Amazon.com (AMZN) has always been a hard company to try and figure out. Not only is it hard to determine what sector the company operates in -- technology or retail -- but Amazon, like fellow online marketing giant eBay (EBAY), offers some really strange numbers.
Amazon Loses Money, eBay Makes Money
On June 30, 2013, Amazon reported a free cash flow figure of just $24 million, yet on Aug. 26, 2013, the stock was trading at $288.88. Amazon actually reported far less cash flow than eBay, which reported $658 million in free cash flow on June 30, 2013.
From a straight value investing standpoint, eBay would be the better buy because it generates free cash flow. More importantly, eBay hasn't reported negative free cash flow in recent years; as recently as March 2013, Amazon reported free cash flow of -$3.042 billion. In other words, Amazon lost $3 billion and hasn't made the money back.
Amazon makes a lot of money: It reported $66.85 billion in revenues on June 30, 2013, but it hasn't figured out how to keep that money. As chart watchers know, Amazon's revenues have been steadily increasing for the past few years. The same, though, can be said of eBay, which manages to maintain free cash flow and rising revenues. eBay reported revenues of $15.02 billion on June 30, 2013, and it maintained free cash flow. eBay doesn't make as much money as Amazon, but it does a far better job keeping the cash that it manages to generate.
Amazon Is a Terrible Business and a Great Service
When judged by classic value investing standards, eBay is a much better business than Amazon.com. eBay's model, which encourages the use of cash and offers financial services through PayPal, allows it to maintain cash flow. The figures prove Forbes's commentator Greg Satell's recent observation that Amazon is a lousy business. Amazon.com provides great service and cutting edge technologies, but it does not actually make money. Instead, Amazon burns through cash faster than it can make it.
The main reason for this is Amazon's CEO Jeff Bezos. He is not a traditional businessman; he's a visionary and innovator who is interested in creating the future, not making money. Bezos wants to change the world, not make a fortune or even a decent profit. His vision has allowed Amazon to keep up, but it's in a pretty risky place right now. There is no margin of error for the company. It needs to maintain those high revenues simply to keep its current operations going.
Amazon is in a very risky position because it is dealing with competitors that have a lot of cash to play with. Google (GOOG) reported a free cash flow of $3.094 billion on June 30, 2013, and Wal-Mart Stores (WMT) reported a free cash flow of $3.26 billion on the same day. The bottom line is that both Wal-Mart and Google can afford to take some pretty big losses. Wal-Mart can survive the sluggish sales it faces because of all that cash. Both of these companies compete directly with Amazon in different areas. Amazon cannot afford to take the losses, yet it has to try and keep up with organizations that are flush with cash.
Amazon Really Vulnerable
The real problem at Amazon is that it has no resources to survive a major setback, such as a sudden drop in sales. Wal-Mart can survive several months of really weak sales because of all that cash. Amazon simply could not; it would have to start cutting services or begin borrowing.
Amazon has a really low debt-to-equity ratio of 0.34%, but that ratio has shot up in the past year. If Amazon starts borrowing heavily, it'll have to cut back on the expansion, which is what drives the revenue. It looks as if Amazon.com is flirting with financial disaster here. The company is in no position to survive a black swan type of event because it has no extra cash. Even worse, it faces competitors with the kind of cash to sail through such catastrophes.
Not a Buy
Amazon is definitely not a buy because of its inability to turn very high revenues into cash flow. Instead, Amazon is probably a company heading for some major losses really soon. If you're looking for a good buy in e-commerce, check out eBay; it actually generates cash and is low-priced. Even though it doesn't get much respect from investors or geeks, eBay has proven it can generate cash flow in a tough sector -- Amazon.com has not.