Amazon's Cash Is Not Amazon's Cash

| About:, Inc. (AMZN)
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Previously, I have already explained regarding (CRM) how cash generation based on paying employees with stock options and stock is misleading, due to the effect of compounding dilution over time.

However, there are still other ways to generate cash whose cash output really isn't the same as producing cash from earnings. (AMZN) is a perfect example of this. Most cash that generates comes not from earnings, but from the fact that it receives payment from its customers much faster than it pays its suppliers. During 2011, 76.8% of's cash provided by operating activities came from the expansion of accounts payable (source: 10-K). Given that's revenues are expanding fast, this effect translates into a larger cash hoard on its balance sheet.

This cash on the balance sheet ($9.6 billion at 2011 year-end), though, is not's to keep. It's just passing by. Indeed, it is a similar concept to what Warren Buffett explains in his Berkshire Hathaway's (BRK.B) yearly missives: this cash is float, much like the cash an insurer gets from the fact it charges premiums upfront and then only pays for events down the road. What the insurer does keep is the returns it's able to produce from the float it invests while it doesn't have to pay it out. is no different. The cash in's balance sheet isn't Amazon's to keep, it will eventually flow back to the suppliers - only the returns that makes from investing that cash will stay with Amazon.

So how is doing investing that cash? It's doing lousy.'s earnings are back to where they were in 2004, in spite of now being almost seven times larger in terms of revenues and keeping five times more cash in its balance sheet.

What metric does Warren Buffett use as a proxy for how Berkshire is doing, then? He uses book value as a proxy to value creation, with book value obviously coming from the accumulated profits over time. So how is doing using the same metric? had book value per share of $0.81 at the end of 1999 and that now stands at $16.83 at the end of 2011. But here, too, there's a surprise to be had.'s increase in book value is not coming from accumulated profits (though these also contributed). In fact, a full $5.8 billion of the $7.5 billion increase in book value (77.3% or around 3/4ths) came from "Additional paid-in capital", that is, employees exercising options paying the strike price to Amazon and selling those shares in the market. How much would's book value per share be today without this effect? $4.26 per share …


It's a fallacy to look at's cash on the balance sheet and conclude that it really generates cash. What generates is float, which it has to invest to produce earnings. On that count, has been failing miserably. Likewise, measures that try to value on its cash generation including the cash generation that comes from the expanding accounts payable are equally flawed., in the end, will always have to be about earnings. Or their non-existence.

Disclosure: I am short AMZN, CRM.