The Market Ticker
Commentary on The Capital Markets- Category [Earnings]
2014-08-12 15:27 by Karl Denninger
in Earnings , 275 references

One-hit wunderkind horsecrap hype-based IPOs are a good way to get your teeth kicked in.

The company attempted to play financial engineering (with a "special dividend") to blunt the impact of their earnings release but it didn't help; the shares got crushed for 20% after the close.

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Ok, so now with time to read the earnings report, here's the deal.

First, revenues are rising as reported but expenses are going up even faster.  Notable places where expenses are exceeding revenue growth rates include:

Stock-based compensation up 31% (!) y/o/y

PPE purchases are up 50% (yikes!) compared against same-quarter last year, and capital lease additions doubled.

Shipping expenses are up 30%.

Marketing is up 40%.

Tech and content is up 40%.

In short -- sweet Jesus, these guys are burning money like it's newspaper in the fireplace!

The only good news is that the cost of goods sold is up 20%, but revenue was up a bit more, so they're driving cost.  Of course that's bad for their vendors; they're getting squeezed.

Now here's the kinda-ugly on the sales side.

International is slowing -- it's up 18% on sales while domestic is up 26%.  But, remember, we were told international was going to save the day!  Uh, that's the same change y/o/y from last quarter -- no improvement in either domestic or international.

If you remember my previous reporting one of the places I watched very, very carefully was media.  The reason is this -- media is a high-margin business, electronics and general merchandise is a very low margin business.

So how's that working out?

Well, domestically media is growing 13%, while merchandise was up 29%.  Internationally it's much worse; media is only up 7%, and those are y/o/y comparisons on the quarter.

The bad news is that media decreased both domestically and internationally on the quarter!  In fact, it was down 13% domestically and 10% internationally.  OUCH.

The electronics business was also down internationally by 5%.  What made up for it was a 7% increate in (zero or even negative margin!) electronics and merchandise sales in North America.

This is crap performance, in short; media sales, which is where the margin is, in fact contracted on the quarter both in North America and internationally, and general merchandise was down sequentially internationally as well!  Of goods sold only merchandise in North America advanced on a quarterly basis.

It's worse when you remove the effect of exchange rates (which helped internationally.)

Operating margin has gone in the toilet as well and is in fact negative -- no surprise given the monster cost ramps compared against revenue.

Amazon is a huge firm that despite all the claims they would turn the corner, smash their competition and make an unbelievable amount of money they have failed to deliver on that promise for more than 10 years serially.  Costs continue to rise in several areas at rates exceeding sales and there is no margin improvement in sight.  In addition their AWS services, which they have touted as one of their saving graces, has become embroiled in a price war and they're spending on PPE (probably for that service although I'm sure distribution is part of it) like a drunken sailor while having to continually slash pricing to obtain customers.

We've heard for years that Amazon was "investing" and that investment would reap rewards.  I see no improvements on an annualized basis in terms of growth rates against 2013, the company has its strongest unit growth in sales in areas where they make little, nothing or actually lose money when fulfillment costs are included and worse, their "cloud" service has become embroiled in a commodity style "race to zero" pricing paradigm and yet they're still committing to spend like crazy on it.

I know what we'll do!  We'll lose money on every sale but make it up on volume!

This is a company with no justification for a stock price anywhere near where it sits, even given the well-justified implosion after hours.  If there was any reason to believe they could stem the price:cost problem with AWS that is spiraling out of control and stop fulfillment and marketing expense from rising faster than revenues there might be an argument for the stock to sell around $100, which would give it a forward P/E of about 30.

Unfortunately as it stands, given what is now a multi-year series of false dawns and promises that are never fulfilled to actually find a return on all this cash plowed back into the business, along with the apparent detonation of their cloud service cost:price structure due to massive slashing of prices (which one can presume is necessary to attract and retain customers) the stock is not worth $30/share.

Good luck if you're long.

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The big item -- mobile advertising revenue growth as a percentage of the total has basically stalled, going from 59 -> 62% on the quarter.  The company (intentionally?) stated only the annualized change, ignoring the quarterly.  Grab the previous quarterly report and compare yourself.

Second problem -- user growth metrics are basically stalled with q/o/q growth in the US only about 1%.  That's indistinguishable from zero, and what's worse is that annually it's just 7% in the US and Canada.

Europe is no better, incidentally.

So the only place you're getting actual user growth is Asia and "Rest of World", and when that tap runs out (a year from now...)

ARPU is up a lot, but is that sustainable?  Do you add more than that ARPU (times 4, since Facebook defines ARPU as "revenue per quarter") in profit to Facebook advertiser business as a result of your activity on Facebook over the space of a year?  By the way, that figure is about $25.  That's the number that Facebook advertising has to generate in additional profit (not revenue) per user of Facebook per year or the company will eventually see its revenue stream collapse, as nobody throws money down a rathole forever.

Is it reasonable to expect that sort of number can possibly work over time, especially considering all of the growth is now coming from Asia and elsewhere?

This company is ridiculously bubble-valued.

And that assumes the ads purchased result in no profit to the buyers, they simply cover the direct cost of the ads.

There's no possibility that pencils out folks.

You're buying (or holding) hype and bull**** -- just like in March of 2000.

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