Amazon Bull: Now This Number Propels The Stock
Amazon (AMZN) reports results later this week, with a small-ish loss expected, but the earnings release could very well send the online retailer’s stock climbing again.
In recent years, of course, Amazon stock has been a rocket, despite the company’s lack of profits. Why? Revenue growth in a market in thrall to growth; and a widespread belief that, since Amazon is powerfully reshaping the retail industry, great profits must be coming its way one day soon.
One of the best-informed Amazon bulls around, analyst Mark Miller at William Blair & Co. in Chicago, believes the stock, while still trading in part on revenue growth, now also trades on gross profit margin, or the difference between sales and the cost of the stuff sold.
Miller -- who along with colleagues at Blair conducts regular and exhaustive surveys of Amazon product assortment and price vs. other retailers – said in a report this month: “Increasingly, investors are weighing gross profit dollar growth, along with the total sales growth, as the key financial performance metrics.”
And an encouraging picture is it.
Of course, hiring and investment in property, plant and equipment – warehouses and the people to man them – are rising faster than sales. And thus gross margins aren’t producing regular after-tax profits.
Still, what’s behind the improvement in gross margins? Miller says in his report that Amazon is shifting its product mix to higher-priced items. Also, it has used its vaunted information systems – it collects data on its own sales, sales of items by third parties on the Amazon site, and data from competitors’ Web sites – to identify CRAP items (as in “can’t realize a profit”). On those items, Amazon seems to be letting third-party merchants that sell on Amazon beat Amazon on price; it still gets some sales of the items by customers who prefer Amazon Prime shipping, and thus gross margins edge up there, as well.
Amazon is likely cutting better deals with suppliers as its growth allows it to buy more. And Miller believes the growing network of warehouses and Amazon’s systems are making it more efficient.
The added people and assets, of course, have to produce still more sales growth – and gross margin expansion – for Amazon to become sustainably profitable. In other words, the company needs to be more productive on an across-the-board basis, including all its expenses, not just on gross margin.
It’s clear that, to date, the hiring binge and investment boom haven’t boosted productivity, at least not as measured by revenue per employee.
There is no doubt that Amazon is the most frightening force in retailing, imperiling companies as varied as Best Buy (BBY), Ulta (ULTA), Target (TGT) and Barnes & Noble (BKS). But the heavy discounting Amazon relies on to compete -- YCharts has dubbed the company the Suicide Bomber of Retail -- trashes not only its competitors' profits, but its own.
If Miller’s right and investors are indeed watching gross margin expansion as a sign that Amazon is worth more, then its shares could continue their climb, profits or not, at least in the near term. It's a tough stock for value investors to own at this valuation (a thousand times shipping fees?) but you'd also be nuts to short it, given the enthusiasm that growth-stock fans have for Amazon.
Jeff Bailey, The Editor of YCharts, is a former reporter, editor and columnist at the Wall Street Journal and New York Times. He can be reached at email@example.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.
- stocks that look cheap
- pharma stocks
- tech stocks
- stocks that look pricey
- money managers
- value investing
- retail stocks
- dividend growth
- income investing
- energy stocks
- stock buybacks
- growth stocks
- earnings season
- warren buffett
- bank stocks
- stock screener
- dividend yields
- short sellers
- dividend yield
- healthcare stocks
- interest rates
- junk bonds
- entertainment stocks
- federal reserve