Amazon has been able to convert its merchandise listings to sales quickly, while at the same time it has been able to bargain better with its suppliers on the payment terms of the goods.

We believe that the working capital management is important for the company and Amazon's stock could continue to benefit from this operational efficiency. Currently, we have a $182 Trefis price estimate for Amazon stock, which is about 2% below the current market price.

Amazon 's bargaining power with suppliers keeps payables low

Amazon has continuously been able to apply the bargaining power with suppliers in the past. In its case, the suppliers are typically the retailers and the third-party sellers who supply goods to be sold through Amazon's website.

Account payable days is an important parameter to gauge a company's control over its suppliers and vendors. This parameter has continuously increased for the company over the past years from 57 days in 2007 to 68 days in 2009. The company recently announced that the same parameter has further increased to 73 days. The company has also been able to maintain its inventory days at around 30 days. This means that the company is able to quickly convert the merchandise inventories to sales, thereby saving on the inventory storage cost.

Negative net working capital an advantage of Amazon's

Amazon's excellent working capital management can be seen from the parameter net working capital % of revenues. This parameter has continuously improved from -11% in 2006 to -16% in 2009 and is a sensitive driver for Amazon stock. For most companies, negative net working capital means that the company does not have the current assets to pay for its liabilities and liabilities could be increasing -- in other words, a bad thing. However, in Amazon's case, its business model allows it sell products quickly before it has often paid the supplier. Essentially, its suppliers are extending financing to Amazon.

We estimate that this parameter could be around -13% for 2010 and could remain at that level over the Trefis forecast period. However, if Amazon's net working capital management continues to do well, there could be upside to its stock. There could be an upside of $24 (13%) to the $182 Trefis price estimate for Amazon stock if net working capital % of revenues is maintained at 2009 levels of 16% over the Trefis forecast period.

You can see the complete $182 Trefis Price estimate for Amazon's stock here.

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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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