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October 22, 2003 |
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In 3Q03 Amazon reported GAAP net income of roughly $15.5 million (4 cents/share) versus a GAAP loss of 9 cents/share in 3Q02. Reporting a profit in a non-Christmas quarter - a first for Amazon - is definitely a positive for the company. Another positive worth mentioning is AMZN's earnings, with the exception of 4Q02 ($2.6 million in earnings versus $5 million in 4Q01), have improved in each of the last 13 quarters. Suffice it to say, not only is Amazon becoming a more profitable venture (losing less money), it is also continues to grow revenues at a dramatic rate (AMZN financials - Excel)
If revenue increases and miniscule profits are not enough, Amazon has also been able to sure up its balance sheet in recent quarters. And although four quarters hardly a sustainable trend makes, given that company was staring at a potential default a few short years ago the recent improvements in the balance sheet are noteworthy. Moreover, when combining the improving equity statistics with a decline in the value of long-lived and intangible assets, Amazon has strengthened its working capital position. In short, with each passing quarter Amazon is becoming more financially stable.
Before getting carried away with all the things going right for Amazon, it should be pointed out that the company is still a long way from possessing a balance sheet that is in the black (negative $1.1 billion in equity is a daunting number to chip away at). Moreover, there is the question of stock price valuation: How does a company go from having less than a $3 billion market cap in late 2001 to having more than a $23 billion market cap today, especially considering that during this time frame (not withstanding the odd quarterly profit) the company lost a fantastic amount of money? In short, you can put any slant you want on cash flows and equity, but beyond the word ‘mania’ it is unexplainable why AMZN is trading with the same market cap as General Motors, and why AMZN’s price/sales ratio is more than 5-times the price/sales ratio of the best retailer in the world (WMT). Speculating why the Amazon’s are rallying One of the reasons why companies like Amazon are rallying strongly is because fund managers and traders are buying/flipping high beta stocks that have extremely liquid shares. To these momentum seekers it doesn’t matter what the underlying asset may be worth. On the contrary, a good story with unlimited potential beats a balance sheet with identifiable potential. In the case of Amazon, the story can be hard to resist: once left for dead this former internet darling has sprung to life and is now reporting profits before Christmas on top of stellar revenue gains! Beyond having to live in a storybook market, fund managers also face the reality of having to generate short term trading profits. To be sure, with mutual fund money perpetually shifting into and out of hot/cold funds, the manager that sticks with the 4% (or 1% per quarter) dividend payers risks losing his job as the markets rally by double digits. Thus, the allure of volatile tech/internet stocks is ever-present -- the upside potential in extremely liquid stocks – assuming shares do not gap lower - is great while the stop loss risk is low (or so the story goes). To better understand the phenomenon of story telling and stop loss gambling, consider a handful of internet stocks. Of these companies the usual suspects – or the best stories – carry the highest turnover rates.
By way of comparison, consider the water utilities industry. These companies offer the investor an average dividend yield of nearly 3% - versus 0% on the above i-nets – yet their stock prices have failed to attract much ‘trading’ attention. What is more attractive to fund managers and day traders -- a 3% annual dividend or the chance to make 3% in a single day in internet stocks?
Conclusion Online retailing is a slightly profitable venture for some, but largely considered to be little more than a hassle for the many. Yes, Wal-Mart offers online merchandise – at better prices than Amazon in most cases – and others like Home Depot are slowly beginning to expand their online operations internationally. Nevertheless, Amazon risked the most money early on in the game and this has helped the company build an extensive online presence and attract a loyal customer following. The point to these ramblings is that Amazon – king of the online jungle - will not easily be slain when Wal-Mart really arrives. That said, no matter how successful Amazon may be in the future, there is still great risk in owning any company that has a negative equity position, a $23+ billion market cap, and unproven profitability. Quite frankly, with nearly $3 billion in total debt and $1.7 in total assets Amazon remains a long-term gamble for would be visionaries, not investors. Notwithstanding the recovery in corporate profits, increases in margin debt, and the Fed induced panic out of bond funds and into stock funds, there is really no knowable reason why companies like Amazon has rallied to such dizzying levels, save momentum based greed. The Big worry for greedy tech stock gamblers is not ROE or price valuation considerations. Rather, whether or not shares can be sold for a profit or only a tiny loss when the momentum dies. |
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