The e-commerce industry in the USA is accelerating and expected to register a growth of 14% on a year on year basis in 2013 holiday season, according to reports on comScore ecommerce spending. This growth will be mainly driven by growing mobile commerce, low cost online retailing and improving economic conditions. The stand-out winner of this forecast will be Amazon (NASDAQ:AMZN), given the company’s gigantic market share in e-commerce industry, its aggressive discount pricing and an ever growing variety of merchandise.
Amazon Revenue Trends
Amazon revenues have always been seasonal, peaking in the fourth quarter of every year owing to the holiday season in the US and worldwide. The revenue guidance for fourth quarter revenues is expected to be $23.5 billion to $26.5 billion, with a growth rate of 14% to 25% on a Y/Y basis. Expecting revenue to be at the middle point of guidance at 19% growth rate, Amazon is expected to grow at a higher growth rate than 14% growth of e-commerce industry, forecasted by ComScore. The growth will thus have to be fueled by both attractive holiday season and increase in market share.
However, generating high revenue growth has never been an issue with the company. Amazon’s is historically growing at over 30%. While the growth which has slowed down in recent years to levels of 25% from early 40-50% range is a concern for investors, prices are yet to reflect the same. We see below the trend.
While the top line growth of the company has always been consistently high, the company is yet to make significant profits. Amazon has been consistently reporting losses or net income margins less than 1%. Amazon as of now, has not found a way to monetize its huge revenue base of over $61 billion. However, the operating cash flow of the company has seen healthy growth in last five quarters. As can be seen below:
The company also reports Free Cash Flow, which is understood by analysts globally as a reflection of company’s earning capabilities. The free cash flow trend, as can be seen in the chart below, has also been in a declining trend owing to the increase in capital expenditures by the company.
Though we expect strong fourth quarter revenues of Amazon, we find its profitability too low for comfort. Given 52% jump in share price year-to date, investors seem to value the company on basis of its operating cash flows. But we believe operating profits and earnings power are better measures of valuations. Growing competition in e-commerce industry from eBay and new entrant Google Shopping will also be a challenge going forward. Currently, the share price is trading at $381.37, which seems too overpriced for a company trading at a price to earnings multiple of 1362, based on last twelve month earnings.
To see Amazon’s latest stock price movement, click here (NASDAQ:AMZN)