Amazon (AMZN, Financial) has been making their patient shareholders a lot of money since its IPO. Since the technology burst in 2001, its share price has been rising significantly, from $7.7 per share to nearly $600 per share. The annual return in the past 15 years has reached as high as 33.7%.
Amazon has not enjoyed a steady rise, but rather a bumpy ride. In the technology bubble, Amazon’s share price had rocketed to $91 per share, then it plunged to less than $10 in the next nine months in 2001. If we assume we bought Amazon shares at the hike of the bubble, at $91 per share and held it until now, we will still make a decent 13.4% annual return.
Weak GAAP earnings
Last Thursday, Amazon announced its disappointing fourth quarter earnings results. While analysts expected it to earn an average $1.53 per share in profits, Amazon’s EPS only came in at $1 per share. The market reacted right away, sending Amazon’s share price down by nearly $50 to $587 per share, a 7.6% decline in a single trading day. Jeff Bezos, the company’s founder and CEO, experienced a $6 billion reduction in his net worth.
For the full year, its diluted EPS was $1.25, a great improvement from the loss of 52 cents per share it had in 2014. If we look at the five years, Amazon has generated bumpy profits. (table below)
Source: Amazon annual report 2015
In the past five years, however, Amazon has managed to continuously and significantly increases its sales and operating cash flow. Revenue has doubled to $107 billion, while operating cash flow has nearly tripled to $11.9 billion in 2015. The growth in operating cash flow was attributed to three sources: the depreciation and amortization of software and website development, including capitalized content costs, the rise in unearned revenue and the growth of accounts payable. I personally think that the amortization of the capitalized content costs is not a real cost, as many contents such as some books might just keep earning money forever.
Sacrifice short-term benefits for long-term success
Amazon looks extremely expensive with earnings multiple of 470. Nevertheless, Jeff Bezos, a truly visionary leader, has sacrificed short-term benefits for long-term success to make customers satisfied. He has mentioned his customer-centric business mind over and over again. In the annual report 2003, he wrote: "Eliminating defects, improving productivity, and passing the resulting cost savings back to customers in the form of lower prices is a long-term decision…Our pricing strategy does not attempt to maximize margin percentages, but instead seeks to drive maximum value for customers, and thereby create a much larger bottom line – in the long-term.”
Amazon has engraved in customers’ mind that it is the place with widest selection in many categories and with the lowest price. It is generating growing huge sales volume, which keeps fixed costs percentage to be quite low. In addition, the inventory turnover are high so that even though it could have lower gross margin, Amazon still enjoys higher ROIC than its competitors.
Furthermore, Amazon has focused on improving delivery services. Its Prime program, a two-day free shipping service, has experienced 51% rise in membership. It also has Prime Now, which could ship items to customers in only an hour or two in several major cities. CFO Brian Olsavky said: “Delivering for free in two hours is hard and expensive, but customers love it.” To shorten the delivery times, Amazon plans to launch drone delivery service called “Amazon Prime Air” which “safely get packages into customers’ hands in 30 mins or less.”
Indeed, under Jeff Bezos’ leadership, Amazon will continue to invest to build more products and services to further satisfy customers’ convenience. In any financial environment, I think Amazon is a stock to own for a long-term.
