- Amazon stock price rose 20% while the NASDAQ lost nearly 8% over the last three months
- The whisper number is for 20% growth and a loss, but that may still disappoint
- How much of the company is retailing, and how much is tech?
While other stocks, even other tech stocks, have been languishing over the last few months, Amazon (NASDAQ:AMZN) has been defying gravity.
While the NASDAQ composite is down 7.9% over the last three months, Amazon stock price has moved up by 20%, eclipsing the old highs. Even after dropping $12 in the last 2 trading sessions they stood at $536, above the previous high of $535.
At that price you’re paying three times sales for a company that is basically a retailer. True, the fastest-growing parts of the business are pure tech – the streaming video business paid for mainly through Amazon Prime and the Amazon Web Services cloud – but even there the multiples are getting scary. And let’s not even talk about a Price/Earnings multiple, because most quarters Amazon remains stubbornly immune to profit.
Amazon.Com next reports earnings on October 22, and the official “whisper number” is a loss of 12 cents/share on revenues of $24.91 billion. The top-line number is the most important one, and would represent sales growth of 20% over September 2014, when sales reached $20.578 billion.
I have held Amazon shares since they were hovering near $300, and ignored the catcalls of investors who insisted the company was worthless, that its cash flow was radically over-estimated, and its lack of profit would doom the shares. I pointed out that the cloud operation should have a multiple like the five times sales accorded to tech stocks like Google (NASDAQ:GOOG), that its streaming operation should be compared with Netflix (NASDAQ:NFLX), and that the reason it wasn’t making money was because it was sinking every dollar that came in into growth.
Cash flow is indeed the key to understanding its latest run-up. During the second quarter it had over $4.5 billion of negative cash flow from investing and financing, an indication that it continues to build data centers and warehouses at a breakneck pace, but it scored $498 million in positive cash flow from operations. Amazon’s business is as seasonal as any retailer’s, and positive cash flow during a June quarter is highly unusual.
Still, the present price of the stock indicates to me there are whispers-within-whispers regarding expectations, and that traders are going to be scouring the October 22 report more closely than before. They will be looking to see if it maintains the 40% annual growth rate for its cloud and whether it scores expanding profit from that cloud. They will want to see growth in Amazon Prime subscribers. They will be looking at that cash flow number closely. I suspect that most will be expecting another bottom line profit, and many could be expected to sell the stock if it doesn’t deliver that.
I lightened up on Amazon shares at about $520. They were, frankly, becoming a substantial piece of my retirement account, and I don’t want to have all my eggs in one basket. There is a lot we don’t know here, like how much of Amazon Prime revenues should be attributed to streaming content vs. free shipping. With retailers like Costco (NASDAQ:COST) still selling at a significant discount to sales, I wonder how to value its merchandise revenues, which remain more than half the total.
I wonder how much longer Amazon.Com can defy investment gravity, but I’m along for the ride.