moshe is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Once you mention the name Amazon, you cannot deny that: Every one, and I mean everyone on planet Earth is familiar with the name, everyone knows what Amazon (NASDAQ: AMZN) does and if you'll check closely' you'll find that many have also purchased various goods using Amazon's service and I'll bet they were extremely happy with the service they got! I know I was many times and I still use their services.
But, is it enough to justify Amazon's value? Are the strong brand and the good service enough to justify Amazon's market value?
If one wishes to compare Amazon to other companies, the big question is to whom to compare Amazon's performance? Is Amazon a retail company like Wal-Mart(NYSE: WMT) (Amazon as Internet retail as oppose to conventional retailer) or a hi-tech company and service provider like Google(NASDAQ: GOOG) and Apple(NASDAQ: AAPL) (Computing, Tablets, cloud services etc.)?
Either way you look at it, the comparison raises big questions (Source: Yahoo, CNBC, 9/6/12):
Market Cap (B$)
P/E
Profit margin (%)
Div (%)
Annual Cash Flow From
operating activities (B$)
Amazon
117
315
1.3
0
3.9
Wal-Mart
249
15.6
3.5
2.2
24
Google
230
20.9
25.6
0
14.5
Apple
637
16
23.9
1.6
37.5
A good look at the table shows that Amazon is at the bottom of the table in all major parameters.
Would you tolerate 1.3% profit margin to any traded company? Would you accept a 315 P/E to a company which operates for many years and is way past the early stages? Will Amazon be able to start paying Dividend if the cash flow is about $4 billion and growing at a rate of less than 10%? And this is from operating activities, when you deduct other activities, Amazon remains with only $1.4 billion in positivel cash flow.
Yes, Amazon is great in describing how the new products and services will generate great profit but, will it truly? The past shows it hasn't delivered and that the company is below the market performance in all major financial aspects (either retail or Internet).
Let's Take a look at profit margins from the Kindle product line. Analysts are saying and Amazon does not deny that the price barely covers manufacturing costs. While contributing to the increasing revenues, it does not contribute to the bottom line. I believe Amazon that profit can come from content and value added services but, this has not been the case yet.
Amazon has tried to improve the distribution centers and lower the operational costs and improve profit margins. But, this investment also hurt the stock a couple of quarters and still did not deliver the promised results.
So, why is Amazon share still strong? If you ask me, I gave the answer at the beginning of the post: The brand. It is so strong that investors disregard the result and just keeps believing that Amazon will finally deliver! Don't try and sell me future promises, a P/E of 315 and 1.3% profit margin leaves no room for error and might be suitable for start-up companies only.
If it wasn't the brand, Amazon would have already paid the price of financially underperforming. Amazon must improve profit margin and generate more cash flow to develop new services and maybe, just maybe start paying dividend, eventually, this is what investors are waiting for.
Apart from a long position on Apple, kaligem has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, and Google. Motley Fool newsletter services recommend Amazon.com, Apple, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
