Less than two weeks ago, I wrote an article titled Amazon – Next Stop $100 Or $1000?. This bearish article may have been a little different from the usual, as I admire what Jeff Bezos and his capable team have created. I just do not think it was or is worth anywhere near where it trades, and that includes the after-hours trading Thursday. All that did was take Amazon back to the (roughly) $760 range where it traded when Value Line reviewed it in its August 12 edition.
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The problem with AMZN is that it’s a fine company that does a lot right. But, as I argued in the article linked to above, it got caught up in a double bubble of Internet bubble 2.0 AND the ZIRP bubble which seemingly “justified” 50-100X P/E’s.
But AMZN has serious issues.
Basically, it operates in a tough business. So it passes a lot of cash through its portals but can only take a small portion of it out for itself. Otherwise, if it charged more, shoppers would just find a new tab at some competitor’s website and but from it.
That’s why its earnings need to receive maximum attention, not sales.
. . . .
The company led with cash flow, which is related to sales, but a company can have lots of cash flow and not even be profitable. Here’s the most important lines, buried a bit in the introductory part of the release:
Operating income was $575 million in the third quarter, compared with $406 million in third quarter 2015.
Net income was $252 million in the third quarter, or $0.52 per diluted share, compared with $79 million, or $0.17 per diluted share, in third quarter 2015.
Operating income barely rose. Yet stock-based compensation was estimated at $776 million for Q3. Or, more stock-based expense than operating profit. Is that fair to shareholders, or is AMZN working mostly for insiders? Note that shares outstanding, reflecting insiders cashing out on vested stock-based compensation, rose yoy from 489 to 496 million shares, or 1.4% dilution.
Despite the slow growth of operating income:
Net sales increased 29% to $32.7 billion in the third quarter, compared with $25.4 billion in third quarter 2015.
Meaning that very little of the sales gain was profit; all the rest was expense.
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Doesn’t this company care about profits at all? Also from the press release:
Fourth Quarter 2016 Guidance
- Net sales are expected to be between $42.0 billion and $45.5 billion, or to grow between 17% and 27% compared with fourth quarter 2015. This guidance anticipates approximately 60 basis points of favorable impact from foreign exchange rates.
- Operating income is expected to be between $0 and $1.25 billion, compared with $1.1 billion in fourth quarter 2015.
Maybe they are sandbagging things a little. But to project, in the holiday season, as little as no operating profit, is just not acceptable in this giant company. If any other company than AMZN, Tesla, or Netflix did this, the stock would absolutely crater. But not these guys.
. . . .
A key question was posed in the Q&A:
Justin Post – Bank of America Merrill Lynch
… I guess when you look at fourth quarter guidance and you back out AWS, it suggests that margins are, on the core business, are going to be pretty down versus last year. Do you view this as a abnormal investment cycle, or just part of the overall kind of ebbs and flows of the business? And then long-term, I know several years ago you talked about maybe high single digit, low double digit margins long term. I wonder if you could refresh us on that, and also just let us know if you think International has structural margin differences than the U.S. in the core retail business.
Brian T. Olsavsky – Amazon.com, Inc.
… As far as long-term operating margins, I can’t forecast that right now. I can’t forecast that for our AWS business either.
Yikes! As AMZN was already hot, hot, hot – but wanted the stock even hotter, the company dangled massive margin increases in front of Wall Street. Now, their casual message is to forget about that goal. Now, the goal is to pamper the customers, as Mr. Olsavsky went on to explain:
We are again working on two fronts. We are honing the businesses that we’re in and making them as efficient, as profitable as possible while also investing very pointedly and very wisely, we believe, in things that will enhance customer experience and create lasting businesses for us down the line. We’ve said we want things that customers will love, can grow to be large, will have strong financial returns and durable and can last for decades. So that’s still our mission. We have pillars of the business right now with Marketplace, AWS and Prime and we’re actively looking for a fourth and fifth pillar.
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No dividends, no actualy interest in sustainable profit streams in the next many years. Just saying “we want [to provide] things that customers will love” is not good enough at thisstage of the game. Not when AMZN is one of the most highly valued companies in the world.
PG is anything but a savvy investor or financial expert, but the OP seems to be complaining that Amazon has gone back to doing what it has done for most of its corporate life prior to the last year or so – growing just as fast as it can.
Long-time investors have lived with the promise (and results) that Amazon can do much better things with its money by keeping the pedal to the metal than it can by paying dividends to shareholders. Those long-time Amazon investors have seen the value of their stock increase year after year after year.
Maybe that will all change, but Amazon’s latest message seems to be, “We’ve proven we can make profits for the last little bit, but we still want to grow. You can jump off with your capital gains or stay on for the ride.”