Let’s examine the cash flow data in hand to see how exactly the company is able to generate heavy cash even with practically no profit. The high cash flow can be attributed to two factors. First is the fact that the company has longer terms of payment with its suppliers (generally more than 90 days). Secondly, it ensures that it gets payment from sales in a shorter duration (normally less than 30 days). This means that for approximately 60 days it is sitting on a cash pile without having to pay anyone. With a short duration inventory clearing cycle, this translates into huge continuous cash inflow for the entire year. This means that there are many items in the cash flow statements such as unearned revenue, accrued expenses etc. that help inflate the cash flow values and should be carefully taken into consideration while making an investment decision.
Lastly, the tablet business has not been able to compete with majors such as Apple Inc. (NASDAQ:AAPL). Among other reasons, one which has hurt the most is Amazon’s inability to sell the product through mega retail chains such as Wal-Mart Stores, Inc. (NYSE:WMT) and Target, as they are Amazon’s competitors in retail business. Also, the tablets are sold at near cost price in the hope that profits will come from sales of e-books and movies through the Kindle store. Until now the scenario looks very bleak as the balance sheet does not show any profit from this business.
The competitors are not far behind either. Best Buy recently announced that it will keep prices at Amazon’s level throughout the year. Even though its sales fell by 4.3% in last quarter, it is continuously improving its business model to compete better. Target, another competitor, has also adopted the same strategy as Best Buy, which may help the company retain its current market share. But the critical point is that they will face extreme difficulty in keeping prices low for a long duration due to higher supply costs.
Going ahead, it will be interesting to see how the company fares in subsequent months. If there are signs of increasing profit, the current prices might not be a fair valuation and we can expect it to move even higher.
The article Amazon: A Future Based on Faith originally appeared on Fool.com and is written by Sujata Dutta.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.