The Market Ticker
Commentary on The Capital Markets- Category [Earnings]
2016-01-29 08:38 by Karl Denninger
in Earnings , 217 references

The excuse factory is going overtime this morning after Amazon missed (big) last night.

Yes, I get it -- the company had a large year-over-year growth rate.  But do remember, this is the Christmas quarter, and like all retailers if you don't knock the cover off the ball compared against the previous quarter -- you suck.  People are also looking at year-over-year, where the news is also good -- but decelerating. 

And that's really the story here.  In addition you have to be a bit alarmed at some of the trends.  For example, net product sales for 2015 .vs. 2014 were up 13%.  That's good.  Service sales (AWS) were up (much) more, 47%.

Overall, the company sold 20% more "stuff" than last year.  That's a good number.

But..... fulfillment costs were up 25%.  That's a bad number, when fulfillment costs on AWS are zero.  In other words they sold 13% more physical stuff but spent 25% more getting it to you.  Shipping expense is going up twice as fast as is gross sales.

Marketing costs were up 21%.  That's roughly inline with the total top-line number.  Ok.

Technology and content expense?  It exploded higher, rising 35%.  Oops.

The company tried to blame the foreign numbers on currency effects, and they're right as far as it goes.  But that's not the problem -- the problem is that they're not making any money, on balance, and of their segment operating income they're spending nearly half of it on stock grants to executives.  That normally wouldn't matter so much but in this case it does, because it takes a ~4% operating margin and, along with everything else, turns it into a 0.56% net profit margin.

Yes, half a percent, or $596 million on sales of $107 billion.

This is a company that has no earnings power.  At all.

It's a juggernaut that destroys competitors, but it does so by choosing not to make money and relies on the market believing that Jeff Bezos, a very wealthy man, can literally walk on water and never has to actually operate a profitable company.  The market has rewarded this with a $300 billion market cap -- for a company that manages to earn a puny $600 million over an entire year's time.

That's a 500 P/E.

Still, even after the selloff last night.

There are other things to be alarmed over in the financials as well.  PPE increased by 29% against that same 20% increase in gross sales.  In other words the company is increasing their fixed assets roughly 50% faster than they're growing.  That's not good, it's bad; not only does it depress the bottom line it speaks to inefficiency in spades

I know the argument on the other side; that the company "is investing to make money in the future."  Ok, when?  This pattern has been going on for over a decade and it's part of why the company doesn't make any money.  Not then, not now, and, I'd argue, it will not ever.

They're also increasing inventory at a rate exceeding gross sales. That's not good either, although the increase is smaller than on the PPE line.

Where are they controlling costs well?  SG&A is well-controlled (increased under sales expansion percentage) and receivables, which are being watched like a hawk.  Both of those are good.

Payables (being slow to fork it over), not so much - up 24%.  And other long-term liabilities increased a monstrous 34% year-over-year.  I can't find this in capital leases, which are up far-more modestly.... Hmmmm...

Oh, one more thing -- AWS sales growth is slowing.  Market saturation approaching?  Maybe.  It's not a big decline -- yet -- but given the other cloud provider numbers it appears that business is entering the cannibalization stage, as all new "disruptive" things eventually do.  When that stage arrives your growth slows, the less-competent start to lose accounts net-net rather than gain them and margins get squeezed as pricing becomes your primary weapon.  Margin has not yet started to decline in this segment for Amazon, but if I had to guess looking at these results plus those from Microsoft in cloud revenue I'd say that we're one or two quarters away from that process starting to show up in Amazon's balance sheet, at which point AWS becomes "just another business" and its net positive contribution to operating income beings to fade.

So what's the stock worth?  Not zero, to be sure, but not 500x earnings either.

Maybe 30x?

Where does that put the share price?

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2016-01-28 09:20 by Karl Denninger
in Earnings , 255 references

Yes, I know, the headline is provocative -- particularly on the back of the quarter that was just posted.

But it is in fact that quarter that leads to the reality.

Mobile advertising accounted for 80% -- essentially all -- of their revenue; their "fee" revenue was only 5% (e.g. games.)

This is now a company that has become a one-trick pony and literally "bet the company" on being able to suck money out of the mobile market via advertising.  So far it is working but in the process of making it work they have witnessed an all-on collapse of the desktop marketplace.

That collapse was masked by their mobile success; had they not had that the company would be literally on the verge of imploding -- that is, actual financial failure.

This is a company with a $300 billion market cap with stock selling at over 100x current earnings.  The "analysts" are all trying to quote 2017 EPS estimates but consider how those numbers look if you go ex-mobile for Facebook.

Look folks, nobody bats 1,000%.


I ran a company in the "you must bet the company every 12-18 months" space back in the 1990s, when the Internet was young.  It was an extremely stressful thing, because you really had no choice but to take this path; that's what technology does!  Every time I signed one of those purchase orders that committed us to a path full of expenses I knew that if I had misread the future, a bet that is always high-risk since nobody can see the future absent owning a Tardis, the damage would mortally wound the firm.

This doesn't mean that Facebook's stock can't go higher for now but in order to continue putting up those numbers and thus continuing to see stock price growth they cannot whiff at any ball as they must continue to validate those forward expectations.

When they whiff, and they will -- everyone eventually does -- you will see them put up a number that is what you'd see if you took this quarterly report ex-mobile.

On that day the firm's forward liabilities they have committed to will effectively destroy the company and you will not get any effective warning before it happens.

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And, if you did, you got it in the back door this morning.

The entire bounce last night on their "earnings" has come off.

Good night Gracie.

PS: Cramer, STFU.  You've been one of the worst at cheering a fed-led bubble machine and deserved banishment 15 years ago.  At this point both you and the entire network that employs you ought to be in the Graybar motel.

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