Amazon's $84 Billion Secret

Brit Ryle

Posted December 6, 2023

In 2007, the company with the biggest R&D budget in the world was General Motors. In 2008, the title went to Nokia. 2009 and 2010 were the years of big pharma, Roche and then Merck spent the most on R&D. 

Volkswagen took the lead for a couple years, starting in 2011. Then in 2016, tech companies took over for good… 

In the 12 months prior to September 30, 2023, Apple (NASDAQ: AAPL) spent $29 billion on research and development. That was a 13% increase over the same period in 2022. 

Such a large R&D budget helps explain why Apple holds such a big advantage in the smartphone market. The company isn’t shy about spending money to make its iPhones more powerful and energy efficient, with better camera technology, cooler gadgets like its Airpods and iWatches. Plus, Apple designs its own processors, which is expensive, but that means it will pay less in royalties to companies like Qualcomm to use their designs.

R&D spending also gives companies like Apple a nice tax write-off. Companies are allowed to knock 6-8% of their R&D budget right off their tax liability. In Apple’s case it can lower its taxable income by more than $2 billion a year.

For Microsoft (NASDAQ: MSFT) its R&D budget grew 10% during the 12 months that ended September 30 – to $27 billion. Of course, that doesn’t include the investment in OpenAI that gave it access to ChatGPT. I suppose we could consider the ~$10 billion investment in OpenAI  as part of Microsoft’s R&D budget, since it absolutely expands Microsoft’s products, but, no tax deduction…

You might expect Google’s (NASDAQ: GOOG) R&D spending to be higher than Microsoft’s, since Google is developing its own AI chat bot, Bard, in house, instead of buying into another company’s technology. You’d be right. Google spent around $40 billion on R&D over the last year. 

But guess which company spends the most money on R&D? Yeah it’s Amazon (NASDAQ: AMZN). I guess the title of this article kinda blew the suspense…

For the 12 months ending September 30, 2023, Amazon spent $84 billion on R&D. It’s wild to think that Apple can maintain its dominant position with smartphones while spending $29 billion – and Amazon spends nearly three times as much!

Technology and Content

Now, Amazon’s R&D spending is a little different. The $84 billion category is actually titled “technology and content” spending. Which means Amazon’s costs for content for its Prime video service is included, which might make us think this is semi-wasted spending cuz Prime video kinda sucks, but then I spent $3.67 in addition to my annual Prime fee to watch Reacher: Never Go Back last night because even though he is physically completely different from Lee Child’s description of Reacher, Tom Cruise plays the character way better than the guy in Amazon’s version of Reacher, so maybe Amazon’s content strategy is working pretty well. 


10 years ago, Amazon e-commerce revenue was $74 billion. That number will be 10 ten times higher this year, over $700 billion. With that kind of growth, it’s pretty hard to be critical of Amazon’s massive spending. It’s pretty obviously paying off.

Then there’s the other aspect of the business, Amazon Web Services (AWS). This business will generate something like $88 billion in revenue and $25 billion in operating income for 2023. 

Now, Amazon doesn’t break out its investment in AWS. That’s considered proprietary information, a trade secret. But whatever the number, it’s money well spent. Because AWS is a full-service backend for any business. Website hosting, customer service, logistics, accounting, billing – AWS provides it all…

Which means recurring revenue, because once a business is set up on AWS, trying to move it is just silly.

Plus – AWS is already hosting a wide range of AI applications. The cost for enough processing power for businesses to run AI applications internally is prohibitive. Companies will be even further entrenched as AWS customers. 

This is a big reason I called Amazon my top King Henry stock – a stock you can go “all in” on and ride to investment glory.

Valuation Surprise

I don’t think there’s much to be gained debating Amazon’s dominance. There simply aren’t many companies out there with the economic power to challenge the investment Amazon’s already made in warehousing, logistics, delivery fleet, online presence and with AWS. 

The biggest question mark for Amazon is its valuation. Its trailing Price-to-Earnings (P/E) ratio is 75. And looking ahead to the next year, the company is valued at 38 times the profit it will bank on ~$600 billion in revenue. 

Many people would say that a forward P/E of 38 for a company expected to grow revenue by 11% from fiscal 2023 to 2024 is a little on the expensive side. 

But it’s how much Amazon can earn in profit on its revenue that really matters. And Amazon is expected to grow its net profit by 47% in fiscal 2024. Which is damn good for a company this size. 

The thing is: Amazon can drop an earnings bombshell on the market anytime it wants. And it’s because of that massive $84 billion R&D budget…

Over the last 12 months, Amazon reported $71 billion in operating cash flow, and $20 billion in net profit. The difference between cashflow and profit is largely due to R&D spending. 

So, what happens if Amazon cut R&D spending by 15% and dropped $12.5 billion to its bottom line? Instantly, that forward P/E drops from 38 to 19. What if Amazon decides $60 billion in R&D spending is plenty, and drops $24 billion down to its bottom line? All of a sudden, the stock is a ridiculous bargain and might even start paying a dividend…

I’m not saying Amazon is about to cut its R&D budget. Not yet, anyway. I expect there is a point somewhere in the future where both its e-commerce and its AWS infrastructure is so robust that Amazon simply won’t need such a large R&D budget. 

Earnings will jump, and maybe Amazon starts returning cash to shareholders via a dividend and a significant share buyback.

Amazon was the first stock I recommended when Dave and I started Pro Trader Today a little over a year ago. It was $87 a share at the time. Now $146, I still say it’s a great buy and can act as an anchor for your portfolio. 

That’s it for me today, take care and I’ll talk to you Friday…

Briton Ryle
Chief Investment Strategist
Pro Trader Today