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Amazon.com, Inc. (AMZN) Stock Is a “Stay Away!” on Q1 Earnings Beat

AMZN stock - Amazon.com, Inc. (AMZN) Stock Is a “Stay Away!” on Q1 Earnings Beat

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Amazon.com, Inc. (NASDAQ:AMZN) reported fiscal first-quarter earnings on Thursday after the bell, and based solely on operating metrics, things are going swimmingly. The valuation of AMZN stock is another matter, but I’ll get to that later on.

Amazon.com, Inc. (AMZN) beats on first-quarter earnings

For now, there’s a lot to digest.

Amazon Q1 Earnings

The headline numbers? Amazon earned $1.48 per share on revenues of $35.71 billion. Both figures beat estimates for $1.13 per share in profits and $35.3 billion in sales.

However, the first thing I want to address is what I consider to be the most important metric for AMZN stock: operating cash flow. It went through the roof, up 53% to $17.6 billion for the TTM, from $11.6 billion for the previous TTM.

Why is this metric so important? Because there’s just no easy way to value AMZN stock. However, Amazon shares many similarities with the businesses owned by John Malone of The Liberty Media Corporation. GAAP accounting is so complex with his many businesses, spin-offs, tracking stocks and complex tax maneuvers that operating cash flow is what really determines the true health of the businesses.

I think the same is true for Amazon stock. So when we see a huge increase in operating cash flow, that’s great news. It’s even better when we see that free cash flow increased to $10.2 billion for the trailing 12 months, compared with $6.7 billion for the previous TTM.

If you back out lease principal payments and and assets acquired under capital leases — just so you have a complete picture — FCF still increased to $3.3 billion from $1.9 billion.

What this tells us is that AMZN continues to be a cash machine, and it’s one reason why the market probably rewards it as it does. Obviously, that cash flow can come from either increased sales, lower expenses, or both. Sales continue to be on fire, up 23% to $35.7 billion compared to $29.1 billion.

However, operating income fell 6% to $1 billion in the first quarter. That tells us that Amazon continues to spend a lot of money expanding.

Should we be concerned about this?

The Growth of Amazon

Again, I think this is where Amazon earnings break the mold, and AMZN itself should be viewed more as a business development company crossed with venture capital crossed with John Malone.

If you look at the “highlights” section of the press release, you see that Amazon has its hands in everything. I mean, there’s now “Echo Look,” which allows Alexa to critique your style choice for the day. You can shop via voice command with Alexa. In fact, Alexa can now accomplish some 12,000 tasks – except it probably can’t provide a fair value price for Amazon stock.

It continues to expand Amazon Fresh – now in Tokyo, London and 21 other U.S. cities. It now has a private label fashion line. AMZN is taking India by storm, and is now the fastest growing marketplace there. In addition, it’s producing tons of Indian content for streaming.

Don’t even talk to me about Amazon Web Services (AWS), which takes up more than half of the highlights in the press release. More and more large companies are migrating to the service, amidst a dozen other highlights.

Should You Buy AMZN Stock?

So back to the ultimate question: What do we do about this stock?

Net income was $724 million in the first quarter, or $1.48 per share, compared with net income of $513 million, or $1.07 per share. Does that mean we can give AMZN a 40x P/E? As I’ve said before, net income is not how you value AMZN, and if you did, its P/E ratio is closer to 160.

We talked about cash flow, so the closest metric I can give it EV-to-EBITDA, which is 36. I value HSN, Inc. (NASDAQ:HSNI) the same way and it’s at a ratio of 9. Same with Liberty Interactive Group (NASDAQ:QVCA), also at 9. The Liberty SiriusXM Group (NASDAQ:LSXMA) is at 11.5. Liberty Global PLC (NASDAQ:LBTYA) is also at 9.

Now, because Amazon is growing faster than all of these, I would not hesitate to give AMZN stock a ratio of 20, or even 25. But at 36, things seem stretched.

Coupled with the fact that this market is insanely overvalued, I say wait until the big correction comes, then dive in.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he did not hold a position in any of the aforementioned securities. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.


Article printed from InvestorPlace Media, https://investorplace.com/2017/04/amazon-com-inc-amzn-stock-stay-away-q1-earnings-beat/.

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