Amazon Q4 – To hell with reason

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There is no rhyme or reason in the valuation of this company.

  • Amazon reported disappointing results but still managed to rise 10% in after-hours trading as the bulls dug deep to find justification.
  • Q4 Revenues / EPS were $21.3bn / $0.21 compared to estimates of $22.2bn / $0.27.
  • Guidance was also weak with Q1 revenues and EBIT of $15.0bn-$16.6bn / Loss $285m – profit $65m compared to estimates of $16.9bn / profit $261m.
  • 2 good things came from the numbers:
    • First. Margins in North America improved nicely to 5% from 3% 12 months ago.
    • This was taken as a sign that there is more to come and the turnaround in profitability is beginning.
    • Second. The attach rate of content to Kindle devices looks like it is moving in the right direction.
    • Sales of the dedicated e-book readers may be falling hard, but sales of the content that go on them grew by 70% YoY.
    • This goes hand in hand with the weakest quarter ever for regular books and a very strong quarter for tablets in general.
    • This implies that iPads and the generic Android tablets such as the Amazon Kindle Fire are being increasingly used for consuming paid content.
    • Amazon’s strategy to sell hardware at cost and make money on the content looks like it is beginning to work.
  • These are positive developments but in no way make up for the fact that Amazon barely makes any money, had puny cash flow of $395m and has a PER ratio to make your nose bleed.
  • I like Amazon’s strategy. It started as a retailer of online books, became an online seller of everything and now is a contender to be a giant of the internet.
  • There are not many companies around that have the ability to re-invent themselves in such a manner but it is already in the price.
  • To have a PER of 14x (with which I could be comfortable), net margins would need to increase 10 times from where they are expected to be in 2013 (0.2%) to 21%.
  • I would much rather have Google 16.4x or Apple at 10.2x 2013 PER and both of these have huge cash balances to deduct to make the ratio even cheaper.
  • Amazon is investing hard for the future but there are going to be bumps in the road.
  • Wait for a big bump and then revisit once Wall Street has panicked and Jeff and his chaps are fitting the wheels back on.

 

RICHARD WINDSOR

Richard is founder, owner of research company, Radio Free Mobile. He has 16 years of experience working in sell side equity research. During his 11 year tenure at Nomura Securities, he focused on the equity coverage of the Global Technology sector.

Blog Comments

“… net margins would need to increase 10 times from where they are expected to be in 2013 (0.2%) to 21%.”

Isn’t that 100x rather than 10x?