by Dan Burrows | July 26, 2013 1:26 pm
No, it’s never going to happen, but if investors in Amazon.com (AMZN) ever want to see a reliable stream of earnings — to say nothing of steady profit growth — they need to get rid of CEO Jeff Bezos.
Make no mistake: The guy is a genius. In less than two decades, Bezos has built Amazon into an empire. It’s a retailer, selling everything from books to groceries. It’s a consumer tech company, building its own tablets. And it’s an info-tech leviathan, supplying back-end services to other technology businesses.
E-tailing? Check. Big data? Check. Social? Check. Mobile? Check. The list goes on. Indeed, Amazon has its finger in just about every important digital pie there is.
The problem for shareholders is that it’s enormously expensive to build — much less maintain — an empire.
Yes, Amazon’s revenue growth is truly something to behold. But profits? Forget about it. Indeed, for the most recent quarter, Amazon posted a surprise loss and a weak outlook.
That’s because Bezos is all about investing Amazon’s take back into the business. Which is fine … except that it makes shares almost impossible to value.
When you buy stock in a company, your equity stake gives you a claim on the firm’s long-term stream of future earnings. The share price is supposed to reflect some multiple of those projected profits.
But Amazon doesn’t trade that way. It moves on revenue growth — not projected earnings. That’s why it has an eye-watering forward price-to-earnings multiple (P/E) of 100. (By comparison, the Nasdaq 100 has a forward P/E of 15.5.)
Amazon is a momentum stock. The idea is that one day — someday — that gusher of revenue eventually finds its way down to the bottom line.
As we’ve written before, Amazon is valued on hope.
But as long as Bezos is in charge, it seems the revenue will always be diverted away from the bottom line and back into empire building.
The chart below, courtesy of S&P Capital IQ, says it all. It shows Amazon’s share price, revenue and net income over the past decade. The blue line is the stock price, the light blue columns are revenue. And those tiny red columns way down at the bottom? The ones you can barely see? That’s Amazon’s profit.
Notice how closely share price and revenue correlate. Also note that earnings do not grow.
To be sure, the annual revenue growth is astounding — from $5 billion to $67 billion in just ten years.
Profits, of course, are another matter. A decade ago, Amazon reported annual net income of $35 million. For 2012, the company posted a net loss of $39 million. Heck, earnings peaked in 2010 and have been in decline ever since.
That’s the price of building an empire that recognizes no boundaries or borders.
Now, none of that will matter to the stock price as long as revenue keeps growing rapidly and the market keeps valuing Amazon by that revenue growth. In the short- to medium-term.
But over the long haul, remember that shares represent a claim on future earnings — not revenue. And as long as Bezos is in charge, he’s going to use Amazon’s revenue to extend and create tributaries — not to boost earnings.
With a momentum stock like this, you’re betting that someday the top line flows down to the bottom line. But that’s a risky bet as long as Bezos is in charge, as “someday” increasingly looks like never.
As of this writing, Dan Burrows didn’t hold positions in any of the aforementioned securities.
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