Friday, 31 January 2014

The most important aspect from the Amazon numbers was...cash flow

Three months ago I wrote a posting on Amazon entitled 'Amazon - scary share price chart but not scary underlying cash flow generation' which concluded that rather than looking at the (lack of) profits, it was better to think about the cash flow scope:

'If you assume that half of the (company's) capex is expansionary then the free cash flow of the company during Q3 13 would have been just over US$2.6bn.  Annualise this and you get a little north of US$10bn...The current EV of the company is (taking into account the pre-market rise) around US$160bn...A 6% underlying free cash flow yield?'

So what is the update on this?  Interestingly the very important chart on Amazon's presentation deck this quarter was on...cash flow.  Suddenly the notion of maybe US$10bn of free cash flow is not so extreme:

The company also turned a GAAP operating profit...although this is a seasonal thing (see Q412 too). 
Amazon generating free cash flow and an operating profit however led to a share price decline (the share in early trading is down around 9% to just under US$370 i.e. around about the levels it reached a day or two after the Q3 statement.  And why was this (as surely everyone likes profits/cash flow)?

Well, as per Seeking Alpha (see here):
'shares continue trading lower in response to Amazon's Q4 miss and largely below-consensus revenue guidance. North American and international revenue growth rates of 26% and 13% Y/Y represent slowdowns from Q3 levels of 31% and 15%.'


Now the free cash flow will not continue gliding up as it is not the Christmas rush every quarter but I can see a building intent within Amazon.  US$360, US$320 and US$280 are three levels I have noted down.

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