The everything store does not have profit

Last week it was Amazon.com's turn to in the earnings season to release their results. I am busy reading the book about Jeff Bezos and Amazon, so the team here decided to leave the report for me now that I am back from the Cape.


First things first, Amazon made a loss of $126 million for the second quarter of this year. A disappointing number but not a huge surprise because of all the money they are ploughing into technology, new distribution centres and other items designed to improve the customer experience. The guidance for the next quarter is even worse, as they are forecasting a loss of between $410 - $810 million, with $410 million of the loss coming from stock options and the writing down intangible assets. Personally I think that it is going to be a couple of years before we see a meaningful profit number from Amazon. I think that Jeff is going to increase his R&D and Capex spends as revenues grow.


The revenue number is by no means small or growing slowly, up 23% to $19.34 billion for the quarter. As one analyst said, it is quite a feat to make a loss on revenues around $20 billion. Next quarter revenues are expected to grow by 26% to between $19.7 billion to $21.5 billion! Breaking the revenue down into regions North America is $12 billion and the rest of the world is only $7.3 billion. To give you a comparison figure Walmart in their last quarter had revenues of $115 billion! When it comes to online sales though Walmart only had $10 billion for the last financial year, which is around half the figure that Amazon had for this quarter.


The large revenue number generates a large operating cash flow of $5.33 billion up around $800 million from the same time last year. This is the number that I think matters in Amazon's case because the bulk of the cash flow was put back into building a bigger Amazon with $4.288 billion going to property, equipment and web + software development. If and this is a big IF, Amazon do not spend this cash on building the company, the PE ratio would sit around the 27 mark. Which considering that they are growing revenues in the mid 20's, that looks cheap!


Given that profit is currently not very high (or negative) on the goals list for the management at Amazon what does their debt look like to fund the lose making company? It is not very high, sitting at the $4 billion mark, which is very small considering the operating cash flow number.

What is at the top of the Amazon goal list though, the customer! This is what will and does differentiate them from other online retailers. Being customer focused has made Amazon a very easy site to use and created a very loyal customer base. All the investment in infrastructure and R&D is to improve the customer experience by making the choice available bigger, easier to access, cheaper and quick to be delivered. More customers means better prices from suppliers for Amazon, meaning cheaper products leading to more customers.


Going forward online retail is only going to grow and Amazon will be the company leading the way. This is a stock that I would be buying for the long run, a buy and forget story, because I think it could be a bumpy ride, with small swings between profit and loss for the foreseeable future. Once the reinvestment of cash stops or slows down, I would expect to see Amazon towering above the competition and having a meaningful earnings number to justify the lofty valuation.