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Amazon (NASDAQ:AMZN), the world's largest online e-commerce retailer, reports its calendar 4th quarter, 2012 financial results after the bell on Tuesday, January 29th, 2013.

4th quarter, 2012 analyst consensus per ThomsonReuters is expecting $0.28 in earnings per share (NYSEARCA:EPS) on $22.27 billion in revenue for expected year-over-year growth of -26% and +28% respectively.

If consensus is met, AMZN will have shrunk EPS in 2012 from $1.37 in 2011 to a loss of $0.03 for the year, even though revenues grew 30% for the same timeframe.

The stock was up over 40% in 2012, continuing a nice string of excellent returns off the 2008 lows.

To say that AMZN has crushed earnings and operating income the last few years is a polite understatement, but the fact is management seems to be sacrificing near-term profitability for longer-term sustainable revenue growth.

AMZN consensus revenue trends
2014 (est)$98.6$101.1$102.6$101.4
2013 (est)$79.1$80.5$81.4$80.5
2012 (est)$62$62.7$62.3$62.8
AMZN consensus eps trends
2013 (est)$1.76$2.38$2.58$2.69
2012 (est)($0.01)$0.77$1.18$1.32

* Source: ThomsonReuters consensus revenue and EPS estimates

* Revenues in billions

We probably should have added a 5th column to show revenue and EPS estimates as of this writing, which are slightly ahead of September's numbers just after the last earnings report, but the reader can quickly see, the trend is a little softer, but perhaps not enough to worry investors.

Big picture analysis

AMZN's year-over-year revenue and EPS growth
2015 (est)





2013 (est)28%177%
2012 (est)29%-101%

* Source: internal spreadsheet from 10-K's

Even if AMZN breaks even in 2012, the 2013, 2014 and 2015 p/e ratio's are 133(x), 61(x) and 33(x) current forward EPS estimates respectively, along with a current cash-flow valuation of 32(x) 4-quarter trailing cash-flow as of Sept. 30, and 107(x) free-cash-flow.

So yes, the valuation seems stupid and beyond expensive, but here are a couple of other metrics to consider:

* AMZN's current global online retail market share is just 1%, and AMZN accounts for about 10% - 11% of US online retail sales, and now with mobile e-commerce adding to the market, e-commerce growth could further accelerate the growth of online US retail sales;

* Even with the other nosebleed valuation metrics, AMZN's "price-to-sales" (4-quarter trailing sales) is just 2(x), and while far higher than other major US retailers, few retailers have generated AMZN's revenue growth over the last decade;

*AMZN's current market cap of $128 billion, is just over 50% of Wal-Mart's (NYSE:WMT) current market cap of $230 billion, even though AMZN's revenue growth rate is 3(x) - 4(x) that of the retail juggernaut.

Walmart is AMZN's only real competition at this point, and Amazon's revenues at $62 billion this year are just 13% of Wal-Mart's expected $471 billion in fiscal 2013.

The point being that Amazon has a LOT of long-term growth ahead of it, the major advantage of being the first-mover of a displacing technology.

Would we buy the stock at these levels? Not a chance. Our first level of technical interest is $225, and then $175, which would be a significant consolidation from its current price, and the fact that it has gotten a number of upgrades and increased price targets into the earnings release is worrisome.

Even at those levels we would need to see earnings per share revisions start to move higher as opposed to the continued reductions we've seen in EPS since 2010.

That may be starting to change.

Here is the longer-term trends in cash-flow and capex:

AMZN's cash-flow analysis with capex

4-qtr trail




4-qtr trail




4-qtr trail




q3 '12$3.48%$2.446%$1.0-33%
q2 '12$3.22%$2.255%$1.0-41%
q1 '12$3.92%$1.9567%$1.1-40%
q4 '11$3.012%$1.888%$2.0-18%
q3 '11$3.1275%$1.6117%$1.51640%
q2 '11$3.2297%$1.4169%$1.8541%
q1 '11$3.0119%$1.2179%$1.892%
q4 '10$3.56%$979163%$2.5 bl-14%
q3 '10$.083-71%$744106%$.01-97%
q2 '10$0.80-68%$52248%$0.28-87%
q1 '10$1.4-35%$41923%$0.95-46%
q4 '09$3.394%$37212%$2.9114%
q3 '09$2.978%$36219%$2.592%
q2 '09$2.561%$35237%$2.168%
q1 '09$2.042%$34226%$1.843%
q4 '08$1.721%$33248%$1.416%
q3 '08$1.6 $205 $1.3
q2 '08$1.55 $278 $1.3
q1 '08$1.5 bl $251 $1.2 bl

* Source - internal spreadsheet from Q's and K's

* CFO = cash from operations

* capex = capital investments

* FCF = free-cash-flow

As a reader can quickly see, capex jumped sharply from 2009, tripling by the end of 2010, and then doubling by the end of 2011, as it gradually slows to a more normal growth rate. Although capex is still increasing in absolute dollars, the year-over-year growth rate is expected to continue to slow.

A slowing of capex, particularly the distribution center build-out, should eventually take the pressure off earnings per share compression as operating expenses slow, which should result in operating income returning to a more normal 5% - 7% range as a percentage of revenues.

While the 4-quarter trailing analysis diminishes the quarterly volatility, the following is a quick table of the cash-from operations (NASDAQ:CFO) generated by Amazon in the 4th quarter of each of the last 4 years:

4th quarter CFO for Amazon
QtrCFO ($ ml's)



q4 '11$4,26923%
q4 '10$3,480320%
q4 '09$82394%
q4 08$42421%

It is readily apparent that the 4th quarter cash-flow is reflecting the longer-term strategic investments in distribution centers.

Amazon could potentially report $5 billion in operating cash flow for the 4th quarter of 2012, given the above table.

While the stock remains expensive on a valuation basis, AMZN's 32% average revenue growth rate for the last 10 years is impressive, and given AMZN's size relative to Wal-Mart and the rest of the world, we think it can likely continue for a while. Even if revenue growth for the next 10 years is half the current 10-year average, as long as earnings per share resumes it growth, and cash-flow continues to accelerate, the cash-flow valuation would look far better to investors than the p.e valuation.

Be patient with the stock and wait for lower risk opportunities to buy.

Disclosure: I am long AMZN, WMT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.