For my regular work, I spend a lot of time digging into the income statements of different publicly traded companies. As you dig through the financials, some companies surprise with their very positive results and others show how fickle the economy can be for companies in the wrong sector. One stock which has always surprised me with its income statement and the share price which is based on those results is Amazon.com (AMZN). My contention is that Amazon.com is very good at growing sales and very bad at bringing any of that sales growth to the bottom line - or even a couple of lines above the bottom line.
First, let's take a look at three other large tech oriented companies:
- Apple (AAPL): In, 2011 Apple reported total revenue of $108.25 billion. Of this very large pile of revenue money, Apple produced a net income after tax of $25.92 billion. A net profit margin of 23.9 percent of sales.
- EBay (EBAY): EBay's sales for the year were $11.65 billion, and the company had net income after tax of $3.23 billion. The result is a bottom line profit margin of 27.7 percent.
- Google (GOOG):Google reported 2011 revenue of $37.90 billion and after tax income of $9.74 billion. Net income for the year was 25.7 percent of sales.
- All results are out of the financials pages of Google Finance. Anyone with an issue with these numbers drop me a note.
As you can see, these companies were able to produce profits after tax of well over 20 percent of sales. Generating lots of cash, building shareholder values.
Then there is Amazon.com. For 2011 the company reported these results - out of the fourth quarter earnings press release:
- Total revenue for 2011: $48.08 billion, 41 percent better than in 2010.
- Operating income: $862 million, down 39 percent from a year earlier.
- Net income: $631 million, down 45 percent.
Amazon managed to bring an astounding 1.3 percent of sales to the bottom line. And 2011 wasn't a far out-of-line year. In 2011, the company earned $1.15 billion on sales of $34.2 billion, for a 3.4 percent profit margin. Profit wise, compared to most other years, 2010 was a good year for Amazon.
Of course, Amazon runs a significantly different business than Google, EBay and Apple. The point I want to make is that it is not a very good business. The company sells more and more every year - at incredibly thin margins. So each year, it builds more distributions centers, hires more employees and spends more on shipping. With the new distribution centers, investors hope the company will be more profitable next year, since the centers were paid for this year. But next year, the company needs to spend more money to service the sales growth. It seems than Amazon will never catch up.
So year after year, Amazon grows sales at amazing rates and manages to turn one to three percent of those sales into profits. This means the overhead is 97 percent of sales growing at 40 percent per year. What if the unthinkable happens and revenue at Amazon does not grow? Right now, Amazon trades at 140 times the consensus 2012 earnings estimate of $1.31 per share. Of course, earnings are expected to double in 2013 to $2.70. If these growth expectations disappeared and Amazon traded at 15 times earnings, it would be a $20 stock. It just seems where profits are concerned, for Amazon.com, next year never comes, and sooner or later, the market will realize the stock is overvalued or a bad quarterly result will make it obvious to all.