One of the traditional excuses for the lack of earnings over at Amazon.com (NASDAQ:AMZN) is how Amazon.com is not really managed for earnings. This myth relies on Amazon.com's own words, on how it's managed for long term free cash flow (Source: Company 10-K)
Our financial focus is on long-term, sustainable growth in free cash flow per share. Free cash flow is driven primarily by increasing operating income and efficiently managing working capital and capital expenditures.
Leaving aside that operating income is crashing and capex is seemingly not efficiently managed. Leaving also aside that the free cash flow measure chosen by Amazon.com does not reflect principal repayments on capital leases, how has this free cash flow measure done "over the long-term"?
If we were to believe Amazon.com's promoters, one would believe that in spite of Amazon.com's crashing net profit, free cash flow was still on an upward path. It also helps that TTM (trailing twelve months) free cash flow when compared to the same measure one year ago still shows a 292% growth rate. But is this really representative of what's been happening, long-term?
My answer is no. Amazon.com's free cash flow is crashing just like net profits. And what's more, Amazon.com's free cash flow has been crashing for many years now. Indeed, it has been crashing for even longer than earnings, since earnings peaked in Q4 2010, whereas free cash flow peaked one year earlier in Q4 2009.
To make these observations evident, I've put together two charts. One showing Amazon.com's reported free cash flow, and another one showing free cash flow without the impact of the $1.4 billion real estate acquisition back in Q4 2012. This is how they look like (Source: Several company reports, $ millions).
It's pretty evident from both charts, but especially from the chart showing adjusted free cash flow, that the trend has been consistently down over time. Remember, since we're charting TTM free cash flow, there's no seasonality involved and we can plot it quarter by quarter. Again, the trend is evident.
Indeed, it gets worse
Not only was the trend down in free cash flow already evident, but I've already explained that the increased capex necessary to keep on feeding AWS is likely to punish these figures even further. Indeed, I expect free cash flow to hit zero probably within the next year.
This situation, however, is made even worse (and the deterioration faster) due to profitability having taken a further turn south. This might make my timeline be hit earlier than I would otherwise expect.
The obvious conclusion here is that Amazon.com bulls cannot hide in a free cash flow story, either. Free cash flow has been declining steadily at Amazon.com for nearly five years now and is at just $1 billion/year right now, headed rapidly lower towards zero.
Amazon.com stock will at some point be punished much harder by the markets. There are no earnings, and soon there won't be any free cash flow, either. One of these days I'll describe what I believe will be the end game of these developments.
Disclosure: The author is short AMZN. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.