Amazon.com Inc. (NASDAQ:AMZN) has proven to be a successful and important business. A few analysts are continually surprised to see Amazon's stock soar. Most recently Jeffry Chmielewski wrote Amazon's 'Free Pass'. He concludes:
Because Amazon MUST grow the topline or the charade is over, nobody sells. It can continue growing for sometime before it eventually hits the growth wall, but it will happen eventually. It's really just a matter of time. And now that the price has gotten so disconnected from reality, it could be sooner rather than later.
Mr. Chmielewski speaks to the sustainability of Amazon's growth, saying:
The bigger you are, the harder it is to keep up that growth. That is why you see Amazon branching out in to more and more low margin businesses (groceries anyone?).
While true, grocery stores tend to have razor-thin margins - Amazon operates far differently than an average grocery store. In fact, many would answer the question of groceries with a resounding "yes." You must realize Amazon is offering discounts on advanced orders of groceries. A customer can pre-order items and select recurring deliveries: Once a month, or every two months, and so on.
It is simply not clear, after researching a few of Amazon's key statistics, whether Amazon is getting a "free pass." So, this article will explore a few of the key statistics important to investors.
Amazon Is Simply Complicated
Amazon has defied expectations. Do you remember the old days? I'm talking about the 1990's. If you wanted a book or a movie, you either went to a store or ordered them from catalogues. I recall VHS movie tape catalogues were the size of phone books.
Today if you want a book, movie or just about anything, you can go to Amazon. The company has also been a conduit for major United Parcel Service (NYSE:UPS) and U.S. Postal Service business, when the latter was in dire need.
As an investor I believe in an objective approach. A company that looks great can flop; a company that looks overvalued can flip. In order to place Amazon in perspective, investors must understand a few basic trends:
- Shares outstanding
- Revenue (quarterly)
- Market cap
First, check out the past 5 years. Then review the maximum time period for each. I know this may seem like a chore, however I promise you will learn something.
Shares Outstanding / 5-year
Shares outstanding are up about 7.1%, in the past 5 years.
I prefer to see the trend go down. Though, given Amazon's stock performance, 7% seems alright.
EBITDA / 5-year
Amazon's earnings have increased dramatically since the first quarter of 2012.
Remember the days when only a select few authors and filmmakers could get their work published or screened? To an extent, those days are gone.
The Blair Witch vs. Forrest Gump
Before getting to revenue and market cap, let's look at some Amazon.com history.
You might have to go back to indie horror film The Blair Witch Project to understand one of the turning points. The film was not produced by Amazon, however it was promoted on Amazon.
The news release from Amazon.com about the low-budget film, which pulled in $248M on an approximate $700,000 budget, seems nostalgic now:
Continuing Amazon.com's reputation for cutting-edge technology, the Blair Witch footage marks the first-ever live video stream for the Video Store. Featuring footage not included in the theatrical release or in the upcoming home-video version, Amazon.com will be the only place online for visitors to access this piece of film history. - Amazon.com news release (September 1, 1999)
I won't delve into how this goes back to Increase Mather. Though, it is safe to say, Increase would not have been a fan of the movie. Mather wrote:
The Blair Witch Project was one of the first low-budget, independent films to bring in nearly a quarter-billion dollars. While today such a return would still be rare and phenomenal, a multitude of people collectively use Amazon to publish and distribute.
There is an old saying. I'm not sure if goes back to the world of filmmaking, or investing:
If you make a quarter-billion, on something that cost under one million, well "that's good" - I made this up, but it's true
Notice Amazon elevates certain movies to Prime. Free access to films like Forrest Gump (for some period of time) are incentive for Amazon.com users to sign on for the premium service.
Here are a few of the current features of Amazon Prime:
Notice the price is $79 per year for free shipping, multiple free movies and free e-books. Some estimates place the number of Prime members "north of 20 million." Keep in mind Amazon has not disclosed the exact number.
Revenue (Quarterly) / 5-year
Pay particular attention to revenue over the past 5 years, compared to revenue since the company was founded (in the next section.)
The revenue increase, seen here, coincides with the improved U.S. economy.
Market Cap / 5-year
You must understand, I am not bearish or bullish on Amazon. I am objective on Amazon and have previously written "I like both IBM and Amazon."
