1 Good Reason to Be Worried About Amazon

What investment thesis about Amazon.com (NASDAQ: AMZN  )  would cause you to run from the stock today? In its second quarter, released last week, the e-commerce king posted a 23% jump in revenue compared to the same quarter of 2013, but its year-over-year net loss widened from $0.02 per share to $0.27.

Investors who jumped into Amazon for the bottom line were in the wrong game to begin with. But there are other reasonable reasons to be worried. Amazon has always stressed that it values free cash flow over profit. Investors who believe the same thing have good reason to run today as, after adjustments, free cash flow was down almost 20% from last year.

There's no money being made at Amazon
Over the last 10 fiscal years, Amazon has in total made just over $5 billion in net income. The company, for better or worse, isn't in the business of making money. The common refrain from investors is that it will eventually be so far ahead in terms of market share and total sales that it will be able to reduce some investments and turn on the fire hose of cash.

One can measure the potential flow out of the hose by looking at Amazon's free cash flow. This is the cash that Amazon generates over a year that is usually sunk back into the business but that could potentially go to investors.

For instance, this time last year, Amazon had generated $1.7 billion in the 12 months through June 30, 2013 -- adjusted upward for a one-time investment in a new office. In the year ending June 30, 2014, the company only generated $1.04 billion in free cash flow.

What to do next
Amazon's free cash slowdown -- exacerbated on a per-share basis due to an increase in available shares -- is bad news. The company has hung its hat on its ability to balance its investments and its revenue, but it looks like that balance is out of whack. Management expressed optimism about its future and shrugged off the fall, with CFO Thomas Szkutak saying in the earnings conference call, "We're investing on behalf of customers and share owners."

For a long while, investing in Amazon has been roughly equivalent to investing in the leadership and vision of founder and CEO Jeff Bezos. With that one quote, Amazon's CFO should have cleared up any lingering doubts about who was in charge of the Amazon train. He said, in effect, "We know better than investors what they need."

If you think that's true, then Amazon should continue to be a wonderful place in which to invest. The brand has never been stronger, with a report in March claiming that Amazon now controls 65% of all new online book purchases, counting both physical and digital copies. On top of that, Amazon's Web Services accounts for almost 40% of the total infrastructure as a service sector.  

On the other hand, if hearing that the company you own isn't really interested in what you want was a little too shocking, it might be time to turn your back on Amazon. There are plenty of businesses still interested in growing their earnings per share, paying out a solid dividend, and growing at a more sustainable pace.

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Read/Post Comments (3) | Recommend This Article (2)

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  • Report this Comment On July 28, 2014, at 1:28 PM, notyouagain wrote:

    Thank you. As a lifelong bookworm that loves (LOVES!) Barnes & Noble I will never (NEVER, NEVER, NEVER) give a company that's trying to kill off Barnes & Noble any of my business.

    After Amazon runs losses for long enough to kill off their competitors they will be forced to raise their own prices because otherwise their business model is unsustainable.

    It's anti-competitive, unethical, predatory, and should be illegal.

    Someday they will be forced to convert a significant number of their 'fulfillment centers' to brick-and-mortar stores like the ones they killed off selling products at unsustainably low prices.

  • Report this Comment On July 28, 2014, at 1:43 PM, anindakumars wrote:

    "It's anti-competitive, unethical, predatory, and should be illegal. "

    Most ludicrous statement I ever read on TMF!

    anti-competitive - if other companies can't compete how is it AMZN's fault;

    unethical - if looking after buyers interest is unethical, so be it; For your kind information - Barnes and Nobles had colluded with Apple to artificially inflate book prices. Talk about BS!

    Predatory - What is your point? Humans are the biggest predators.

    Should be illegal - well if it should be then who is stopping anyone; who is stopping the government or regulators from suing Amazon; or for what matter you! Ah frak, not again!

    "After Amazon runs losses for long enough to kill off their competitors" ... well if that happens, then they can afford to raise prices. Whether they will is another matter altogether.

    Wish you the best, Godspeed to your intellectual deathbed!

  • Report this Comment On July 28, 2014, at 2:01 PM, notyouagain wrote:

    Scathing comeback acknowledged, i have been wrong on this one so far, and if I were to be right some day, it isn't like anyone would remember it anyway.

    Anti-competitive - if this doesn't n

    Make sense, then explain why we have laws against 'dumping' ...or at least I thought we did.

    I didn't know B & N had colluded with Apple to artificially inflate book prices. Must've been e-books because Apple has nothing to do with regular printed books.

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