I’m in a love-hate relationship with Amazon. Love…because I sit with a big unrealized gain. Hate…because Jeff Bezos toys with the Street. His guidance is worthless, even mocking and inappropriate.
So…the second largest capitalization in the S&P 500 at $1.6 trillion, comes after Apple and finds the analysts’ consensus uniformly bullish. Maybe 42 yeses and 2 neutrals. But, nobody can sharp pencil his numbers, just dealing with generalities on e-commerce and its cloud business AMC(Cloud), is now the tail wagging the dog. It’s super profitable with top line growth galloping ahead at yearend.
In all analysts’ commentary on Amazon’s fourth quarter, only 1 house ventured forth with hard numbers, pre the release. Monness Cresp Hardt put revenues at $116 billion with earnings at $6.71 per share. Amazon reported net sales of $125.6 trillion with earnings at $7.2 billion. Put the Street’s miss at 10% low. For a major property like Amazon, this is a big miss. Amazon is a money manager’s stock, beyond the realm of sharp penciled security analysis.
Jeff Bezos forever toys with the Street. His financial reports are exercises in obfuscation, designed to give shareholders next to nothing in interpretive commentary on published numbers.
I’d give them a nod for opening its report with a 2-liner on operating cash flow. It was $16 billion, up 72% year-over-year. Of all metrics posted I consider operating cash flow the most cogent number. Amazon as a stock is selling at 25 times operating cash flow. Not too outlandish a valuation considering this is the metric that underscores wherewithal to grow its business footprint. Put an $80 billion number on operating cash flow for 2021 and we’re at a 20 multiplier. This is sufficient to keep me in the stock. Cash flow for ’21 I put at $36 billion, yields a free cash flow yield of 2%, nothing to stir the pot.
Then, several pages are devoted to what a great corporate citizen Amazon remains in renewable energy and empowering small and medium sized businesses.
But, management’s guidance on e-commerce first quarter numbers is worthless. What can you do with a forecast of operating income between $3 billion and $6.5 billion? When you get to segmentation of sales and operating income internationally and in North America, questions pop up. International revenues grew from $75 billion to $104 billion but operating income remains minimal. North American sales for 2020 grew almost 40% but operating income moved from $7 billion to just $8.6 billion.
The Amazon story rests elsewhere than in e-commerce. The AWS segment, cloud computing services, showed $13.5 billion in operating income revenues of $45 billion, a snappy 30% operating income ratio for 2020. If you put on a 20% growth rate in AWS for the New Year we’re over $16 billion, keeping operating margins steady. Such a number far exceeds the e-commerce sector which I’d project at $11 and $12 billion.
Microsoft, for example, a major player in cloud computing shows revenue growth there of 22% at $14.6 billion. For 2021 I’d put operating cash flow comparable with Amazon. But, Microsoft’s Cloud computer sector could reach $20 billion or one third annualized operating income, still a bigger factor in the business.
What I find so neat is that both Amazon and Microsoft are capitalized in the market pretty close to each other at $1.6 trillion. Right or wrong, I find Microsoft’s numbers more reassuring. There’s $60 billion in free cash flow, a 3.5% yield on its market capitalization.
Microsoft sells at 30 times its earnings run rate of 1.5 times the S&P 500’s valuation. This is a bargain. R&D runs at 12% of revenues with net cash flow at a 25% growth rate. My Microsoft holding should remain double Amazon’s weighting. Over 5 years, Microsoft has appreciated over 300%. Only Apple did a little better. From such ciphering there is a macro takeaway. Never read 1 income statement alone. Pit 1 growth stock’s quarterly against another to see for yourself which one sings the loudest.