Amazon Earnings Preview: A Secular Growth Story At 28X Cash Flow

Jul.25.13 | About:, Inc. (AMZN)

Please excuse the late preview, but Amazon (NASDAQ:AMZN), the iconic e-commerce retailer, is scheduled to report their 2nd quarter, 2013 financial results after the closing bell tonight, Thursday, July 25th. Analyst consensus is expecting $0.05 in earnings per share (EPS) on $15.732 billion in revenues for expected year-over-year growth of 400% (the Q2 '12 compare was $0.01 in EPS) and 23% respectively.

While the EPS estimate has slid since the April earnings report and pressure continues on the earnings estimate, the revenue estimate has been more stable. The focus will be on the Gross and Contribution margins for AMZN which have started to stabilize and move higher the last 3 quarters.

If you read some of the commentary on this site and elsewhere about AMZN's valuation, some investors become livid with the thought of someone suggesting that a stock be bought or owned that sports a P/E ratio of 230x expected 2013 EPS of $1.27. That is just one valuation metric though, and I consider it somewhat deceptive since the cash-flow valuation on AMZN is just 28x 4-quarter trailing cash from ops.

The following table probably shows it best in terms of a comparison with 4-quarter trailing (or trailing twelve-month) (TTM) EPS and trailing twelve-month cash flow from operations per share (OCFPS):

Comparison of EPS vs. Cash flow per share






Price to


3/13 $0.64 422x $253 $9.17 28x
12/12 $0.60 400 $280 $9.07 31
9/12 $0.70 269 $234 $7.32 32
6/12 $0.87 281 $228 $7.03 32
3/12 $0.81 190 $230 $6.63 35
12/11 $1.21 139 $190 $8.45 22
9/11 $1.37 105 $200 $6.75 30
6/11 $1.90 94 $213 $6.90 31
3/11 $2.27 80 $185 $6.53 28
12/10 $2.31 69 $175 $7.61 23
9/10 $2.53 61 $150 $1.82 82
6/10 $2.47 49x $118 $1.75 67x
Click to enlarge

Source: internal spreadsheet from Q's, K's and earnings reports

* EPS = earnings per share

* OCFPS = operating cash flow per share

The reason behind the sharply contrasting metrics, and the direction of both is that with the build-out in regional distribution centers at AMZN, which are then depreciated, and with depreciation being a non-cash expense, AMZN is growing their cash flow at a much faster pace than EPS, thanks to expense growth.

Is a 28x cash flow valuation an expensive valuation? Sure, a lot of people would say "Yes, absolutely," but AMZN's valuation is not much more expensive than Nike's (NYSE:NKE) 22x cash flow valuation while AMZN's price to sales valuation at 2x is identical to NKE's price to sales valuation of 2x.

More importantly, AMZN is growing revenues at 23% - 25% pace for the last 13 years while NKE's expected sales growth is just mid single digits. It would take more time to flush all of this out and compare AMZN with some of the great brands and retailers trading today, but the point is that while AMZN's P/E valuation looks stratospheric, the cash flow valuation is comparable to one of the premier and iconic brands in the world today.

Is Amazon now a "brand"? Absolutely, and more importantly, it is tied to the worldwide growth of consumer spending. Here are the margin trends for the last 8 quarter for AMZN:

AMZN's Margin Trends




chg (bp's)




chg Bp's)



3/13 26.57% 261 15.39% 98 1.13%
12/12 24.13% 347 13.51% 237 1.90%
9/12 25.26% -193 14.73% 158 1.68%
6/12 26.07% -166 15.96% 136 2.81%
3/12 23.95% -191 14.41% 0.27 3.02%
12/11 20.66% 34 11.14% -76 1.49%
9/11 27.19% 372 13.5% -132 0.84%
6/11 27.73% 323 14.6% -141 2.33%
Click to enlarge

The key for AMZN (in my opinion) will be to stabilize and grow the gross and contribution margins, with the contribution margin being the gross margin dollars less AMZN's fulfillment costs. In terms of valuation, Morningstar has an "intrinsic valuation" on AMZN of $300, while our internal valuation model, which is typically quite a bit higher than Morningstar's, is much higher than $300.

AMZN is not a big position within client accounts, but we would add to the stock near $250, as well as any pullback to the $284 or $285 area depending on the volume. To conclude, the P/E ratio on AMZN is not the metric to use to value the company. Pay attention to cash flow and the price-to-sales ratio, as we do with any retail stock.

We aren't doing anything in front of earnings, but only look for lower-risk entry points to add to the name.

Disclosure: I am long AMZN. 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.