Monday, 2 February 2015

Amazon - it is still all about cash flow

The last time I wrote about Amazon (link here) I talked at length about cash flows even whilst bemoaning the lack of share price progression.  Pleasingly the latter has improved with the reaction to last Friday's results being nicely positive and pushing the shares closer to 52 week highs: 


So what was so excitable in what the company said?  A lot of the headlines focused on the growth of the Prime business:

'Prime members are buying more. It's more convenient. They are getting their physical product to them faster versus being not a Prime member...with Prime being almost 10 years old, growing at 53% year-over-year on a sizable base, tens of millions, we think is very interesting. It's something that we are very focused on as we continue forward'

Clearly this is playing to consumer preferences.  I think Prime is a key execution/client sticky rationale but the key metric in these numbers were cash flow in my view.  Once again there was a material seasonal bump in free cash flow generation...


...this time even more impressive on an underlying basis as purchases of property and equivalent reached a new recent peak too:


To put this free cash flow into context, if you take the last four stated numbers you get to just over US$5.5bn which equates to a FCF yield for the company of 3.4%.  Not too shabby for an entity which is growing revenues by 20% per annum...


...and has also moved back into operating profitability too.  


Via the conference call it is clear that the company are going to continue to invest as the CFO noted:

'In terms of investment, certainly we are going to continue to support the growth of the business. You should expect that we will be spending more in terms of CapEx to support our web services business which is growing very fast. You should expect us to add fulfillment capacity, as we have done in prior years'

The opportunities however are huge.  Here's what they said about the international division for example (which is back into profitability and is little over half the side of the North America division - albeit growing more slowly at the moment): 

'...if you look at our international growth rates, the unit growth rates are actually growing at a higher rate than revenue. And then emerging geographies. We talked about India earlier. Very excited about India. We are investing in India. We are also investing in China. So those are certainly impacting the results as well'

Amazon remains a stock of interest for any medium-term focused growth investor due to the cash they are generating - and the cash flow they will be generating when the relatively rapid current expansion level is even mildly switched off.  

I have talked at buying the stock below US$300 as this level reflects a low sentiment point.  Ex a material crack in the markets I wonder if we shall see this level again.  Nevertheless reflecting the still high current earnings-based metrics (a x100+ P/E ratio and an equivalent EV/ebit multiple) I recognise the potential for volatility.  I have raised the 'buy on a bad day' level to sub US$315 though reflecting progress (and historic chart resistance at this point).  



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