I've just been around long enough to know a stock can go up or down. However, my opinion is to give credit where credit is due. The way I see it, on average, investors don't give "free passes."
Investors are not saying "well, I think Amazon's only worth $90B, but I'll get it anyway." Check out the leap over $150B:
I see the bears' concerns and the bulls' defense. I believe investors should consider Amazon, and be open to holding competitors, new and old.
Shares outstanding / Maximum
Now check out the maximum time period for the four statistics in the prior section. I promise not to mention The Blair Witch Project in this section.
The share total is up from approximately 280M shares, in the late '90s.
EBITDA / Maximum
The maximum chart for Amazon's EBITDA tells a story of rags to riches:
Some are critical of Amazon and point to a growth ceiling. It is necessary for investors to be mindful, a larger company can face constraints. At this point, it seems Amazon is most vulnerable to competition.
As an investor, my number one concern on Amazon.com's Prime service would be an alteration to the free shipping deal. Because so many customers join Prime, for this amenity. Thus far, there is no reason to believe this key feature is in peril.
Remember when Netflix tried to spin-off DVDs to the ill-fated Qwikster? My first thought was: If Amazon tried to spin-off books, to Bookster, the stock could react similarly.
Jeff Bezos, thus far, has not made a similar misstep. Instead, the company and the company's stock have defied expectations. This goes to a couple key investment lessons:
- Rarely, an important business can experience a form of hyper-growth
- A company's value can lie in the hands of core investors
Imagine what it would be like today if Amazon just ceased. Small businesses were dwarfed by Amazon; however, many small businesses now sell products on Amazon.com and use the company's services.
Though, the reality of the situation is, major holders including Bezos have a large say over the value of the company. Future actions can not be predicted. This is why my opinion is to have exposure to this quality business - but don't take the whole farm and exchange it for shares of any one company.
Revenue (Quarterly) / Maximum
This chart shows what can only be described as hyper-growth.
Remove everything from the table. If you saw this chart and did not know what the business was, what would you think?
You see, at one point an entrepreneur was tinkering, with a business, in a garage. Now, twenty years later, the business is doing $17B in revenue a quarter.
Let's look at the last 4 quarters:
- December 31, 2012: $21.26B
- March 31, 2013: $16.07B
- June 30, 2013: $15.70B
- September 30, 2013: $17.09B
Given Amazon's varying total cash position, relative to total debt, the company can afford to take on some ambitious projects. As a result of successful, ambitious projects already undertaken.
Amazon's 10-Q states, "we face intense competition" and "our expansion places a significant strain on our management." The 10-Q explains 11 lawsuits against Amazon, since 2010, mostly over alleged patent infringement:
- Positive Technologies Inc - suit settled
- Walker Digital LLC - part dismissed, remaining allegations being defended
- GPNE Corp - suit settled
- Technology Properties Limited, et al. - US International Trade Commission "issued an Initial Determination of non-infringement." Amazon is defending against the lawsuit
- Boston University - Amazon is defending against the lawsuit
- Telebuyer, LLC - Amazon is defending against the lawsuit
- Cellular Communications Equipment, LLC - Amazon is defending against the lawsuit
- Advanced Escreens, LLC - Amazon is defending against the lawsuit
- Volstar Technologies, Inc - Amazon is defending against the lawsuit
- Hourly workers - Busk v. Integrity Staffing and Amazon, Vance v. Amazon, Vance v. Amazon, Allison v. Amazon, Johnson v. Amazon, Davis v. Amazon - "alleging, among other things, that Amazon.com, Inc. and several of its subsidiaries failed to compensate hourly workers for time spent waiting in security lines and otherwise violated federal and state wage and hour statutes and common law." - Amazon is defending against the lawsuits
- Personalized Media Communications, LLC - Amazon is defending against the lawsuit
These legal proceedings represent complex realities of business. Investors should not dismiss these suits. The businesses filing suit, hold patents their legal departments believe have been infringed. All major technology companies face similar hurdles, some bigger than others.
Market Cap / Maximum
This is probably the most important chart to understand:
Clearly Amazon has skyrocketed. Typically such an astronomic increase can be cause for concern.
