Amazon (AMZN) operates in two segments, North America and International with international sales bringing in 44% of its revenue in 2011. The company's staying power comes from its ability to successfully alter its business model, meet demands of the burgeoning number of online consumers, deliver good prices, broad selection, convenience, and on time delivery.
Amazon is currently trading around $245. The stock has a 52-week range of $166.97 and $246.71, earnings per share of $0.82, and a price earnings multiple of 291.66. It does not pay a dividend. The company has total cash of $4.97 billion, no debt, a current ratio of 1.08 and book value of $16.60. The shares are 66.5% owned by institutions and 19.64% owned by insiders and only 2.10% of the float is short.
Two things stand out here. First, the price earnings multiple looks quite scary. But, the company and various analysts are not too concerned with this number as Amazon expends a great deal of its capital investing in products and technologies that bring more business to Amazon. It subsidizes its Kindle offering to facilitate purchases of Amazon media offerings. It has invested in cloud data storage that offers archiving and backup for a great price. Its ROKU offering brings consumers to Amazon's streaming capabilities. The company keeps earnings down to inflict a little short-term pain for long-term gain in continuing to add value to the enterprise. Unlike retailers such as Best Buy (BBY), Wal-Mart (WMT), and Target (TGT), Amazon does not have stores which impact a company's income statement as depreciation. Amazon's business model sees cash flows bearing the brunt of its business model for the purposes of creating value through investment in avenues to drive consumers to its online business.
The second number that gets a lot of attention is the debt position. Zero debt is not something you see every day in companies engaged in programs to expand business. This is a very impressive indication that Amazon has taken some very measured action to add value to the company without taking on a huge debt load. Even more impressive is that this company started out as a money losing on-line bookseller that did not make a profit for the first several years of operation. It managed to find investor support for a business model that essentially failed at the outset but made appropriate changes to its business plan to work for investors, put the company in profit and provide some pretty extraordinary returns to investors.
Second quarter net income was $7 million or $0.01 per share on $12.8 million in sales compared to $0.41 per share in the second quarter of 2011. Its sales were up 29% from the same period last year at $12.8 billion. It expended $960 million repurchasing 5.3 million common shares in 2012.
Analysts expectations for third-quarter revenue are between $13.6 billion and $14.1 billion, but off the high-end guidance of $14.3 billion. Operating losses are expected to be between $50 to $350 million, as Amazon increases spending in front of the holiday season. As well, it is expected to see a boost in revenue in the back-to-school season. The operating loss is not a shock as the strong growth in North American sales of media is expected to improve revenues into the future. Watchers of this stock think its success is built on e-commerce demand, which is expected to remain solid despite any weakness in international markets. Because of its investment initiatives, Amazon continues increasing customers and volumes at rate of 25% and 43% respectively
Amazon has done everything right to broaden its product and customer bases. It has invested in publishing imprints to add more print content, streaming abilities and media offerings to drive business to its Kindle, Roku and Glacier products.
It has invested in 18 new fulfillment centers to expedite product delivery. In the past, Amazon did not have warehouses in the states where it sold a lot of product to lessen the sales tax load on the consumer. This strategy has been re-thought at Amazon weighed the tax issues against constant legal action and figured prompt delivery with sales tax was less expensive for the company than fighting with Federal and State agencies into the next millennium.
Amazon's ability to be nimble in business direction and zero debt make it a unique player in the e-commerce world. In comparison, the other online giant, eBay (EBAY) has debt, and it doesn't even carry inventory and just started having affiliate fulfillment centers in 2011. Amazon has been a growth story ever since its inception, and keeps investing into its digital and fulfillment initiatives to drive more consumers to its portal.
The future for this company is not as clear cut as its present. While I agree that the keeping revenue maximized and profits minimal has been a great direction for the company in this economy, the prospect of adding value has not done much for the book value of the stock, which is $16.60. The company is going to have to undertake some initiatives that see profits increased and distributed to shareholders. The value proposition will have to change in time when the economy is better to keep investors interested in this stock.
The lack of debt is a double-edged sword. Amazon is not a takeover target because of its lack of debt. The company has no weakness and an enterprise value in excess of $103 billion, which makes it too big to digest. A stock split may keep investors interested, but I can't see Amazon making that call right now. I am cautiously optimistic about this stock. I expect that there will be some decrease in the short-term with sales and profit numbers having more impact in the future on the share price as economies stabilize and other players are able to compete. I don't count this stock out, I just think it is a bit pricey right now. I think investors should watch Amazon closely for new developments, but should avoid buying for now.