Amazon gets bearish Barron's treatment


"We're making it up as we go along," says Wedbush's Michael Pachter, trying to model estimates amid Amazon's (AMZN) famous lack of detail regarding the costs of ventures like cloud-computing, Kindle, and same-day delivery of groceries. "Revenues are growing quickly so there's progress, but what are the costs for all these businesses? You tell me."

That investors give a free pass to nearly-profitless Amazon is great for consumers and bad news to the owners of companies like Netflix (NFLX), Best Buy (BBY), Staples (SPLS), RadioShack (RSH), Wal-Mart (WMT), and even Kroger (KR). But what happens to Amazon once the pass is revoked?

Analysts willing to venture a guess see earnings of $10.61 per share in 2016. To hit it, Amazon would need to continue to grow revenues at more than a 20% annual pace while expanding operating margins to 4% from 1% now. Plausible? Sure. But if the stock were to climb 10% per year over the next three, shares for the far more mature company would still trade at 40x those hopeful earnings.

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Comments (36)
  • Paulo Santos
    , contributor
    Comments (34911) | Send Message
     
    They saw earnings at $7.00 this year, 2-3 years back as well. And at $5.50 for 2012, which came out below zero.

     

    The same thing will happen to 2016, AMZN will be lucky to be doing $2-$4 by then. And even the revenue growth rate has been plunging and will likely fall below 20% before year-end (or right this quarter, even).
    5 Oct 2013, 08:55 AM Reply Like
  • Atkins
    , contributor
    Comments (1049) | Send Message
     
    ...and the stock will continue to rise, thanks to the Bezos mystique. Amazing but inevitable. The disconnect between image and reality in this market is greater than I've ever seen it in my life.
    6 Oct 2013, 11:52 AM Reply Like
  • Value Mine
    , contributor
    Comments (224) | Send Message
     
    The year 2005 called. They want their analysis back. This is old news. Amazon longs don't seem to care.

     

    The idea of investing in something that 'might' have a PE of 40 in 2016 is crazy to me. There are so many other good things out there.
    5 Oct 2013, 09:39 AM Reply Like
  • Atkins
    , contributor
    Comments (1049) | Send Message
     
    Completely crazy, alpha, but a clear path to gains. Rationality has left the market.
    6 Oct 2013, 11:53 AM Reply Like
  • wyostocks
    , contributor
    Comments (9115) | Send Message
     
    Atkins
    "Rationality has left the market"

     

    It always comes back when least expected. Keep the powder dry for much better entry points.
    6 Oct 2013, 03:30 PM Reply Like
  • Atkins
    , contributor
    Comments (1049) | Send Message
     
    True, wyo, but I suspect we'll be waiting a long, long time.
    6 Oct 2013, 08:14 PM Reply Like
  • Michael428
    , contributor
    Comments (872) | Send Message
     
    I read the article but I guess because of space constraints Barron's missed a bunch.

     

    * Whole bunch of new states like Virginia, Connecticut, Mass and more will be charging sales tax this year, in addition to all states already charging sales tax.

     

    * E-Bay which is actually Amazon's biggest competitor in large items like TVs bought on-line is still not charging sales tax anywhere.

     

    * The 20% growth in Internet sales is affecting brick and mortar stores as total retail is growing by only 3%...so simple math Brick and Mortar is losing share. Target and Walmart are now competing, not because they want to in low margin business, but because they have to. Target and Walmart have much stronger balance sheets. Walmart starting way behind in e-commerce at $9 billion a year, looking for 30% e-commerce growth.

     

    * E-commerce hurting just about everyone that are not either 3P or e-bay (that did not go bankrupt like article said). People can find cheapest price on Internet, walk into Staples and get a price match. Instant competitor pricing not good for any business. Article acted like ability to price change was a good thing.

     

    * Article had cash flow wrong....pretty big mistake. Amazon paying suppliers in 72 days.

     

    * Article talked about affect on cash flow of $1 billion in Stock Based Comp, but did not discuss what would happen if stock turned and employees wanted cash instead of stock.