Though, it goes down to one of investors' most fundamental questions.
- What is the business worth?
If you operated a major fund, with $18B to spend, would approximately 10% of Amazon be worth that much to you? Obviously the bears would say "no," the bulls would say "yes." Investors who are neutral might lean either way.
Amazon defies traditional analysis on certain points, such as P/E. Mr. Chmielewski compares Amazon to Wal-Mart (NYSE:WMT) and Target (NYSE:TGT). Though, these are companies with physical locations and many more employees:
- Amazon has 88,400 employees
- Wal-Mart has 2.2M employees
- Target has 361,000 employees.
I also like Wal-Mart and Target, though I see Amazon's potential. One reason is due to Amazon's lean operating. Of course I would like to see more profit from Amazon, and indeed Amazon is not conducive to a basic criteria of many investors and analysts, who rely on P/E and net income. However, there are a few dimensions of the business that support investment. (Not to say the stock is never going to go down.)
Wal-Mart of the Internet?
Before Amazon, if you wanted something delivered, you could call a company and have the item shipped. You could get a catalogue and place an order. Amazon currently provides a go-to place for customers, almost as if it is the Wal-Mart of the internet.
Wal-Mart does over ten times Amazon's EBITDA, and pulls in an average $16.2B net income a year. Wal-Mart's earnings seem able to support the company's $61.8B total debt. While Amazon's cash balance tends to exceed total debt of $3.7B (with a face value of $3.06B.)
|Amazon.com 10-Q||3 months ended September 2013||3 months ended September 2012|
|cash and cash equivalents end of period||$3.87B||$2.98B|
|net product sales||$13.8B||$11.5B|
|cost of sales||$12.3B||$10.3B|
|net income (loss)||($43M)||($22M)|
Now, check out the striking similarity between Amazon's current market cap movement, and Wal-Mart's from the late 1990's.
Be especially mindful of the fact Wal-Mart's appears to have gone all the way to $300B, before subsiding. I will now add Google (NASDAQ:GOOG), though I believe it is important to view the charts separately:
Google's business is different and in a few key areas Google wins the race.
There is excellent reason for analysts to use statistics, to either justify or refute a company's valuation when charts look like this. Especially when a company does not have a dividend. You must understand, Google makes a boatload of profit, whereas Amazon currently does not.
Amazon In The Long-Term
So, the future is a big question mark. No one knows precisely what will happen.
It seems fair to say that Amazon has the ability to sustain operations for many years. Simply, I would be surprised if Amazon closed its doors in the next 10 years.
I would be less surprised to see the stock encounter weakness; however, this is directly tied to leadership, strategy, competition and the economy. The company appears to be embarking on successful ventures, some could succeed and some could fail. This is the reality of business.
Amazon's total shares outstanding has increased. There was also a buyback, some thought was a "bad choice."
In 2010, Amazon's board of directors approved the company to repurchase as much as $2 billion of its shares without an expiration.
The company's most recent 10-Q states: "We have $763 million remaining under the $2.0 billion repurchase program."
On one side there are people saying "Amazon is going down." On the other side people saying "Amazon is very valuable." Often when I see a situation like this I think to exposure through a quality mutual fund. Because, I know both sides have points worth considering.
Amazon is an amazing growth story. The market is going to go, where it is going to go. Some will say "it's going up," others will say "it's going down." A few of them will be right; some by chance and some due to spot-on analysis.
The fact of the matter is, if the market goes down Amazon could too. If the market goes up Amazon could also. Investors should keep Amazon's market cap, relative to companies like Wal-Mart and Google in mind. It makes sense for Amazon to have a certain comparative value to Wal-Mart, based on services. It makes sense, currently, for Amazon to be worth less than Google, because Google's finances are much stronger. Though, businesses can change on a dime; they can flip or flop on that dime. For now, the day of Amazon is here, and the company appears to be here, to stay.
If you have thoughts on Amazon, please take a second to comment.
Disclosure: I am long AMZN, WMT, TGT, Vanguard Total Market Index (VTI) and T. Rowe Price Growth Stock (PRGFX). 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.
Disclaimer: This article is not a recommendation to buy or sell. Please consult a financial adviser to determine proper allocations.