There have been major swings in the stock price for Amazon (NASDAQ:AMZN) over the last three months - however, the overall trend has been downwards, and the stock has lost more than 17% during the period. The swings in the stock price are quite amazing for a company that has such a strong revenue base. Amazon is generating over $74 billion in revenues, and the growth in revenues has been astonishing over the last three years. Nonetheless, the company has been unable to convert this revenues growth into profits - that explains the swings in the stock price, to some extent.
Usually, the trend in the stock price of a company showing these levels of revenue growth is upwards - however, in order to sustain the upward trend, the company has to convert the revenue growth into profits. The long-term trend (five years) in Amazon's stock price is also positive, and the stock has gained over 300%; however, the swings in the stock price have come from the fluctuations in the operating income, as well as net margins. At the moment, the company is concentrating on its TV business, and we are likely to see substantial revenue growth from this segment.
Another Product to Support Revenue Growth?
Amazon has seen phenomenal growth in its Prime Instant Video service, and the streaming has tripled in a year. More importantly, it is now ahead of Apple (NASDAQ:AAPL) and Hulu in terms of video streaming. Furthermore, the investment in content and programming has allowed the company to compete better with Netflix (NASDAQ:NFLX).
To further enhance its competition with Netflix, the company has recently launched Fire TV. This device is similar to Apple TV, and even allows users to surf Netflix, YouTube and Hulu. However, the default programming for searches is directed to Amazon's video service. Also, it does not allow users to use their subscription right on other websites. For example, a person has subscribed to Netflix and searches for a particular movie which should be free for the user. The Fire TV would carry out the search normally, but will not show if it falls under subscription.
Although this could disappoint some people who have Netflix subscription and have just bought this device. This could be a good thing for Amazon. Apple, Hulu and Google already had their TVs in the market, and Amazon was falling behind. The Fire TV works better with Amazon Video service. In addition, it is incredibly fast as compared to the products provided by the competitors. Also, the voice command option is button-operated, making it more convenient. These factors would result in the expansion of Amazon's user base in the long term.
Better Priced Product and Litigation Risks
Fire TV costs $99, which is identical to Apple TV's price. However, the better performance and features should allow the company to capture considerable market share. Apple's clientele is hard to break, as most of the Apple users are in for brand loyalty. For this reason, Amazon would have to come up with newer and better service. In addition, Amazon is very active in providing premier TV shows and movies on its service.
A patent infringement lawsuit was lodged against Amazon by Rovi -- a seller of program guides to cable operators. The case included two patents which could be important to Amazon's Video services. Rovi had already lost in the district court and lodged the appeal with the U.S. appeals court. However, the U.S. appeals court has upheld the decision made by the district court, and ruled in favor of Amazon. Nonetheless, it looks like Amazon will face further patent infringement lawsuits, as Rovi management believes that their portfolio is even more relevant to Amazon now than in the past.
A Few Words About the Valuation
Amazon is currently trading at insane multiples - the price-to-earnings ratio for Amazon is 555, compared to the industry average of just 36. Furthermore, the price-to-book value of 15.6 is more than three times the industry average of 4.6. Operating and net margins of 1% and 0.4% are considerably below the industry averages of 5.4% and 3.1%. Amazon investors have shown huge faith in the management over the last few years. The management has also been able to grow the business at a phenomenal rate - the company continues to put money back in the business and grow its size. However, the question arises that how long Amazon will continue to grow its top line without growing its bottom line. We will continue to see wild swings in the price until the company starts to convert the revenue growth into profits and cash flows.
Amazon is moving forward robustly in the video services, with revenues skyrocketing. The company has decided to cash this opportunity further by expanding its market through Fire TV. We believe that this device will significantly increase the customer base and also increase revenues from the existing customers in the following quarters. The revenue growth for Amazon will continue as the company continues to expand into different segments. Amazon has always sold hardware close to the cost in order to penetrate the market and make profits on the content. However, the company needs to show profitability soon, and revenue growth needs to be turned into profits and cash flows.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.