Monday, 26 October 2015

Amazon: free cash, amazing AWS...but you have to get the top-slicer out for the shares

I noted back in April that Amazon shares were 'still all about the cash flow' (link here).  Therefore pretty impressive that even after 'finance lease principal repayments and capital acquired under capital leases' free cash flow was positive.  Less restrictive measures showed a positive US$3bn+ quarterly generation which if you extrapolate it is kicking around a 5% free cash flow yield.

Of course such latter statistics can easily be critiqued...hence my use of the above chart.  Still, at least cash flow however measured is going in the right direction...a bit like the Amazon share price which broke US$600 (although closed just below that level) on Friday after Thursday's after hours results.  

So a warmly received set of numbers...and the reason (again) was centred on Amazon Web Services which might only be 7% of sales...
...but showed further progression in its operating results... account for just over half overall company operating profits: 

It also helps to have a cloud based client list that includes such luminaries like General Electric, BMW and Netflix.  

So what price AWS?  Back in April I opined about a US$20bn+ valuation but today this would put the stocks on x10 extrapolated operating income - not high enough.  I would say US$40-50bn of value today (although I have seen numbers as high as...US$110bn as analysts muse on charts like the one below as well as highly exciting write-ups from the recent AWS re:Invent conference which noted a sharp increase in audience and new technology which further augmented their competitive position. 

And this is the trouble of course with Amazon valuation: the numbers can go crazy very easily.  For example I was quite taken with this analysis

'AMZN's Prime ecosystem is gaining traction with some estimated 60-80m users globally, and the higher purchase frequency as well as larger order size from the Prime users will likely to be supportive of AMZN's Q4 numbers during the holiday season. If the recent increase in hiring part-time workers is any indication, AMZN is preparing for another blockbuster quarter. By 2020, I would not be surprised to see Prime penetration reach 50% of US households, which is roughly 60m'

Never bet against Amazon and their ability to enter new sectors/retail market places and ultimately dominate them as these revenue numbers show...

...and of course there remains plenty of other markets Amazon have not attacked yet.  

Earlier today I wrote up the recent Alphabet/Google numbers and concluded that for the first time since I had been invested in the company it was time for a top-slice.  Of course its headline actual earnings numbers are somewhat higher in absolute terms than an Amazon (or Facebook or Netflix).  

(chart sourced here)

In the US$300s and US$400s it was easy for me to be well-disposed towards Amazon.  In the US$500s (unpublished here on Financial Orbit) I became much more neutral/top-slice oriented and at/around US$600 a share I think you should take some money off the table in the stock. In fact proportionately I would take a lot more off the table than I suggested in Alphabet/Google earlier. 

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