Amazon: A High Risk Bet

AMZN: A high risk bet

Amazon (NASDAQ:AMZN), the online retailer, has seen its stock price jump over the last 5 years to register an absolute gain of close to 250%. Has the company achieved something phenomenal over the last 5 years? Let’s take a look at the financials of the company.  Over the last 5 years, the company has generated average quarterly profits of $153 million on average revenues of over $10 Billion every quarter.

To put things into perspective we compare Amazon’s performance against another online retailer, eBay Inc. (NASDAQ:EBAY) During the same period eBay has generated average quarterly profits of $ 610 Million against average quarterly revenues of about $2.8 billion. One could argue that Amazon is a more efficient cash machine and investors see value in its growth and cash generating capability, which has seen the stock gain significantly. To answer this we look at the operating cash flows of the two companies over the last 5 years. Amazon has generated average quarterly operating cash flows of $768 million every quarter over the last 5 years, while eBay has made close to $804 million every quarter over the same time period. Considering these facts you wouldn’t be wrong in assuming that the eBay stock would have outperformed Amazon over the last 5 years. Surprisingly the eBay stock has gained 15% every year against the Amazon stock's gains of 28% every year. While Amazon has seen higher growth in revenues, eBay has done a far better job when it comes to profitability and cash flows, which has helped the company grow its earnings considerably over the last 5 years. This is reflected in the current earnings multiples of the two companies. Amazon trades at an earnings multiple of close to 4000 against eBay’s 25. All these facts make Amazon a significantly high risk bet and if the earnings don’t show a significant move in the right direction, it may only be a matter of time before investors lose love for the stock.

Amazon is one stock we at Amigobulls aren’t in love with, as we value companies with strong fundamentals rather than risk our money on promises of good times to come by. The AMZN stock closed at $280.98 in the last trading session registering a decline of over 1% in the day. The comparative figures for Amazon and eBay are summed up in the table below.

Amazon eBay
Average Revenue Growth over last 5 years 31.3% 12.2%
Average quarterly Revenue over last 5 years $10,000M $2,800M
Average quarterly Net Income over last 5 years $153M $610M
Average quarterly Operating Cash Flow over last 5 years $768M $804M
Average yearly stock gains 28% 15%
Current P/E over 4000 25

To see Amazon’s latest stock price movement, click here (NASDAQ:AMZN)

To see eBay’s latest stock price movement, click here (NASDAQ:EBAY)

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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