Wednesday, April 27, 2011

Let's Talk About A REAL Bubble: AMZN

I love this quote from the CEO in the Company's press release that accompanied the earnings report:  “We love inventing on behalf of customers and have never been more excited about the long-term opportunities.”

He's probably thinking to himself also:  "We love inventing earnings reports on behalf of investors and have never been more excited about the opportunities for this enabled by GAAP and our Government."

It boggles my mind that the only investment "bubble" that the financial media sees right now is gold and silver.  I'm bored of explaining to people why gold is not even remotely in a bubble.  So let's look at what a real investment bubble looks like. 

AMZN's total market cap is $90.4 billion.  Now, AMZN announced that its latest operating income was $322 million vs. $394 million in Q1 2010.  That's an 18% decline.  Based the latest trailing 12 month cash flow just over $3 billion, AMZN is trading at 30x cash flow.  When a normal company trades at anything over 5x cash flow, you expect that to be because you expect a very high rate of cash flow growth.  BUT, AMZN's operating income, the largest component of cash flow, dropped 18%.  Think the market is being insane about the prospects for AMZN's growth? 

AMZN also announced that the operating income for next quarter would be between $94 million and $245 million.  This is an incredibly wide variance in guidance and it blows my mind that the market has tacked on over $3 billion in market cap to AMZN for a company that can't project its cash flow expecation for Q2, which already 33% over!  This is insane.  Let's give Bezos the benefit of assuming Q2 operating income will come in at the midpoint of $170 million and annualize that number, which is generous considering that operating income is now declining at double digits.  This yields a forward operating income projection of $680 million. The stock thus trades at 132x operating income!  THAT MY FRIENDS IS A BUBBLE.

Please note, we're not even talking about net income and p/e ratios here.  Amazon's accounting is so obsfuscated by GAAP exploitation that I would more likely believe in the Easter bunny than I would Amazon's reported numbers. 

So what's the deal?  I used to track and untangle Amazon's accounting pretty closely up until about 8 years ago. I fatigued waiting for the SEC and NASD to crack down on AMZN's accounting shenanigans.  Of course the employees in those two organizations spend more time surfing porn than they do enforcing the law.  The basic "crux" of Amazon's accounting exploitations has to do with how they account for fulfillment, marketing and shipping expenses.  These are major major expenses for Amazon.  Now, I don't have time to dissect its last 10K today, but I assume that they are still doing the same thing they were doing 8 years ago, especially since the source of their operating income cliff dive will be from these expenses.

In a nutshell, Amazon "buys" revenues by spending a massive amount on the process of getting you to buy from them.  This includes subsidizing the price you pay by charging less than competitors and offering huge shipping deals, often extending free shipping.  To be sure, they have negotiated favorable shipping deals with the big shippers.  HOWEVER, they do not recognize the costs involved in all of this as they incur them, choosing instead to "capitalize" the majority of these costs.  It's a "cost accounting" manipulation that is far too complicated for the regulators to understand.  I don't have to go thru the footnotes of their financials because all I had to do was read their press release to know they still do this.  Feel free to see what I mean HERE In the 7th paragraph they detail the nature of what I call their ramped up "revenue buying" programs.

The fact of the matter is that Amazon is one big ponzi scheme and as long as they can continue growing revenues, even at the expense of reporting declining operating income and cash flow, and as long as the stock market keeps inflating the AMZN bubble, then this scheme will continue.  But believe me, the fact that their revenues are still growing at double digits AND their operating income is plummeting by double digits, tells me that they are getting a lot more desperate and aggressive at "buying" revenues.

Eventually this will come to an unhappy ending for everyone except the CEO Jeff Bezos, who sells millions of shares every quarter.  I would too if I were him.  In the meantime, I often buy from Amazon because it is convenient and, if they want to subsized the cost of getting a product to my house, it is a lot cheaper in terms of what I pay plus the time involved and I love a "free lunch." 

The bottom line for me is that I know that if I had time I could show you how Amazon likely loses money every quarter on a net income basis.  I focus on operating income and cash flow because those are the numbers AMZN highlights in its press release.  This harkens back to the tech bubble days when "pro forma" accounting was inserted in the financial media in place of true GAAP accounting.  Now all tech companies use "pro forma" accounting and the stock market is conditioned to use it too.  But even the operating income numbers they report are manipulated and dirty.  If anyone is interested, the footnotes in the last 10K will give you the keys to backing into somewhat real numbers.  But we would need to see the inside books to see the golden truth.


  1. there you go, being smart again

  2. LOL. right now i'm underwater on some AMZN puts. that's not so smart LOL


    just saw gold at 1517 and silver at 46 on the cnbc ticker ? wtf ? that is 10 and 2 down from the finviz quotes.

  4. mabman:

    it seems like everyone reporting uses different closing data--Comex close, nyse close, aftermarket close etc

  5. It's some what old, but this article was still insightful. I think over the last year it is getting harder for AMZN to disguise the reality of the situation, but the CEO is a word smith assuring the drop in net income is because they care about the future and are investing in that not into the moment, right.. Even the most horrendous accounting strategies can't conceal hemorrhaging forever.