     

    * The sales per employee number is just not the way to express cost. You could have part-time employees, etc. Should be expressed as fulfillment cost as a % of revenue. Amazon has shipping costs which Walmart does not if customer buys in store. Amazons fulfillment costs are much higher. This was actually very amateurish by Barron's writer.

     

    * Very small chance Amazon will earn the 84 cents the article said. This is predicated on company earning 74 cents in the 4th quarter. See earnings trend since 2005. 74 cents is not in the cards.

     

    Year...... Q1...... Q2...... Q3...... Q4.... Annual Earnings

     

    2005... $0.12.. $0.12.. $0.07.. $0.47.. $0.78
    2006... $0.12...$0.05.. $0.05... $0.23.. $0.45
    2007... $0.26.. $0.19.. $0.19... $0.48...$1.12
    2008... $0.34.. $0.37.. $0.27... $0.52.. $1.49
    2009 ...$0.41.. $0.32.. $0.45... $0.85...$2.04
    2010 ...$0.66.. $0.45.. $0.51... $0.91...$2.53
    2011 ...$0.44.. $0.41.. $0.14... $0.38...$1.37
    2012... $0.28.. $0.01.. -$0.60.. $0.21..-$0.09
    2013... $0.18..-$0.02
    5 Oct 2013, 09:39 AM Reply Like
  • Copious28
    , contributor
    Comments (444) | Send Message
     
    Maybe you should write a full article. I'd read it, especially if the focus was on wmt with regards to internet sales.
    5 Oct 2013, 11:03 AM Reply Like
  • krk
    , contributor
    Comments (866) | Send Message
     
    Michael-
    On this one point:
    "E-Bay which is actually Amazon's biggest competitor in large items like TVs bought on-line is still not charging sales tax anywhere."

     

    And this has Amazon worried enough to appeal to the Supreme Court with the twisted goal of LOSING the case!

     

    http://buswk.co/17n8Zze

     

    As it stands, Amazon has been singled out with the burden of collecting sales taxes in many states as its size and ambitions forced it to have a physical presence. However, many online rivals still enjoy the sales tax loophole and now Amazon faces an unlevel playing field it itself enjoyed all these years vs. its brick & mortar rivals that put Borders & Circuit City out of business. Now, as Congress is gridlocked, Amazon thinks SCotUS might kill the loophole of "Quill vs.N.Dakota" that the Supreme Court itself created in 1992.

     

    Bezos most certainly doesn’t want some wily entrepreneur to do what he did and create the next Amazon. .. By getting the Supreme Court to overturn Quill Corp. v. North Dakota, Amazon would clear the way for a new law that ..taxes all parties evenly.
    5 Oct 2013, 11:58 AM Reply Like
  • Michael428
    , contributor
    Comments (872) | Send Message
     
    Copius

     

    Here is the easiest way to think of Amazon.

     

    I live in suburbia. For some reason most of my neighbors have Toro lawn mowers. Some go to Home Depot to buy. Some go to a one hardware store to buy as the store delivers.

     

    To me Internet pricing is like our town having 15 hardware stores all on one street selling the exact same lawn mower, all delivering the mower and all having the price on the window. The competition would force profit margins close to zero. The stores would just do a sale thinking they could get customer loyalty. And I actually think there might be more customer loyalty on lawn mowers because they have to be fixed, but even here people would comparison shop the cost of service.

     

    I understand completely how customers love being a customer of Amazon. And I also read Peter Lynch's bible on investing where he advised investors to buy companies they know. But Internet pricing competition did not exist in 1996 when Lynch wrote "Beating the Street", and investors are not seeing this Internet pricing competition is only good for the buyers and not the sellers.

     

    My guess is Walmart would have been much happier if the Internet never happened and they are only getting into the business to protect themselves.

