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Wall Street's bears are scratching their heads again. (Nasdaq: AMZN  ) has come through with another analyst-humbling quarter, with no slowdown in sight.

The e-tailer's quarterly highlights include:

  • Net sales rising 18% to $4.89 billion. A strengthening dollar against European currencies ate into the company's top line; on a constant dollar basis, net sales would have risen 25%.
  • Earnings climbed 24% to $177 million, or $0.41 a share. Analysts predicted a profit of just $0.31 a share.
  • North American sales climbed a sharp 21%. International sales were up 15% on a reported basis, but would have clocked in 28% higher without the foreign exchange fluctuations.
  • Free cash flow over the trailing 12 months soared 82% to $1.43 billion.

Valuation pundits will gravitate right to the company's bottom line, and shake their heads at what is now profitability of $1.56 a share over the past four quarters. Based on last night's close, can Amazon really be worth 52 times earnings?

Skeptics can also point to the company's lofty price-to-sales ratio of 1.8, given's $19.9 billion in net sales over the past year. That's clearly not a low number in retail, where (Nasdaq: OSTK  ) , Wal-Mart (NYSE: WMT  ) , and Best Buy (NYSE: BBY  ) all trade for less than 0.5 sales. On the other hand, Amazon is gradually transforming itself into a digital delivery company, where healthier margins dictate higher price-to-sales multiples.

However, the one metric that most bears review is the company's ability to generate free cash flow. $1.43 billion is a lot more than the $679 million the leading e-tailer scored over the same four quarters of the previous year. Amazon is actually trading at just 25 times trailing free cash flow. That may not make the stock a blue light special, but it does make the earnings multiple seem a bit less outlandish.

Bears who insist on sticking to the plain-vanilla earnings-based valuations -- a somewhat misleading metric, since it discounts the company's envious cash flow management model -- may also want to brush up on recent history. Amazon has now beaten Wall Street estimates for five consecutive quarters. The last two quarters have been blowouts, suggesting that analysts are seriously undershooting the company's prospects in this recession.

Amazon is growing where other retailers -- online or bricks-and-mortar alike -- are not. It's still not putting out hard numbers on the Kindle, but clearly, the e-tailer doesn't have a problem with its overall growth.

As other online merchants like, (Nasdaq: DSCM  ) , and Bluefly struggle to turn a profit, Amazon coasts. When real-world chains like Circuit City are closing down, and even discounters such as Target (NYSE: TGT  ) post monthly declines at the store level, Amazon has never been more appealing.

Attracting shoppers and bears alike? That doesn't sound like a bad combination, especially for contrarian bulls.  

Fill your cart with further Foolishness: and Best Buy are Motley Fool Stock Advisor picks. Best Buy and Wal-Mart Stores are Motley Fool Inside Value picks. The Fool owns shares of Best Buy. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz has been shopping online for about as long as has been in business. He does not own shares in any of the stocks in this article. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 24, 2009, at 12:46 PM, Melaschasm wrote:

    As a consumer I initially only bought on Amazon when they had great prices. Now I also buy on Amazon because of their selection.

    I know there are speciality online retailers that can beat Amazon's price, but if I know nothing about the company, I do not trust them with my credit card information.

    Personally I think Amazon will continue to gain market share for many years to come, and in the long run, higher volume should mean higher profits.

  • Report this Comment On April 24, 2009, at 2:13 PM, floatingblue wrote:

    Dear Mr. Munarriz,

    just a few public questions to better understand your valuation technique and knowledge. I really would appreciate your public answers to my few questions that the public can learn from your valuation knowledge:

    1. Did you calculate the free cash flow yourself?

    If not, did you check the way your source calculated it?

    2. Did you check whether it is sustainable and cleaned up all "not for ever repeatable factors"?

    3. Did you subtract "appropriate taxes" (AMZN so far does not pay income taxes but sure will have to in the future)?

    4. Did you check whether your multiple makes economical/financial sense?

    5. Did you subtract liabilities/debt from your "multiple x FC" to calculate equity value?

    6. .... to be continued

    I guess, your honest answers to these few questions would be: NO!

    So, I am going to answer the final and most important question:

    Does your valuation makes economically and financially sense and holds basic academic standards? NO!

    But, in case I am wrong, I am eager to learn and therefore appreciate your public answers/ a public discussion with you about the valuation of AMZN!


  • Report this Comment On April 26, 2009, at 1:41 AM, TMFBreakerRick wrote:

    floatingblue, thanks for the comments -- and the questions.

    As for my free cash flow source, it comes from the horse's mouth this time:

    Its trailing free cash flow appears to improve with every passing quarter, so one could argue that it is sustainable.

    As for "income taxes" that Amazon has to pay, the company has been paying income tax for years now. It didn't take long to eat through the carryforwards from the 1990s. It set aside $69 million in income tax provisions this quarter alone. If you are referring to the state taxes that some states are starting to require, that is obviously paid by the customers.

    As for subtracting liabilities and debt, have you seen how clean Amazon's balance sheet gets with every passing quarter? This isn't the debt-padded company it used to be. It actually has billions more in cash and marketable securities than its long-term debt obligations, so if I were to use enterprise value instead of market cap the multiple would have been slightly lower -- not higher.

    As for the multiple makes financial sense, I did compare it to peers that have lower multiples, but they're clearly not growing as quickly -- and as consistently -- as Amazon these days.

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