There may not be another company out there that ruffles feathers quite like Amazon.com (AMZN 0.53%) does. Quarter in and quarter out, investors and analysts debate how a company that makes so little in the way of earnings per share can be valued at such "outlandish" levels. I get it. But it's also a short-sighted take on what's becoming one of the most fascinating business stories of our time.
Amazon announced earnings a bit more than a week ago with top-line revenue growth of 23% and net income up 31%. Not too shabby at all for a company many see as "barely profitable." Some of the highlights of the quarter included the introduction of Fire TV, a massive deal with HBO to bring its original content to Prime members, and the continued growth of Amazon Web Services.
Rather than focus on all of the spending founder and CEO Jeff Bezos commits to the business, investors would be wise to focus more on what one metric tells us about how he views the company's progress: free cash flow. Whether you agree with him or not, it's how he's running this business and I'm willing to bet the house he won't change to accommodate the whims of a bunch of Wall Street analysts. He's been doing it since 1997, when he stated as such in his shareholder letter:
We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions.
Hey, you gotta love consistency, right? And what about free cash flow and why is it so important to him? In his own words, in a 2013 interview with the Harvard Business Review blog network:
Percentage margins are not one of the things we are seeking to optimize. It's the absolute dollar-free cash flow per share that you want to maximize, and if you can do that by lowering margins, we would do that. So if you could take the free cash flow, that's something that investors can spend. Investors can't spend percentage margins.
So the numbers that long-term Amazon bulls want to focus on are operating cash flow and free cash flow (defined as operating cash flow minus capital expenditures). Here's how those numbers have stacked up over the past decade:
I don't care if you're an Amazon bear or bull; I'm not trying to sway you either way. But regardless of what you think of the company as an investment, just make sure you understand the game that Jeff Bezos is playing. It's a bit different than the rest.
