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You'd think that as soon as a company reported earnings, analysts would jump into frenzied activity, poring over every number and detail to produce an informed opinion regarding what had just been reported.

On the other hand, over the years it was rather strange that Amazon.com (NASDAQ:AMZN) reported progressively worse earnings, to the point where it produced a yearly loss on a year (2012) where, 2 years prior, it was supposed to already be making more than $5 per share.

So how does one explain these two seemingly contradictory facts? In one hand, the frenzied analysts poring over any new detail, in the other Amazon.com going one way, and the recommendations and price targets heading the other, seemingly oblivious to the developments -- as if the story always stayed the same even if the numbers changed?

An Episode Which Might Explain it

What follows is an interesting episode, which might explain a good part of what is taking place (but not all of it).

On January 29, Amazon.com disclosed its latest earnings report for Q4 2012. In it, as is now common with Amazon.com, Amazon missed earnings and guided lower for the next quarter. What was new, was that Amazon.com also missed revenues by a mile ($1 billion) and also guided revenues for next quarter much lower than expectations (another $1 billion).

As always, analysts jumped into action. That very day they informed their largest customers of their opinion, and the next day research reports - along with countless price target upgrades - hit the Street. One thing you can't complain about, these guys are incredibly productive.

Also as always, sometime after this I was going over several of these research reports, when I saw something strange: a chart in RBC's research showing gross margins and pro forma operating margins which made for a distinct "dejá vu". I had seen that chart somewhere before, and since Amazon.com's pro forma earnings are not standard, such was very weird. So I went back and quickly discovered the culprit. Let me reproduce the two suspect charts below:

(click to enlarge)

(click to enlarge)

But the weird part was just starting. I then started comparing the two reports, and what would you know it, they were almost alike from page 4 to page 8! Indeed, close to the end one finds the following paragraphs headlined "Valuation Context" in both reports:

Citigroup

Valuation Context

With AMZN trading at 130X our 2013 GAAP EPS, it would seem hard to support the shares here. But we believe AMZN well deserves a premium valuation for three basic reasons.

1) AMZN has an extremely strong growth outlook - Despite an increasingly sizeable base ($61B+ revenue in 2012), it has sustained for the past four years 30%+Revenue growth, 40%+ Gross Profit growth, and 35%+ Unit growth. More importantly, while we would expect the Large Numbers Law to slow down its growth rate going forward, it still faces significant growth in its Core Retail market. Even if AMZN achieves our Double-Double scenario, that would still leave the company accounting for 4% of Global Retail Sales. There is plenty of growth ahead here. Just in its Core Retail market.

2) Amazon's EPS is of very high quality - Because of its consistent negative working cycle, AMZN has consistently converted a very high % of its EPS into FCF. To be specific, since 2005, AMZN's FCF has average 248% of its Non-GAAP EPS. (It would be even higher if it was compared with GAAP EPS.) The working cap advantage will dissipate when AMZN's Revenue stops growing. But see 1) above.

3) It has a proven business model and execution/innovation track record - Simple points here are that from 2003-2011, AMZN generated a consistent 6% Operating Margin (excluding non-cash Amortization and Stock Comp). That marks a proven model, in our books. And we have consistently viewed this as one of the Internet's best management teams because its successful, long-standing focus on innovation in support of customer satisfaction.

RBC

Valuation Context

We would continue to argue that AMZN deserves its premium valuation for three basic reasons.

1) AMZN has an extremely strong growth outlook - Despite an increasingly sizeable base ($60B+ revenue in 2012), it has sustained for the past four years 25%+ Revenue growth, 30%+ Gross Profit growth, and 35%+ Unit growth. More importantly, while we would expect the Large Numbers Law to slow down its growth rate going forward, we believe it still faces significant growth in its Core Retail market. Even if AMZN achieves our Double-Double scenario, that would still leave the company accounting for 4% of Global Retail Sales. As we see it, there is plenty of growth ahead here. Just in its Core Retail market.

2) Its EPS is of very high quality - Because of its consistent negative working cycle, AMZN has consistently converted a very high % of its EPS into FCF. To be specific, since 2005, AMZN's FCF has averaged 248% of its Non-GAAP EPS. (It would be even higher if it was compared with GAAP EPS.) The working cap advantage will dissipate when AMZN's Revenue stops growing. But see 1) above.

3) It has a proven business model and execution/innovation track record - Simple points here are that from 2003-2011, AMZN generated a consistent 6% Operating Margin (excluding non-cash Amortization and Stock Comp). That marks a proven model, in our books. And we have consistently viewed this as one of the Internet's best management teams, given its successful, long-standing focus on innovation in support of customer satisfaction.

What happened here? It would seem that we've just entered a new era of centrally-planned and dictated research reporting (to go along with centrally-planned and dictated markets)!

An Explanation

We didn't actually enter a new era of centrally-planned research reporting, of course. But we did enter the era of Copy+Paste research reporting. What appears to have happened was more or less obvious. With Mark Mahaney's dismissal from Citigroup, Citigroup named a new team to take over covering Amazon.com. At the same time, Mark Mahaney was hired by RBC and proceeded to cover Amazon.com. Now, Mark Mahaney decided to Copy+Paste his old reports when putting up a new report on Amazon.com's quarter. And at the same time, the new team over at Citigroup decided to do the same - simply Copy+Paste old reports while dutifully increasing price targets. So basically we ended up with two reports that are thinly disguised copy of one another!

The end result was this mess -a Copy+Paste of an old opinion which mostly disregards Amazon.com's increasingly dire guidance and revenue slowdown. Both these reports do applaud the slightly better margins -- but that's after like 8 quarters in a row of unexpectedly decreasing margins as well.

Conclusion

It would seem that some research opinions are pre-determined no matter what happens. Now we've gone a step further and it would seem that some research opinions are actual wholesale Copy+Paste jobs of the previous opinions. These reports will one day change -- after Amazon.com crashes.

Source: Copy And Paste Research Reporting