Amazon’s Growth Story Keeps Selling
January 31, 2014 Leave a comment
Amazon’s Growth Story Keeps Selling
SPENCER JAKAB
Jan. 29, 2014 4:03 p.m. ET
“The bottom line” has earned a place of distinction, if you can call it that, on lists of hackneyed clichés. So it seems appropriate investors in one of today’s evolving media and retail powerhouses pay it little heed.
When shares of Amazon.com Inc. AMZN -2.59% surged by 9.4% on Oct. 25, the real reason wasn’t the company’s one-cent-per-share “beat” of analysts’ estimates for the third quarter of 2013. It still recorded a loss of nine cents a share.
The more likely cause was the 24% year-over-year gain in Amazon’s top line, or revenue, at the high end of Amazon’s wide guidance range. Wagering the same thing will happen again to the stock on Thursday when Amazon reports fourth-quarter results would be risky, though. It has moved by 7.3% on average following its last 48 earnings reports with losses resulting nearly half the time.
For what it is worth, analysts polled by FactSet have penciled in revenue growth of 22.5% for the quarter, at the high end of Amazon’s guidance of 10% to 25%. More significantly, they also see what—for Amazon at least—is a healthy profit. Projected earnings per share are 74 cents, up from 21 cents a year earlier and the best quarterly figure in three years. Back then, revenue was just half as high.
That doubling of revenue in three years is the real reason Amazon receives the benefit of the doubt from so many investors. The stock fetches the same multiple of sales, 2.6 times, that it did three years ago, meaning Amazon’s market value also has doubled.
Amazon’s growth stems in part from accepting puny margins, though—a fraction of those at retail behemoth Wal-Mart Stores Inc., WMT -0.76% for example. Mushrooming revenue certainly justifies some premium, but how much exactly? Double Wal-Mart’s multiple of sales? Triple? In fact, Amazon’s shares fetch five times as much as Wal-Mart’s relative to revenue.
The prevailing wisdom is that chief Jeff Bezos will one day flip a switch and voilà—margins will normalize on Amazon’s gargantuan revenue. But its pace of expansion would lose a step or two in that case.
Growth and profitability aren’t mutually exclusive. The two, though, would look more like what is seen at a brick-and-mortar retailer. For bedazzled investors, that is the bottom line
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