Amazon.com Inc.

Written by Ophir Gottlieb, 6-15-2015

AMZN revenue (TTM) has broken new all-time highs for over 40 straight quarters, levered free cash flow spiked to a new all-time high last quarter by a HUGE amount, but earnings are essentially nowhere to be found. That lack of earnings accompanied with a stock rise may actually give Amazon the most powerful tool in all of technology. More on that in a sec.

At the same time, R&D and SG&A expenses are expanding rapidly (absurdly?), although the success of AWS (cloud computing) and brand recognition appear to be the fruits of those expenses. The continuous increase in revenue and free cash flow along with exploding R&D expense and essentially no profits, make AMZN a truly compelling company to watch.

AMZN generates $83,000 in revenue per minute; let's not lose sight of the enormity of the firm's imprint and disruption with respect to on-line sales. But the company's real goal may be best summarized by Yahoo Finance Senior Columnist Michael Santoli when he said, "I think Amazon is just looking at where people spend time on-line and they want to have a piece of it." That statement surrounded news that AMZN was now delving into the PC gaming market, but it holds true for all things Amazon.

Here are the driving forces behind Amazon's fundamental rating.


Whether the firm turns its attention to profitability will always be the question, but what is not up for debate is the fact that whether it be on-line shopping, digital music, content (TV) streaming, cloud computing or gaming, Amazon presents a serious threat to all competitors in all spaces if for nothing else, its willingness to lose money to grab market share.

I don’t think AMZN will ever be a spend thrift, nor do I believe Founder and CEO Jeff Bezos will ever manage the company that way. But, I do believe the R&D efforts are (finally) turning into profitable business lines (prime, AWS) and SG&A expense has generated recognition of the brand as best perceived” for the second consecutive year. In short, the spending is working.



AMZN is up +13.6% over the last three months and up +38.4% over the last six months. The stock price is up +30.5% over the last year.

Before we dig into the fundamental trends that drive the rating, let's look at a two-year stock chart with regression channel and 10-day momentum (on the bottom).


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As stated earlier, revenue is simply exploding, and continues to break record highs basically every quarter (TTM).

Revenue over the trailing twelve months hit nearly $92 billion, up fro $78billion a year ago, or a 17.72% rise. The two-year change in revenue (TTM) is a 43.74% rise. These are crazy numbers for a firm this size.

What do all these numbers mean
AMZN's fundamental rating benefited these results:
1. The one-year change was positive (but no extra points were given for a large percentage increase).
2. The two-year change was positive.
Finally, the up trend (consecutive quarters) in revenue benefited the fundamental (star) rating.


Let's look at the beautiful revenue (TTM US$ millions) chart, below.



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Just for a moment we can compare Amazon to its on-line competitors from China, namely JD and Alibaba. While earnings are a totally different story between BABA and AMZN, on the revenue side, there is simply no comparison, AMZN is a mega-mega cap.



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So revenue was the "good" stuff. The "bad" stuff is net income (after tax profit). For the most recent trailing-twelve-months (TTM) the company reported a net loss of -$406 million and the firm has really not seen consistent earnings for three years now.

In our next chart we plot Net Income (TTM US$ Millions) in the blue bars and the quarterly results in the gold line. Note the falling bars from a year ago which are now negative.


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To keep our heads spinning, when we look at levered free cash flow (FCF) (TTM US$ Millions) we see that it's not only rising, it just smashed an all-time high of nearly $4 billion. That's a 52% rise in a year. And keep in mind, a stock price is the present value of all future free cash flows, so this may be the single most important metric of them all. Let us at the every least do away with the ridiculous narrative that AMZN is somehow going to run out of money or can't "make money." That's just not the case, and it's not the case by a lot.

For our next chart we plot levered FCF ($million TTM) in the blue bars through time.

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R&D is even more compelling, or concerning, depending on your point of view) for Amazon. The company spent over $2.75 billion in the last quarter on R&D which is more than Apple and Google. The spending is is trending higher and has seen consecutive in creases for nearly 10 straight years on a quarterly basis.

Research and Development (US$ Millions) in the most recent quarter for AMZN is up an astonishing 38.3% from last year's value of $2 billion and 99% higher than than the $1.4 billion spent two-years ago.

Further, R&D per dollar of revenue for the latest quarter was $0.12, which is hugely higher than last year's value of $0.10.

In our final time series chart we plot R&D (US$ Millions) in the blue bars and R&D per dollar of revenue in the gold line. Note that both are rising.

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The R&D phenomenon is so great that I simply can't help myself and show a chart with all mega cap technology equal spaced on the x-axis (rank) and R&D for the latest quarter om the y-axis.


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It's simply astonishing that AMZN spends more on R&D than all but three technology companies. That expense (along with Selling, General & Administrative expense (SG&A)) is exploding but appears to be actually doing something for the firm (beyond killing the bottom line). The expense is turning into an investment, and that investment is starting to generate returns.

Summary
The bull or bear argument for AMZN is very clear cut. It is not about solvency risk, it's simply an argument (opinion) about whether the firm can continue to do "all things consumer" and turn that free cash flow and revenue explosion into bottom line earnings. As of right now, regardless of earnings, AMZN is likely the most feared technology company in that it can enter any market at any time and grab massive market share very quickly without concern for earnings.

Jeff Bezos' willingness to sacrifice earnings has actually made him and the the firm dangerous to all other technology. If you believe the expenses are turning into assets, you believe the bullish thesis surrounding AMZN. If you don't, you believe the bearish thesis. That's just as simple as it gets.

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