I’ve read a few reports on Amazons business performance for last year, it didn’t make a profit, and it’s on course to do the same this year from what I’ve read about the upcoming earnings report this afternoon.
The general trend from various opinion pieces on Forbes and some stock watch guides is that there is a tendency for this company not to focus too much on profit margins and that the share price is volatile and overvalued.
I’m curious as to whether this is just normal, or whether I just dump the shares, is revenue more important than profitability?
Here’s an excerpt from one of the reviews I was readin’
I know the company is expanding, however if most of its operations are not being profitable, it just reminds me of World Com.
I know however they’re always breaking even and relying on future expectations of growth to appease shareholders, and they’ve been doing this for 15 years, my question is how long can this last, surely they’ll have to retrench and start making a decent profit?
Yes. The stock currently trades at an Enterprise value / EBITDA multiple of about 50x. Considering most companies typically trade in the 10-12x range, Amazon is exceedingly overvalued. But apparently there enough people in the market place that disagree with me given the current price it’s trading at.
Why? If you own stock in a company, and that company grows, then you own stock in a bigger company and your stock is worth more. There isn’t really any reason shareholders shouldn’t be “appeased” with that situation. I’d argue it makes more sense for the shareholder then companies like Apple, that just raise large profits and sit on them, where neither the shareholders or the company spends it.
Indeed, that’s really the whole point of joint-stock companies. Profits aren’t just divvied up amongst shareholders at the end of every quarter, its re-invested in the company.
Companies grow by making profits, don’t they? You define the size of a company as its assets less its liabilities, and that’s the same as the sum of all its profits.
Yeah, Amazon has done alot of reinvesting, opening warehouses in various parts of the globe, investing in developing the Kindle range, bringing out Amazon Prime, however, all these products and services haven’t made much of a profit or hit margin.
It sounds to me that Amazon has said to its investors ‘Ok just hold on, we’re doing this which will bring in more revenue’ for the majority of its existence.
I certainly won’t argue whether Amazon is overpriced or not. But at this point they are spending 100% of their free money on building competitive advantage in markets where people perceive that to be almost impossible. If they are right, they could end up massively profitable if they ever stop expanding. Right now they essentially run 3 separate businesses, and they are trying to build competitive advantage in each:
Physical shipping of items to you - the “classic” Amazon.com - they are building large warehouses physically close to as many people as possible, and thus trying to build in a shipping cost and logistics advantage that no other retailer is going to be able to match with just a handful of warehouses. Obviously national scale retailers like Walmart or Target would be in the best position to mirror this advantage, but their execution is absolutely awful, and amazon seems to me to be building up again disruption from smaller players, not from companies like them.
The world’s datacenter - they are building out “the cloud” and being the backend provider for many competitors. Their competitive advantage here to me seems to be scale over most, but not all, of the other cloud providers.
The publisher for the digital age. This one gets overlooked I think, but Amazon is moving to disrupt existing publisher relationships, and both become a new publisher and own the relationship from the author all the way down to the reader, without nasty middlemen like Ingram Micro or Bookstores in the way as in the traditional publishing industry.
Under traditional, conservative investing metrics: yes, AMZN is significantly overvalued.
Its P/E excluding extraordinary items is 1286, which is insane. Apple (AAPL) has a PE of 13.1, as a comparison. Because this is the SDMB, I’m already expecting someone may jump in and point out all the exceptions to using P/E ratio, how it isn’t a catch-all signal etc etc. Let’s presume I’m not an idiot, but am instead mentioning P/E ratio for AMZN because it is one of the most commonly used and understood financial metrics and serves as a good illustrative point to answer the question as to whether or not AMZN is overvalued.
Traditionally P/E ratio is a major metric in answering that question, with the understanding high-growth industries (like technology for example) are expected to have companies with higher P/E ratios, but even compared to companies in similar lines of business AMZN has a very high P/E ratio.
There is a separate question at play here though, and that is whether or not AMZN is going the direction of World Com. Here are some things that suggest against this:
AMZN tangible book value per share in 2006 was 0.58. In 2012 it’s 12.42. Growth in book value (and it has gone up every single year in between then and 2012) is a sign of something fundamentally good going on with the company. It is almost impossible for an unsuccessful business to grow book value over time.
AMZN cash flow has increased almost every year from 2006 to 2012.
AMZN revenue has increased every year from 2006 to 2012.
AMZN has a strong balance sheet. That is a catch-all of saying they have a lot of cash and not a lot of debt. They had $11bn in cash and equivalents at the end of 2012 and a debt to equity ratio of 0.3, which is pretty low for a business that has been so aggressive with expansion and that has a lot of plant assets. Wal-Mart’s is 0.8 for example.
Finally, AMZN doesn’t actually lose money that often. From 2006 to 2012, 2012 was the first year they had negative net income. They had around $3.8bn in total net income from 2006 to 2012.
People who are investing in Amazon are betting on their long game. They have said publicly that they are playing a long game - and that its misunderstood (which I suspect means that they have a more complex secret hidden agenda than simply ‘put everyone else out of business and turn on the profit machine.’)
They can choose to turn on the spigot of profits pretty much any time. That they haven’t means that they haven’t seen their end game play out yet - they have other uses for the money they are generating.
Companies grow by making profits, don’t they? You define the size of a company as its assets less its liabilities, and that’s the same as the sum of all its profits.