Jeff Bezos has made a name for himself by saying that margins aren't what matter. Instead, he's focused Amazon.com (NASDAQ:AMZN) on generating the highest free cash flow per share possible. That approach rattles many traditional investors, who view earnings per share and growing margins as the end-all, be-all of investing. While his methods may not be immediately intuitive, it's been hard to argue with the results.
Even with last week's fall, Amazon's stock has grown 140% over the past five years, outpacing the S&P 500 by 60 percentage points. Amazon constantly tops lists for innovation, and the ceiling for sales growth seems infinitely high. On top of it all, the company has diversified its offerings without any drop in its core business. What's not to love?
The free cash flow evaluation
Amazon's free cash flow hasn't grown meaningfully over the past few years. In the 12 months up to July 2011, the company generated $4.03 in free cash flow per share. In the same period this year, Amazon's free cash flow per share has dropped to $2.25. In the intervening years, that number went down and up but has stayed below $3 for each period.
If Bezos' belief is that it's "absolute dollar free cash flow per share that you want to maximize," as he said in 2013, then right now Amazon isn't making the best of it. The twist is that if you asked Bezos to explain what was going on, he would probably say that four years isn't the timeline for success he's working on.
Amazon's long, long, long-term plan
What many investors find comforting about Amazon's plans is that they are set up to unfold over a period much longer than four years. Again, Bezos has addressed the concerns that low prices and free shipping can cut into the bottom line: "[We] believe that by keeping our prices very, very low, we earn trust with customers over time, and that that actually does maximize free cash flow over the long term."
The exact timeframe we're dealing with has never really been specified. Investors often talk about Amazon's future, where things are going so well that it can stop investing in new businesses and can push its margins back up. While Bezos has said that margins aren't the same as free cash flow, there is an undeniable connection.
He said -- they hope
Ultimately, Amazon's success comes down to the vision of one man. If Bezos is right about the long term, then there's a point where Amazon starts generating much more for its investors. If it never turns the corner, and Bezos is wrong, then the whole thing is going to collapse.
What that means is that an investment in Amazon is an investment in Bezos, more than anything else. Amazon's trailing twelve month earnings are negative, and the company could easily be considered overpriced. However, for the faithful, the potential for massive gains in the future justifies the cost.
I've never been fully convinced of the Amazon magic, but I can't deny that it's paid dividends -- metaphorically speaking. Amazon's margin madness seems to just escape the pull of some horrible fate at each turn. I can't sleep knowing that my cash is doing the same. For braver investors, Amazon looks as strong as it always has, which is just to say that Bezos is still at the helm, navigating his way through the chaos.