Amazon.com (NASDAQ:AMZN) shares are trading lower by about 5% after reporting quarterly earnings results after the bell on Thursday. Shares are now off by about 20% from year-to-date highs as investors rotate out of momentum stocks and into lower multiple names. Over the past five years, Amazon is perhaps the ultimate high-multiple stock. While consistently delivering double-digit revenue growth, the company has rarely grown profits as it focuses on investing for future growth. The lack of current earnings power has made it hated by value investors since it was trading at $100. For the past few years, these investors have been wrong, but it now seems the street is getting more anxious about Amazon delivering some profits.
Amazon earned $0.23 on revenue of $19.74 billion while analysts were looking for $0.24 and sales of $19.42 billion (all financial and operating details available here). Revenue was up a solid 22.8% year over year, though the company barely turned a profit. On the positive side, operating cash flow increased to $5.35 billion, which was up 26% year over year. Free cash flow was $1.49 billion in the quarter, but for the trailing twelve months, it is only $1.4 billion, though the purchase of additional office had a negative impact. For perspective, Amazon has a market capitalization of nearly $150 billion, giving it a 100x trailing free cash flow multiple.
While EPS was up from $0.18 a year ago, operating income was actually lower by 19% to $146 million as operating expenses were also up 23%. The company is aggressively investing in content for Amazon Prime as seen by its deal with HBO, and the launch of Fire TV will also pressure margins in coming quarters. Amazon Prime Instant Video is still small compared to Netflix (NASDAQ:NFLX), but video streams did triple over the past year.
While revenue growth was solid at 23%, unit growth, the quantity of goods Amazon ships, was a bit disappointing at up 23%. In the previous quarter, unit growth was 25%, and in the previous quarter, it was 29%. Unit growth is decelerating, which suggests we should see some decelerating revenue growth. In fact, management offered somewhat downbeat quarterly guidance. Sales are expected to be $18.1-$19.8 billion or up 15-26%. Management is also forecasting a loss with an operating loss of $(455)-$(55) compared to an operating profit of $79 million a year ago. Most analysts were expecting Amazon to be profitable in the quarter with sales of at least $19 billion. This guidance suggests Amazon will deliver an in-line quarter, at best.
Finally, many investors are bullish on Amazon Web Services, which is the company's cloud offering. This segment saw revenue growth of 60%, which at first seems fantastic. While it is never prudent to be overly critical of 60% growth, it is worth noting that Microsoft (NASDAQ:MSFT) delivered cloud growth of 101%, and its Azure offering, which competes directly with Amazon, grew by 150%. The cloud space is growing dramatically. Amazon is growing quite fast, but its growth is not quite as robust as some competitors. If we see growth slip below 50% in coming quarters, that could be a sign it is losing a bit of market share.
Overall, this quarter was a pretty mixed picture. Revenue growth was solid, though the company is unable to consistently deliver profits. Unit growth continues to slow, which portended deceleration in revenue growth in quarters. The company is investing heavily in content, and it remains to be seen whether Amazon can compete with Netflix. High multiple stocks work until they don't. The company isn't making money, so value investors are unlikely to rush into the stock if it falls further. With sentiment turning and mixed results, I would not advise buying this dip. However, I would not go out and short the stock because revenue growth is still above 20%, and shares have defied gravity for years. Amazon is the prime example of a stock where the best trade is to do nothing. Investors should simply stay away.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.