For one reason or another, Paulo and many other AMZN bears just cannot seem to get their heads around the reasons why Wall Street values AMZN so highly. In this article, I consider the bear case, which, pretty much, myopically revolves around spending and AMZN's P/E ratio.
Here's Paulo's summary of the Amazon bear case, as the company's stock adds on about 16% in midday trading:
- The entire beat was down to "Equity-method investment activity, net of tax". That is, a one-off gain which we will surely be able to read about in the 10-Q. This line represented more that a $100mn positive swing, thus accounting for $0.21 in EPS. The $0.28 reported EPS minus this swing would bring EPS down to the $0.07 estimate;
- Again, Amazon.com guided next quarter down. Indeed, right now even the top of guidance ($40mn) is close to zero, and most of the guidance is now underwater;
- Revenue guidance for next quarter was also weak, midpoint was $12.6 billion versus the $12.82 billion market consensus;
- Amazon.com's operating cash flow TTM fell 22% from the quarter before;
- Amazon.com's free cash flow TTM fell 45% from the quarter before;
- Almost unbelievably, even Amazon.com's cash in the balance sheet is almost $1.2 billion below where it stood in the same quarter last year (March 2012 Cash+Marketable securities are at $5.715 billion versus $6.881 billion in March 2011).
I would like Paulo to elaborate a bit on how he implies that Amazon is cooking the books in bullet point number one.
The rest of the bear case basically comes back to one thing - Amazon.com continues to spend money. Of course, cash flow and the company's cash balance is down. This is no secret. Amazon could not be more open about its spending. And don't expect the spending to come to a halt anytime soon.
As CFO Thomas Szkutak explained on the company's conference call, Amazon plans to open 13 more fulfillment centers in 2012. That's old news and I still cannot figure out why that or anything else related to spending is bad news.
CEO Jeff Bezos explained the method behind Amazon's madness 13 years ago:
Q: Do you have a goal for when you can throttle back on expenses and become profitable?
Our strategy is very, very clear: We're focused on long-term returns for investors. And to throttle back on investment now would be shortsighted. When we have less opportunity, that will probably happen. But as long as we have lots of opportunity, we're going to continue to invest commensurate with that opportunity in a very disciplined and methodical way, but in a long-term context. To do anything else, we believe, is irrational. But we also don't claim that that's the right strategy. We just claim it's ours. And then people get to decide. But we're clear about it. And we do passionately believe it's the right strategy.
Make no mistake about anything I've said here: Long-term profitability and building an important and lasting and sustained company is incredibly important to us. We just believe that, by investing now, we increase our chances of achieving those things.
All of this short-term bearishness is little more than a horribly misguided tragedy. It's going to cost good people lots of money.
If you're a trader, have at it. Short AMZN, but you'll likely be just as willing to go long. You make decisions on the basis of technical indicators not ignorance.
Jeff Bezos has been at this for more than a bakers dozen worth of years. He has fielded the same questions about spending and margins for more than a decade. It has come to a point where the second guessing is nothing short of absurd.
Since 2001, after the dot-com bust it has produced a gain of 1,246%. Over the last five years, 210%. Over the last two, 38%. And, before this post-earnings surge, it's been flat over the last year. That stagnation is now history.
And Jeff Bezos would never do anything as asinine as a dividend. He has cash so he can spend it to position his company for a future it will dominate. Revenues continue to soar in the present. At the end of the day, with a company like Amazon, that's about all that matters.
When I collect my loot next month, I intend to purchase AMZN January 2014 call options. The upside we have seen today is nothing. While the stock might pull back near-term thanks to a mix of technical factors and short-term hysteria, it's headed past $300 on two simple facts:
- People are buying lots of stuff on their Kindle Fires (read the transcript of the conference call).
- When Bezos and his team determine their work is done (for now) and this reinvestment cycle can slow down, margins and profits will make AMZN's present valuation look wimpy.