As has been the case for years now, Amazon.com, Inc. (AMZN) is expected to report double-digit revenue growth when it reports its fiscal first quarter numbers after Thursday’s closing bell rings. And, as has also been the case for years now, whether or not the e-commerce giant meets its earnings estimates will largely be irrelevant, as owning Amazon stock is perpetually a matter of where the company is going rather than where it is.
And yes, last quarter’s and last year’s operating income for Amazon were both record-breaking, mostly on the sheer growth of the company’s North American bottom line, and its surprising fiscal success with Amazon Web Services.
Is it possible Amazon has finally created enough scale — and scaled back enough on its ill-advised expenses — that it’s becoming a real, viable company?
Thursday’s announcement could at least partially answer the question.
AMZN Earnings Preview
As of the latest look, analysts collectively expect Amazon to report a profit of 58 cents per share on $27.99 billion worth of revenue for the previous quarter. Both compare favorably to the loss of 12 cents per share of AMZN booked a year earlier, when the company drove $22.7 billion worth of sales.
As was noted, however, a loss doesn’t mean a lot for Amazon — it books them all the time, mostly in the name of future growth.
On the flipside, the range of top and bottom outlooks is wide, and a handful of high-profile analysts aren’t as bullish as the crowd … and for understandable reasons.
Wedbush’s Michael Pachter is one of those doubters. He’s only looking for a profit of 45 cents per share of AMZN, interpreting the recent shareholder letter from CEO Jeff Bezos as notice that he intends to keep investing heavily in growth. It’s not a stretch to hold that opinion, in light of Amazon’s disappointing fourth-quarter numbers, mostly for that reason.
3 Things to Think About With AMZN
While Amazon stock is driven higher or lower by a great number of factors, three currently stand out as the biggest influences on the stock’s value. In no particular order…
1. Monthly On-Demand Video Subscriptions
It was only a few days ago that Amazon began offering new subscription terms to its Amazon Prime service, allowing access to Amazon’s on-demand video library as well as free shipping choices on a monthly basis rather than requiring a full-year subscription commitment.
Opinions about the potential impact such an offer may have on the top line have been mixed, but the general consensus is that this is something for primary competitor Netflix Inc. (NFLX) to worry about.
See, Amazon doesn’t necessarily have to turn a profit with its on-demand video efforts. It can monetize those customers in a variety of other ways. Netflix, on the other hand, only has one pathway to profitability.
2. Cash Flow
In the grand scheme of things, Amazon’s bottom line doesn’t mean a whole lot. Its expenses are as much accounting opinion as they are fiscal fact and may or may not paint an accurate picture of the company’s health.
A more meaningful measure of Amazon’s success is its cash flow.
Those who know AMZN well will be cheering this idea, as the company’s operating cash flow reached $8.8 billion in the fourth quarter, and grew to $11.9 billion for all of 2015 (almost doubling 2014’s cash flow tally). Free cash flow rolled in at $5.2 billion in the fourth quarter, and ended the year at $1.3 billion.
Don’t get too excited just yet, however. This little disclaimer casts a shadow on the numbers:
“All of these free cash flows measures have limitations as they omit certain components of the overall cash flow statement and do not represent the residual cash flow available for discretionary expenditures. For example, these measures of free cash flows do not incorporate the portion of payments representing principal reductions of debt or cash payments for business acquisitions. Additionally, our mix of property and equipment acquisitions with cash or other financing options may change over time. Therefore, we believe it is important to view free cash flows measures only as a complement to our entire consolidated statements of cash flows.”
Those payments being referenced were quite sizeable.
The point is — to the extent it can be interpreted anyway — cash flow means a whole lot more than the income statement does.
Last but certainly not least, Amazon Web Services has been an undeniable success, driving $7.88 billion worth of revenue last year, and turning $1.8 billion worth of that revenue into operating income. The top and bottom line were both much bigger in 2015 than they were in 2014.
That profitability party, however, may be coming to a close. If rivals Microsoft Corporation (MSFT) and Alphabet Inc (GOOGL, GOOG) are any indication — and they are — cloud margins are finally starting to compress now that the rise of so much competition has turned it into something of a commodity.
In other words, the long-term potential profitability of AWS is about to face its first real test.
Bottom Line for Amazon Stock
Amazon stock is still what it was a year ago, five years ago and fifteen years ago … a bet on a prosperous future. For years the market gave the company a pass on profitability, but those passes are becoming tougher and tougher for Bezos to earn.
Unexpected expenses or lackluster revenue growth could do outsized damage to AMZN stock … more so than it has done in the past.
Just tread lightly.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.