The 24% year-to-date plunge in Amazon (NASDAQ:AMZN) shares is, by itself, not so significant in the stock's volatile and curious history.
Between October 14, 2011 and the end of that year, for instance, Amazon shares fell 30%. But each price break is certainly time to reassess one of the most bizarre and fascinating companies in recent American history. As we've written about repeatedly, investors are so enamored of the company's sales growth and how cool and disruptive its business model is, that lack of profits hasn't been much of a problem for the stock. Until it is. Maybe that moment is now, or at some point in the not-too-distant future. So, some discussion of business fundamentals is in order.
AMZN data by YCharts
For starters, there is no arguing that Amazon is upending the retail order, forcing giants like Wal-Mart (NYSE:WMT), Target (NYSE:TGT), Best Buy (NYSE:BBY) and many others to invest heavily in online operations and to simultaneously cut their prices, squeezing profit margins that at this point in an economy recovery ought to be widening.
WMT Operating Margin (TTM) data by YCharts
The transparency of the web allows consumers to price compare endlessly. And as Amazon and others such as Alibaba have broadened their product offerings, there has been increasingly fewer items traditional retailers can enjoy fat margins on.
Truth is, Wal-Mart's heart isn't in this shift of business model, nor is Target's or Best Buy's, so Amazon is scooping up sales and market share aggressively, even if its own margins are bad or non-existent.
AMZN Revenue (TTM) data by YCharts
To keep the sales growth going, Jeff Bezos, Amazon's founder and CEO, is throwing a lot stuff at the wall: (just reading the "highlights" of an Amazon quarterly earnings release, a section that typically ignores anything related to earnings and instead trumpets new and improved customer offerings large and small, can be exhausting) getting into the delivery business to enable same-day service; hooking Prime users up with old HBO content like The Sopranos; reportedly developing its own smart phoneline.
Look at all of our ideas, Bezos seems to be saying, and please ignore the accompanying financial data. In the data, we find suggestions that economies of scale are, for now at least, eluding Bezos. Net shipping costs as a percentage of sales, which had been bouncing around at 4.6%-to-4.7% in recent quarters, rose to 5.0% in the first quarter. Net property and equipment on the balance sheet rose 60% vs. a year ago, reflecting the investment binge required to keep sales growing. And employment was up 36% year-over-year, to 134,600, out-racing sales that grew 23% in the latest quarter.
So, Amazon added 33,300 workers (excluding the tens of thousands of temps it uses during the holiday season) during the last twelve months. That's roughly the total employment of eBay (NASDAQ:EBAY), Goldman Sachs (NYSE:GS), Texas Instruments (NASDAQ:TXN), Cintas (NASDAQ:CTAS) or DirecTV (NASDAQ:DTV).
EBAY Total Employees (Annual) data by YCharts
And some of these companies produce real profits with those workers.
EBAY Net Income (TTM) data by YCharts
At 124,600, Amazon's total employment is roughly equal to that of Johnson & Johnson's (NYSE:JNJ) or Procter & Gamble's (NYSE:PG). Granted, most of Amazon's workers are lower-skilled and lower-paid, many working in its warehouses. But the operation is becoming plenty complex.
Amazon's guidance for the second quarter is for sales to grow between 15% and 26%, and anything over 20% would likely be satisfactory for Amazon bulls. But Bezos is also projecting an operating loss, of between $55 million and $455 million, vs. a year-ago operating profit of $79 million. The second-quarter earnings statement will no doubt include a lengthy list of "highlights." But its actual financial data is also likely to receive closer scrutiny and perhaps an increasingly skeptical eye.
Jeff Bailey, The Editor of YCharts, is a former reporter, editor and columnist at the Wall Street Journal and New York Times.