     

    Michael
    5 Oct 2013, 02:04 PM Reply Like
  • chopchop0
    , contributor
    Comments (5217) | Send Message
     
    Sales tax issue could maim amzn if smaller competitors are able to continue using the loophole
    6 Oct 2013, 08:25 PM Reply Like
  • investingInvestor
    , contributor
    Comments (2495) | Send Message
     
    Michael, good comments.

     

    Back in the 1980s, all the local merchants were driven out of business by Walmart. Whole downtown main streets became ghost streets. Walmart B&M stores became customer magnets.

     

    My guess is the local merchants would have been much richer if Walmart never happened.

     

    Karma...
    6 Oct 2013, 11:50 PM Reply Like
  • chopchop0
    , contributor
    Comments (5217) | Send Message
     
    "My guess is the local merchants would have been much richer if Walmart never happened.

     

    Karma..."

     

    And the average shopper would have been poorer. Thank god for WMT forcing suppliers and small-time retailers from gouging customers.

     

    http://onforb.es/1cn47yb

     

    Btw, if you make a good product, you've continue to do just fine. The people who have felt it the most are the "local merchants" who made a living marking stuff up.
    7 Oct 2013, 08:20 AM Reply Like
  • streetwatcher
    , contributor
    Comments (174) | Send Message
     
    During the days leading to the FaceBook IPO, CNBC had a line like this:" Q: Why would you buy FB shares? A: I have 90 million reasons" Obviously referring to the collection of profiles that FB had in coffer.
    AMZN has many times that number of profiles (Name, Address, Purchasing Habits, Internet IP address, etc.). They have acquired this data at no cost. Google on the other hand, spends a fortune on gathering these kind of information - Using tools disguised as Mapping Vehicles driving around the streets, collecting everything even the private WI-FI information. Google makes money from advertising, so does Amazon. Is it possible for AMZN share price to catch up with Google's?
    5 Oct 2013, 09:54 AM Reply Like
  • 215304
    , contributor
    Comments (689) | Send Message
     
    streetwatcher, there's a big difference between Google and Amazon. Google makes wads of money, has made wads of money for years, shows consistent earnings and revenue growth, and thus sells at a low P/E and PEG. Amazon has scores of millions of profiles, huge revenue, and great revenue growth but makes no money and has not demonstrated that it can make decent money. Until it can start generating huge profits the notion of it rising to $900 a share seems outlandish. In fact, Amazon is having a hard time generating ANY profit, let alone massive profits.
    5 Oct 2013, 11:45 AM Reply Like
  • wyostocks
    , contributor
    Comments (9115) | Send Message
     
    This is another instance of the market confusing the company and the stock; the company is great and executes fabulously while the stock is over valued and way,way over valued.
    5 Oct 2013, 10:16 AM Reply Like
  • wyostocks
    , contributor
    Comments (9115) | Send Message
     
    I meant over hyped and over valued.
    5 Oct 2013, 10:40 AM Reply Like
  • Paulo Santos
    , contributor
    Comments (34911) | Send Message
     
    It's also hard to say how well the company really executes, given the costs it seems to suffer.
    5 Oct 2013, 01:20 PM Reply Like
  • wyostocks
    , contributor
    Comments (9115) | Send Message
     
    Paulo
    How they execute for the shareholder and how they execute for the customer are two separate topics. As I am not a shareholder I could care less about their profitability. As a customer, I care greatly how they execute their business, and I say again that they execute fabulously.
    6 Oct 2013, 10:39 AM Reply Like
  • Paulo Santos
    , contributor
    Comments (34911) | Send Message
     
    But there's a problem here. A company cannot be said to be "great" and then fail at the most basic objective a corporation has, which is to make profits.

     

    Something else might be great, but the company itself, not so much. Perhaps it would make for a great non-profit organization.

