Amazon Q4 – To hell with reason

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.