Jeff Bezos has always trumped measuring Amazon (AMZN) by its cash flows over GAAP earnings. In his 1997 annual letter (pdf) to shareholders, reprinted in the company's Annual Reports since then, he has emphasized:
- When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we'll take the cash flows.
As a result, Amazon earnings releases have de-emphasized GAAP earnings over cash from operations. Amazon benefits from having a negative cash conversion cycle. We have covered this here in relation to Groupon (GRPN). This is because it gets money from its customers for the products it sells before it has to pay its suppliers. In essence, the suppliers fund its operations.
However, eventually, the suppliers do need to get paid. In the latest quarter earnings for Q1 2012, the Amazon Cash Flow from Operations looks like this:
Three Months Ended March 31, | Twelve Months Ended March 31, | |||
2012 | 2011 | 2012 | 2011 | |
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 5,269 | 3,777 | 2,641 | 1,844 |
OPERATING ACTIVITIES: | ||||
Net income | 130 | 201 | 561 | 1,054 |
Adjustments to reconcile net income to net cash from operating activities: | ||||
Depreciation of fixed assets, including internal-use software and website development, and other amortization | 457 | 202 | 1,338 | 652 |
Stock-based compensation | 160 | 110 | 605 | 448 |
Other operating expense (income), net | 46 | 33 | 168 | 112 |
Losses (gains) on sales of marketable securities, net | (2) | 2 | (8) | 1 |
Other expense -income), net | 15 | 37 | (78) | (36) |
Deferred income taxes | (38) | 15 | 83 | 38 |
Excess tax benefits from stock-based compensation | (40) | (46) | (56) | (219) |
Changes in operating assets and liabilities: | ||||
Inventories | 747 | 343 | (1374) | (997) |
Accounts receivable, net and other | 746 | 359 | (479) | (170) |
Accounts payable | (4258) | (2649) | 1,388 | 1,641 |
Accrued expenses and other | (529) | (183) | 721 | 697 |
Additions to unearned revenue | 397 | 210 | 1,252 | 709 |
Amortization of previously unearned revenue | (269) | (220) | (1070) | (897) |
Net cash provided by (used in) operating activities | (2438) | (1586) | 3,051 | 3,033 |
INVESTING ACTIVITIES: | ||||
Purchases of fixed assets, including internal-use software and website development | (386) | (298) | (1899) | (1138) |
Acquisitions, net of cash acquired, and other | (50) | (139) | (615) | (473) |
Sales and maturities of marketable securities and other investments | 1,738 | 1,939 | 6,641 | 5,318 |
Purchases of marketable securities and other investments | (852) | (1112) | (5997) | (6135) |
Net cash provided by (used in) investing activities | 450 | 390 | (1870) | (2428) |
FINANCING ACTIVITIES: | ||||
Excess tax benefits from stock-based compensation | 40 | 46 | 56 | 219 |
Common stock repurchased | (960) | - | (1237) | - |
Proceeds from long-term debt and other | 68 | 89 | 154 | 168 |
Repayments of long-term debt, capital lease, and finance lease obligations | (153) | (111) | (483) | (295) |
Net cash provided by (used in) financing activities | (1005) | 24 | (1510) | 92 |
Foreign-currency effect on cash and cash equivalents | 12 | 36 | (24) | 100 |
Net increase (decrease) in cash and cash equivalents | (2981) | (1136) | (353) | 797 |
CASH AND CASH EQUIVALENTS, END OF PERIOD | 2,288 | 2,641 | 2,288 | 2,641 |
Note that cash at the beginning of Q1, 2012 was $5.3 billion and the end of the period showed $2.3 billion. Of this, Cash provided by Operating Activities was negative $2.4 billion of the change in cash. This is explained by the massive change in Accounts Payable, which decreased by over $4 billion. This may be explainable from the overhang from Q4 2011 where massive sales resulted in massive accounts payable accruing.
Over the entire year such changes in payables should smooth out. This is one reason Amazon emphasizes 12 month cash flows in results. However if we look at the cash flows from the trailing 12 months ended March 31, for 2012 and 2011, we find that net cash provided by operating activities is essentially flat at $3 billion for the 12 months.
Investors have believed, based on Bezos' philosophy, that Amazon's GAAP earnings do not really demonstrate its true earnings power based on massive investments by Bezos for future growth. It is now 12 years since Amazon has gone public and the future is now. GAAP earnings for the last four quarters have been .28, .38, .14 and .44 cents/share for a total of $1.24. At today's share price of $220, Amazon is trading at 177x trailing GAAP earnings. On a cash flow basis it is trading for about 33x trailing 12 months cash flow but the cash flow from operations has been essentially flat year/year.
At some point there is hope that Amazon will display its true earnings potential, which is greater than what it has been showing so far. This is the hope that the market is assigning the lofty multiples for. We love the company and its customer-centric approach. However this date where Amazon's earnings will truly show up has been forever deferred to the future and we would like to dig further into the flat cash flows and will be cautious about adding at current levels.
Disclosure: I have diagonal calls on Amazon.
