Amazon Drops $1 Billion on Real Estate

Demitri is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Amazon (NASDAQ: AMZN) is doing its part to help the Seattle real estate market rebound. Late Friday afternoon the company disclosed in financial filings that it will purchase the 11 buildings that make up its headquarters in Seattle. Amazon had been leasing the property, but apparently decided that it makes more sense to buy it outright. The price tag on the deal was a cool $1.16 billion. 

According to Reuters, the massive real estate deal will qualify for at least a couple entries in the record books: 

  • At $644 per square foot, it's the most expensive real estate ever purchased in the Seattle area.
  • At $1.16 billion, it's the biggest single-property commercial real estate deal of the year.

Investors might be tempted to shrug this purchase off as just par-for-the-course for tech giants. Just a short drive from Seattle, for example, Amazon's Redmond neighbor, Microsoft (NASDAQ: MSFT), has over 8 million square feet of office space at its home base. And Google's (NASDAQ: GOOG) campus-like headquarters, complete with swimming pools, sand volleyball courts, and 18 cafeterias, is anything but austere.

Then there are the plans (pdf) for Apple's (NASDAQ: AAPL) new HQ, which call for a massive ring shaped structure that will approach 3 million square feet and be clearly visible from space. In the context of tech giants fighting with each other to draw thousands of talented employees, Amazon's billion-dollar splurge doesn't look so outlandish.

But the real difference is that Microsoft, Google, and Apple all enjoy profit margins of about 30%. Amazon's margins, meanwhile, clocked in at just 1% last quarter and are flirting with a drop into negative territory. Amazon is an online retailer, and so the company's margins aren't directly comparable to these tech leaders. But, on an absolute basis, the contrast couldn't be more stark.

GOOG Operating Margin TTM data by YCharts

Those razor-thin margins leave Amazon exposed to investor complaints charging that the company isn't carefully guarding shareholder resources. The company has booked solid revenue growth of better than 20% in each of the last three years. But Amazon has shown a stubborn willingness to lose money on everything from high-end fashion to free shipping over that same time. And that's led to the distressing trend of expenses eating up a growing portion of net sales.

Source: Financial filings.

What's more, CEO Jeff Bezos didn't signal any slowdown in that strategy when he launched the company's new line of tablets last month. In fact, Bezos left the distinct impression that Amazon is losing money on tablets like the Fire HD, telling allthingsd "we don’t want to lose a lot of money on the device." Bezos said that the company's goal was to profit off of customers' use of the products, instead.

Despite shrinking profit margins, Amazon can clearly afford this purchase. At last count the retailer had over $2 billion in cash on the books and has been generating cash flows of about the same amount each year. So the company should have no problem coming up with whatever advance it needs for a purchase this size. And with interest rates at historic lows, it could make perfect sense to take advantage of some cheap debt financing in order to knock out those monthly lease charges. Why rent when you can afford to buy?

But that argument would have been a lot more convincing when Amazon was booking the near double-digit margins it saw in 2004. Now, with their company approaching its first operating loss in years, investors could do without a big splashy purchase like this. Amazon should get back to logging record profits and leave the spending records to others. 

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SigmaSwan owns shares of Apple. The Motley Fool owns shares of Apple, Amazon.com, Google, and Microsoft. Motley Fool newsletter services recommend Amazon.com, Apple, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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