AMZN

http://seekingalpha.com/article/4016406-amazon-sells-first-s…

Summary

Amazon surprised the Street with weak retail margins, while AWS continued strong.

I was shocked more by Q4 guidance, which encompassed a wide range of results including no profit.

The idea that AMZN cares so little about profit that it might break only even in Q4 tells me it’s time for investors to value it normally.

Thus I think that there are increasing chances that over the next year or two, it could be revalued sharply lower in price.

Background

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 (NASDAQ:AMZN) back to the (roughly) $760 range where it traded when Value Line reviewed it in its August 12 edition. At that time, the expectation of VL was for $1.10 per share in EPS for Q3 on revenues of $31.1 B.

Instead, the company reported only $0.52 per diluted share on an immense $32.7 B in net product sales.

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I must be math challenged. Please help me out. You write at SA

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.

Just before that you wrote:

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.

In other words, “Operating income barely rose” is 41.6% ($406-> $575 = 41.6%)

While shares outstanding rose outrageously by 1.4% (489 → 496 = 1.4%)

Let’s make it an apples to apples comparison by doing it on a per share basis.

Lets reduce operating income by 1.4% (575 / 496 * 489 = 567)

Now lets calculate the operating income growth per share:

$406-> $567 = 39.7%

Most companies would kill for that kind of growth but then, I’m math chalenged. Something must be escaping my attention.

Denny Schlesinger

13 Likes

I was shocked more by Q4 guidance, which encompassed a wide range of results including no profit.

The idea that AMZN cares so little about profit that it might break only even in Q4 tells me it’s time for investors to value it normally.

Ever since Amazon’s very first investor letter (which is a great read), they have always preached that profit will not be the focus anytime soon. Actually, if they generated profit, they would have to pay taxes on that and would leave less cash to invest to grow the business, so investing 100% of profits and showing no income, as long as they can reliably lead to significant future growth, is better than having profits and having to pay taxes, which don’t help the company going forward.

AMZN is my biggest holding, and I expect that it will be worth a few times what it is today 10-20 years from now. They could fail with future initiatives and it may never be valued as high as it is today, but I’m betting on Bezos. I don’t plan to sell any of my shares in the next 10 years so I would actually prefer that they show no profit for the next several years if they have good uses for that cash to continue to grow the business.

-mekong

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