The sun is about to set on all things tech once again says my Silicon-Valley-Stock-Analyst-BS-Detector, which has been pinging off the charts since about early April. Yes, we are in for another Dot Com Kind of Sell Off. And while there are countless “high growth” companies with curious income statements promoting all things irrelevant, it’s Washington-based Amazon that’s being so passionately pushed by analysts lately.
First, let me disclose. I do not own Amazon but I like Amazon enough as a company from a “user” perspective. I have ordered stuff off Amazon; it arrived on time. Second, their customer service and swift refunds are second to none in terms of e-tailers. Third, this analysis has nothing to do with the recent media reports around Jeff Bezos’ management style. America is a free country, as yet, and no one has to work at Amazon or buy from Amazon.
Recently though, a client asked me whether she should buy the stock because an analyst had recommended it, so I poked around in Amazon’s financials. While I have my own methodology of looking at equity investments, there’s a few things one cannot ignore, particularly cash flow. This is how much cash a company has after expenses. If you were a company, this would be your “net savings” every month. How much left in the bank account after your expenses; are you in the red or the black? This matters to all companies; you cannot grow a business or reinvest without growing cash flow. You can fake it, but not for too long.
I am fixated on cash flow more than most investors because I invest in dividend and dividend growth stocks (which Amazon is not) so this is my #1 Go To Metric. Now “fast growing” companies often do not pay dividends because they are theoretically reinvesting all that money in growing faster. So, it still matters if Amazon is growing its cash flow year on year because A) it means they are managing their expenses and B) they can continue to reinvest and be a market leader.
And at first glance, Amazon’s cash flow from operating activities does look like it’s growing YOY. Look at this chart:
Source: Yahoo! Finance
Yes, it’s all good, until you take out depreciation which is one of the items my Accounting professor refers to in his session on “Accounting Magic”. It’s interesting how Amazon’s depreciation is growing faster than anything else on their cash flow statement – just enough to make up for net income losses and even faster than their capital expenditures (not shown in this chart).
Now most companies employ Accounting Magic to a greater or lesser degree to tweak the numbers, so it’s not unusual. What is unusual here is that Amazon does not look like a company that is growing its cash flow nearly as fast as they’d like you to think, and not nearly as fast as their stratospheric PE ratio (Go To Metric #2) would dictate. In fact if you just removed depreciation, and nothing else (there’s more accounting magic in there beyond just depreciation, trust me) it looks like Amazon’s operating cash flow has flat lined. No wonder Amazon employees are crying in their coffees, it’s no fun squeezing blood out of a turnip.
So, if I can find this information on Yahoo!, what are analysts who are paid $300,000 a year thinking? Well, they may know something I do not. But many analysts are representing their firms’ interests first and foremost. Often equity analysts issue buy recommendations so that the market maker (bank, brokerage, fund) they work for can unload it on you. (You, the retail investor, are known as the ‘dumb money’ in many a Wall Street lawsuit). Yes, scandalous but it happens ALL THE TIME. Not all analysts are liars but you need to see their compensation packages to know precisely how much BS is packed into these recommendations.
All that said, if oil prices stay low, as they probably will for some time, all retailers and e-tailers in general should do well including Amazon. Lower manufacturing prices + consumers with more money in their pockets = good news for retailers in general. I’m not sure I’d buy Amazon though, I’d go with an retail index or a retail brand that churns out a nice reliable dividend.
Amazon was truly a great buy when it fell to $9/share back in 2001. Apple was a terrific buy at $30/share back in 2002. During these capitulation moments, you can find extraordinary value in equity markets, as buyers in 2009 can attest. So while the sun is just about setting on Silicon Valley, Boston and other start-up hubs worldwide, do something else with that trigger finger, there’s better value in other sectors now. There will be a great buying opportunity in the not too distant future, when everyone sobers up and brands like Amazon are once again on sale.