     

    Likewise, without the consumer qualification it's hard to know whether Amazon.com really executes well.
    6 Oct 2013, 10:48 AM Reply Like
  • streetwatcher
    , contributor
    Comments (174) | Send Message
     
    The fact that AMZN share price continues to climb, is beyond expectations of those analysts who are expecting Profit. If I recall correctly, the Market prices shares based on Supply and Demand. AMZN price increase is indicating that there is Demand. Are the AMZN buyers numb about profit? Is there a secret/ingredient that people like Mr. Santos do not see? How do the Institutional Investors and Fund Managers account for their performance if they are holding so many AMZN share in their portfolio? (Beside the fact that in the last 3-5 years they have MADE money).
    It seems a PIECE is missing from all the arguments and discussions here (Other than the Profit). It could be the power of Amazon.com innovation that brings out new products and services every quarter.
    6 Oct 2013, 07:10 PM Reply Like
  • Paulo Santos
    , contributor
    Comments (34911) | Send Message
     
    There is no missing piece. It's a bubble, just like in 2000. There was no missing piece then either.

     

    Then it bursts, then stocks participating in it drop 50-80-90-99%.
    6 Oct 2013, 07:13 PM Reply Like
  • streetwatcher
    , contributor
    Comments (174) | Send Message
     
    In the 80s the bubble was covering many segments of the market. It seems nowadays we are considering AMZN in the bubble (and maybe a few others like Lumber Liquidators - LL, which barely analyst on SA pays any attention to it).
    This is the billion dollar question: What drives the hope of AMZN buyers - big and small? We only see the stock price chart indicates that day-to-day they are making money.
    6 Oct 2013, 07:28 PM Reply Like
  • eenk
    , contributor
    Comments (456) | Send Message
     
    The bull argument to Amazon is top-line growth, and popularity. When you buy shares of Amazon, you know for certain (yes that's a strong word) that you're buying into a company that will be bigger tomorrow than today.

     

    The reason one can use the word 'certain' regarding growth is the same reason the company makes no money. Once you offer a great service at zero profit, you're likely to grow. Add to that the growth of the sector, and worldwide opportunities, and new products. No matter that the rate of growth is slowing, growth is growth.

     

    An ever growing company excites the imagination. The belief is that a company that grows endlessly (and continuously expands its product offerings) will create new opportunities for itself, and be worth more in the future than the past.
    7 Oct 2013, 05:19 PM Reply Like
  • Brett22
    , contributor
    Comments (83) | Send Message
     
    Used to order a lot from Amazon because it was easy an prices were often reasonable. Sales tax now being charged on all purchases and we never buy anything from Amazon; a couple more key strokes through the find.com, google shopping, shopwiki or several other sites and we can find what we want tax FREE. Checkout even easier by using Paypal and avoiding having to enter personal data. When people realize the Amazon business model is broken, the stock cratering will be a great business school case study.
    5 Oct 2013, 10:25 AM Reply Like
  • BIG_BEN
    , contributor
    Comments (166) | Send Message
     
    you realize you are falsifying your state tax returns if you do not include the untaxed purchases?
    5 Oct 2013, 10:49 AM Reply Like
  • Michael428
    , contributor
    Comments (872) | Send Message
     
    Brett

     

    Not many people talk about sales tax...but give me a break...it was so obvious.

     

    I think the company grew initially not because of Bezos' genius but because he was smart enough (smart but not genius) to exploit the sales tax advantage. California (which now charges 9 % sales tax) used to charge none and you have a business now running at basically zero margin.

     

    You don't have to be Albert Einstein to realize that the previous 9% advantage was huge.

     

    Thanx for the post!
    5 Oct 2013, 10:59 AM Reply Like
  • wyostocks
    , contributor
    Comments (9115) | Send Message
     
    Brett22
    Have to disagree. Sales tax is not charged on all items; some yes but not all. With Prime there is also no shipping.
    5 Oct 2013, 11:01 AM Reply Like
  • wyostocks
    , contributor
    Comments (9115) | Send Message
     
    BigBen
    Not all states have an income tax.
    5 Oct 2013, 11:01 AM Reply Like
  • BIG_BEN
    , contributor
    Comments (166) | Send Message
     
