Genius in the house

Last week Amazon came out with their first quarter's figures, and they continue to grow. Their revenue figure is $19.7 billion which is up 23% compared to last year's quarter. Their cloud based service had increased revenue of 60%, to $1.2 billion, which is small compared to the rest of the company but cloud based computing is the future (good place to be building a base). A concern for Amazon is their cost of shipping, which is up 66% over 2 years and up 31% compared to the last quarter, which has resulted in Amazon testing doing their own shipping.


The good revenue number also translated into strong EPS growth of 27% from 18c a share to 23c BUT this is off a very low base. Their net income figure was only $108 million! Due to their low margins their earnings figure is susceptible to out of the ordinary events. For the next quarter they are expected to make a loss of between $55 and $455 million, which will come from stock compensation (over $400 million) and the amortization of assets. So the loss will be a non-cash loss and earning will rebound in the following quarter.


Amazon's operating margin is 0.7% down from 1.1%, which is very low but it is low for a reason. Amazon are spending billions on building for growth, where they are building new warehouses and distribution centres and spending on R&D. Amazon are building an infrastructure that will be hard for their competitors to compete with, which is why investors are busy paying a 465 times current earnings for a share. Over the last 12 months Amazon has spent over $3.8 billion on their infrastructure development which compared to their earnings is huge. A positive figure for the company is that even though they have a low earnings number, their free cash flow for the last 12 months is $1.5 billion (compared to $177 million last year this time).


When buying this company you as an investor are expecting growth in sales for a very long time to come, further you are also looking for an massive earning boost when Amazon slow their infrastructure spend. A rough calculation of mine puts their PE ratio in the 20s with only a halving in their infrastructure spend (which is a very plausible scenario).


Amazon operate in a rapidly growing sector and as Byron says, They are run by a genius.