The share price of Amazon (NASDAQ: AMZN) witnessed an increase of 30.1% YTD (Year-To-Date) and seems to be climbing greater heights. Should investors remain bullish on the stock just because the company has been witnessing a strong top-line growth? To arrive at a conclusion, Amigobulls analyses a series of financial and non-financial parameters.
Amazon derives its revenue by selling a wide range of products and services to customers. The company also offers other services such as Amazon Web Services (AWS), fulfillment, publishing, digital content subscriptions, hardware manufacturing, etc. Amazon’s revenue grew at a 9-year CAGR of 31.3%, with its revenues increasing from $5.26 billion in 2003 to $61.09 billion in 2012.
But the real picture isn't as rosy as it appears. Although Amazon leads the top-line growth numbers in the industry, the percent of revenue growth deteriorated during FY’12. The Y/Y revenue growth declined to 27% from 41% in FY’11. This is despite an increase of 3 points Y/Y in fulfillment, marketing and technology expenses.
Amazon’s revenues are growing but its bottom-line is still bleeding. The company seems to prefer market share over margins. Take the instance of Amazon’s tablet market, wherein the company aims to make profits from the content rather than by the sale of these devices. But this strategy has not worked very well for the company’s bottom line. FY’12 Earnings Per Share (EPS) on ‘diluted’ and on ‘diluted before non-recurring items’ basis stood at $(0.09) and $0.28, a decline from $0.08 and $0.61 over the past ten-year period respectively.
Will Amazon turn profitable at all?
Profitability is often looked as a synonym to the free cash flow generated. This figure doesn't look good either. For a 61 billion dollar company, the free cash flow is reduced close to zero by the capex spend. If Amazon’s revenue is offset by an equal amount of operating expense (as a % of revenues) we do not find Amazon using its operating levers quite well. On the cash flows front, the company is spending most of its operating cash flows in capex, which might be a risky proposition for a loss making company like Amazon.
We believe that the stock is currently overvalued because Amazon is yet to show its consistency in generating profits. Again, we cannot determine EPS-related valuation multiples since the company is currently making losses. “Artificially” low prices and offsetting profits at established segments against losses in new segments makes the company least attractive”. Let us look at a few of Amazon’s closest competitors and their valuation…
Even if Amazon were to command an average P/E of ~30x, the company has to report a profitable EPS of $10.3 during FY’13, which in our opinion is not possible even if the company were to report 100% growth in its EPS. In summary, we don’t think the current P/E levels like ~1,500x is justified for a risky company like Amazon.