January 29, 2013 11:40 pm

Amazon: positivity premature

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If revenue growth continues to decelerate, the stock could crack

Sales growth in Amazon’s fourth quarter, reported on Tuesday evening, was 22 per cent, the slowest rate since 2009. The figure a year ago was 35 per cent. Sales growth fell hard when measured in absolute dollars, not just percentages. Operating margins were below 2 per cent, 40 basis points better than a year before, but well below levels seen in earlier years. Free cash flow was down 15 per cent on the year, even after the $1.4bn Amazon dropped on new offices is excluded, on the grounds that it is non-recurring. The company’s outlook for first-quarter revenues was below expectations and suggests further deceleration.

The stock rose 8 per cent after hours, to $281. This is not, despite all appearances, complete madness. The stock was at $284, its all-time high, less than a week ago, and the operating margin, low as it was, was a bit higher than expected. Most importantly of all, operating margins in North America – Amazon’s oldest and biggest business – hit 5 per cent, a meaty two percentage points higher than the year before and within shouting distance of those old-fashioned retailers that actually try to make money. It could be that the growth in sales of digital content and services is finally turning profitability around.

So, for those who believe the progress on North American margins is sustainable, and can be exported to Amazon’s international businesses (which account for more than 40 per cent of sales), there seems to be real reason for hope. Euphoria would be premature, however. Amazon has a market value of $127bn, about 70 times its 2012 free cash flow. To make sense of that valuation, both sustained revenue growth and margin expansion will be required. If revenue growth continues its current pattern of steady deceleration, the stock will eventually crack, even if margins continue to widen.

Email the Lex team in confidence at lex@ft.com

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