    Yes not all states have sales tax but internet companies should not charge tax when shipping to those destinations. My state requires you claim internet/cross border purchases. Obviously not everyone claims this. I am pretty sure every state with a sales tax has a similar box on the tax return. The playing field was only unlevel for the tax dodgers :) Honestly I think that loophole should have been closed long ago but it just shows how slow bureaucracies are at keeping up with the changing world. Ecommerce has been around for a while now...
    5 Oct 2013, 11:13 AM Reply Like
  • Hiro Hara
    , contributor
    Comments (142) | Send Message
     
    Sales tax issue is kind of interesting. The company who deals with the commerce to a state continuously, they must collect sales tax. The notion was that the online sales was only one time only, the seller does not have to bother with the state of the particular sale. It makes sense eBay is not really selling, but auctioning, so sales tax is only one time, and the transaction is only one time. Amazon is the seller, so they must collect the sales tax for every states they do business continuously. For Amazon's vendors who sells home improvement goods for example selling through, they might not have to collect the sales tax if the transactions are one time only.
    5 Oct 2013, 11:49 AM Reply Like
  • krk
    , contributor
    Comments (866) | Send Message
     
    Michael-
    I don't know about Bezos' "genius or smart" part.
    Twisted-clever and diabolical perhaps!

     

    Just look how Amazon has gamed the sales tax issue

     

    How Amazon wins the sales tax wars even when it loses
    http://bit.ly/16rvhjT
    ..in Texas .. it will benefit from a “rebate” on the sales taxes collected in the suburbs where its warehouses are located. “This bonanza would run well into the millions.”

     

    Amazon poised to get a cut of California sales taxes
    http://lat.ms/16rvjbi
    California law allows some merchants to designate a legal "point of sale," permitting them to direct 100% of the city share of sales taxes to a specific community where they have a physical presence.
    This gives online retailers such as Amazon tremendous leverage to negotiate sales-tax rebates from cities that want one of their facilities.
    For Patterson, dubbed the Apricot Capital of the World and located just off Interstate 5 in Stanislaus County, the projected bonanza is nearly as big as its entire general fund .. the city is considering rebating as much as 75% of its share of sales-tax revenues to Amazon. Patterson "is not ashamed about taking advantage" of any legal tools available for economic development in part because rival communities are doing the same thing. ..the nearby city of Tracy expanded its existing sales-tax-sharing plan to include e-commerce warehouse and shipping facilities in hopes of attracting Amazon.
    San Bernardino, meanwhile, is working on an agreement with Amazon that would give the retailer as much as 80% of its share of sales taxes in the first few years.

     

    So, while Amazon adds and collects sales taxes from its customers in Texas and California, it pockets a good chunk of it, meaning that while the taxes might impact its revenues, but when it does make the sale nonetheless, its profit margins are boosted by this yet another twisted loophole.
    6 Oct 2013, 12:53 PM Reply Like
  • TruffelPig
    , contributor
    Comments (4207) | Send Message
     
    No one ever thinks that competition could be growing - it is NOT that difficult top sell stuff on the internet. EBAY and many many small sites are actually doing it right now. I buy more stuff with other companies than Amazon online.
    5 Oct 2013, 12:24 PM Reply Like
  • krk
    , contributor
    Comments (866) | Send Message
     
    Nissan Versa Note: Not worth the cost at any price
    http://bit.ly/1926Euh

     

    And this is the car Amazon's chose for its foray into its car buying program like Costco's.
    http://amzn.to/16B5EbO
    5 Oct 2013, 02:36 PM Reply Like
  • Bleecker Street Research
    , contributor
    Comments (497) | Send Message
     
    One problem with their analysis, if Amazon is hurting shareholders of competitors, then why are all of them up way more than Amazon YTD? NFLX, RSH, and BBY all trouncing AMZN ytd
    6 Oct 2013, 03:06 PM Reply Like
  • loony911
    , contributor
    Comments (10) | Send Message
     
    This stock can remain irrational longer than you can remain solvent.
    6 Oct 2013, 11:51 PM Reply Like
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