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Amazon: Slower Growth, Great Operating Leverage

05 Feb 2019

Amazon is seeing slower growth as the company has definitely proved something to naysayers with a $10-billion net profit.

Even if I see double-digit growth continue to last for another decade and expect further margin expansion, I can justify the valuation at best.

Not being attracted to the risk-reward, I have tremendous respect for Amazon, yet require a pullback towards $1,000 before getting upbeat. (AMZN) has rapidly grown to become a huge cash flow generating machine which for once and all has proved naysayers wrong who claimed the company never turns a real profit.

The result speaks for itself although growth has slowed down quite meaningfully at the end of the year. Nonetheless, Amazon is a true giant with huge profits, not only at AWS but at the core North American e-commerce business as well, although the international e-commerce business remains a rough spot.

In any case, I continue to find it hard to come up with long-term revenue and margin projections which justify that today’s levels make a compelling risk-reward thesis at this valuation. Note that this caution should not be confused with a bearish thesis.

The Results reported fourth-quarter sales of $72.4 billion, marking a 20% increase in reported sales as full-year sales were up by 31% to $232.9 billion. Comparables were more difficult because of the timing of the Whole Foods deal and adverse currencies which shaved off one percent of fourth-quarter sales growth.

Margins have seen a healthy jump as well. Operating earnings jumped by 78% in the final quarter and were equivalent to 5.2% of sales, up 170 basis points compared to the year before. Operating margins came in at 5.3% for the entire year, as operating earnings tripled to $12.4 billion for the year. With net earnings totalling $10.0 billion for the year, earnings for the year topped $20 per share with half a billion shares outstanding.

The company is rapidly strengthening the balance sheet, now holding over $41 billion in cash, offset in part by $23 billion in debt. The net cash position of $18 billion is equal to roughly $36 per share. With shares down 5% to $1,625, and operating assets valued at $1,589, multiples remain sky-high at 80 times earnings with earnings power currently trending at $20 per share.

Source: Seeking Alpha