The Miracle of Amazon’s Soaring Revenues; Never Mind Profits, Which Limp Along

A trio of laudatory articles on Amazon (AMZN) in recent days compelled one to take another look at the company’s performance.

Fortune magazine (February 28: “How Amazon Keeps Cranking”), The Wall Street Journal (February 22: “Retailers Struggle in Amazon Jungle), and Fast Company magazine (March: Amazon is No. 27 on the list of most innovative companies) discuss the amazing success of Amazon’s Kindle reader, its explosive sales growth, and how it under-prices Wal-Mart (WMT), Target (TGT) and other retailers.

In those three articles, however, by our count, the word “profit” was mentioned just once.

Little wonder. For the year ended Dec. 31, Amazon’s sales rose 40%, to $34.2 billion, but net income trailed that advance, rising just 28% to $1.15 billion, or $2.53 a diluted share. And aggressive pricing to boost sales is most evident in recent results. The fourth quarter saw sales soar 36%, but profit rose just 8%. And for the first quarter not yet ended, Amazon is projecting that sales will grow between 28% and 39%. Amazing. But operating income is expected to decline by between 2% and 34%.

It’s the opposite of what we expect from a growing company. Instead of economies of scale that cause margins to widen, Amazon is struggling to maintain already razor-thin margins.

YCharts Pro finds the stock overvalued, trading at about 70 times trailing earnings. We’ve run this chart before, and you’ll see why.

Amazon.com Stock Chart by YCharts

The stock is up 50% over the past 12 months, based on enthusiasm about booming sales.

Amazon.com Stock Chart by YCharts

Certainly not on margin expansion:

Amazon.com Stock Chart by YCharts

It’s true, Amazon is a fierce competitor. Borders’ spiral into bankruptcy can be largely tied to Amazon’s deep discounting of books. But the revenue boom unmatched by a margin expansion, after all these years, begs the question: where’s the payoff?

YCharts has previously explored the costly free shipping gambit and the potentially expensive spats with states over uncollected sales taxes. We’ve also lauded the idea of making acquisitions — and fast — with those overvalued shares.

Nobody here is suggesting you short the damned thing, not with its $80 billion market cap and its hordes of fans on Wall Street and Main Street. But when you read the next batch of Amazon-is-so-cool articles, remember to see what’s said about profits.