Amazon's reported weak fourth quarter results and gave weaker first quarter guidance. The stock rallied. It would seem on the appearance of a big earnings beat. Earnings came in at a jaw-dropping $27.75 per share vs. estimates of $3.53 per share. But, there was a lot behind that number which was overinflated due to non-operating gains.
The company had a fourth quarter operating income of $3.5 billion, better than estimates for $2.5 billion. However, the big boost to earnings was due to booking an $11.8 billion gain in their holdings of Rivian (RIVN). This non-operating gain helped to push their net income to $14.3 billion.
The guidance the company gave missed all metrics. Revenue for the first quarter is forecast to be $115 billion at the mid-point of the range vs. estimates of $120 billion. Meanwhile, operating income is expected to be $4.5 billion at the mid-point of the range versus forecasts for $6.3 billion, a huge miss, which in itself should have sent the stock tumbling lower.
But more concerning is what's happening to the free cash flow from operations. The company reported an outflow of $9.1 billion over the last 12 months. Cash flow from operations came in at $22 billion vs. estimates for $31.8 billion, a massive 30.6% missed. It resulted in free cash flow from operations dropping to $46.3 billion over the last twelve months from $54.2 billion in the third quarter. More importantly, this metric has fallen for the third quarter in a row, from a peak of $67.2 billion in the first quarter.
It's a massive problem for the stock because it has been valued at a market cap to free cash flow operating metric for some time. With free cash flow on the decline, one would think the stock should trade at a lower multiple than it has in the past. The lower end of its historical range has typically been around 25 to 26.
It was trading just at that lower range before it reported results, around 26. But now that the stock has reported results and we see the cash flow dropped, that multiple has risen back to 30. The market cap would need to drop to roughly $1.2 trillion, about 21% lower than its current market cap of approximately $1.5 trillion for the multiple to fall back to 26. With 516 million diluted shares outstanding, the stock would be worth $2,325.
Overall, this was not a strong quarter for Amazon, and the guidance seems to be equally concerning. The free cash flow from operations should be a genuine concern to investors, and the after-hours rally seemed to be driven by automated algorithms that just read headlines and don't dive into the actual numbers. The weaker guidance alone should have been enough to send this stock even lower following results; the free cash flow numbers should have made that decline even steeper.
Instead, the stock rallied sharply on Rivian gains, which are very likely to get marked down when the company reports first quarter results, given that Rivian has been down more than 40% since the start of the year. Holdings in equity portfolios get marked to market every quarter. They can distort earnings when companies report results, particularly true of these mega-cap stocks with massive balance sheets.
So if Amazon melts lower in the days ahead or even turns red today, don't be surprised. At least now you'll know why.
Investing today is more complex than ever. With stocks rising and falling on very little news while doing the opposite of what seems logical. Reading the Markets helps readers cut through all the noise delivering stock ideas and market updates, looking for opportunities.
We use a repeated and detailed process of watching the fundamental trends, technical charts, and options trading data. The process helps isolate and determine where a stock, sector, or market may be heading over various time frames.
This article was written by
I am Michael Kramer, the founder of Mott Capital Management and creator of Reading The Markets, an SA Marketplace service. I focus on macro themes and trends, look for long-term thematic growth investments, and use options data to find unusual activity.
I use my over 25 years of experience as a buy-side trader, analyst, and portfolio manager, to explain the twists and turns of the stock market and where it may be heading next. Additionally, I use data from top vendors to formulate my analysis, including sell-side analyst estimates and research, newsfeeds, in-depth options data, and gamma levels.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future results.