bill9300

Amazon: Is 'Free Cash Flow' More Important Than Net Income?

Longtermvl-





Is AMZN’s FCF from Short-term Cash held from Customers' Sales December Q, paid to suppliers in the March 2008 Q worth $16bn in Market Valuation??? Remember this FCF, as many classify it, is not Net Income.



Goldman put a 20 X 2009 estimated FCF, to try to justify Amazon's valuation of $34bn. (2009?)



Amazon a company that earned $1.5bn in the past 6 years, a 2007 profit of $476ml and a P/E of 60+) How can "FCF" (aside from earnings) most of which is of POOR QUALITY be given such a outrageous valuation (20X).



From the Goldman recommendation-in the article-

"Trading at around 20X 2009E free cash flow, Goldman believes Amazon stock can outperform on rising revenue if margins are only flat; RAPID REVENUE GROWTH ASSISTS FREE CASH FLOW BECAUSE AMAZON USES ITS IMPROVING CATEGORY SHARE TO NEGOTIATE LONGER PAYMENT TO SUPPLIERS in categories such as books..."





"FCF" for 2007 according to their definition (computation 1- in the article) came out to $1.181bn, as compared to (computation 2) the FCF beginning with Net Income , of $496ml a difference of $685ml.



Do you feel it is proper or fair to value this $685ml at $13bn, ($685ml x 20 = $13.7bn?) when it all vanished in the following quarter?



Two methods of computing Amazon's FCF for 2007

1) Cash Flow From Operations...........$... bn.

Less Capital Expenditure..............

Free Cash Flow.....................

2) Net Income...................

Plus Depreciation.............

Less Capital Expenditures.............

Free Cash Flow..................... ml

Difference between the formulas ......................... million