Critics of Amazon.com (AMZN -2.35%) often point out that the e-tailer's earnings are slim and unpredictable. Hence, Amazon's price-to-earnings (P/E) ratios tend to sit in the nosebleed section and make it a no-go for value investors.
But earnings can be deceptive. Have you seen the size of Amazon's cash flows lately?
Amazon's cash machine, by the numbers
Let me show you how Amazon's free cash flows and EBITDA profits compare to a few more traditional retailers:
|
Company |
Free Cash Flows (TTM) |
EBITDA Earnings (TTM) |
Revenue (TTM) |
Net Income (TTM) |
|---|---|---|---|---|
|
Wal-Mart Stores (WMT -0.13%) |
$20.3 billion |
$32.9 billion |
$490 billion |
$14.2 billion |
|
Amazon.com |
$8.8 billion |
$12.3 billion |
$150 billion |
$1.9 billion |
|
Walgreens Boots Alliance (WBA 2.39%) |
$6.6 billion |
$7.3 billion |
$117 billion |
$4.3 billion |
|
Costco Wholesale (COST -0.78%) |
$2.2 billion |
$5.2 billion |
$123 billion |
$2.6 billion |
|
Kroger (KR 1.45%) |
$1.1 billion |
$5.5 billion |
$117 billion |
$1.6 billion |
Data source: Morningstar. TTM = trailing twelve months.
Over the last four quarters, Amazon generated just $1.9 billion on net income from a $150 billion top-line till. That works out to a net profit margin of just 1.3% -- below every other name on the list above. From this perspective, Walgreens rules the roost with a 3.7% net margin.
But the picture changes when we move over to the more cash-intensive profit metrics.
About 5.9% of Amazon's revenue trickles all the way down to the free cash flow line of its financial statements. That's ahead of Walgreens' 5.6% free cash flow margin, Wal-Mart's 4.1%, Costco at 1.8%, and Kroger's barely profitable 0.9% reading. If Amazon can maintain these top-notch cash flow margins while also matching Wal-Mart's industry-leading revenue volume, the company would generate something like $29 billion in annual free cash flows.
The difference is even clearer in EBITDA terms. Amazon's EBITDA margin is a lofty 8.2%, far ahead of Wal-Mart's second-place 6.7% and Walgreens' 6.2% in third place. Matching Wal-Mart's revenue to Amazon's EBITDA margin, you'd get a hypothetical annual EBITDA profit of $40.2 billion.
Image source: Amazon.
What do these numbers mean for Amazon investors?
You could see my hypothetical margin-plus-revenue combos as a measure of Amazon's mighty cash machine, or as an opportunity for other retailers to widen their margins. Either way, it's clear that Amazon is doing something very right here -- it just doesn't show up in ordinary headline fodder like bottom-line earnings and the related P/E ratio.
I would argue that Amazon is doing an excellent job of limiting its tax bills while producing stupendous amounts of cash profits. Furthermore, Amazon is doing this while also producing some terrific top-line growth. And that's not a new phenomenon; Amazon's revenue growth has been outpacing the industry for years:
AMZN Revenue (TTM) data by YCharts.
So what do you get when you pair industry-leading cash margins with equally fantastic sales growth? In my eyes, that combination builds a shareholder-friendly cash machine for the ages.
