, Inc. (AMZN): Bezos’ Amazonian Wall Street Leash

Price/Sales Ratio

This is the ratio analysts have been using to value the stock. It is quite common for this ratio to be used for start-ups and newer companies that have either negative earnings or are in the early stages of generating earnings.

The unique thing with Amazon is just how long this ratio has been used. Again, that speaks to the super-strong faith many have in the company.

Look at how steady the price/sales ratios have been over the 10- and 5-year periods:

Cash from Operations & Price/Cash from Operations Ratio

The stock price has tracked very closely to revenue changes, as analysts are using the Price/Sales ratio as a main valuation tool, as per above.

As this chart shows, the stock price is also now tracking very closely to the cash generated from operations. Granted, the Price/Cash from Operations ratio has been extremely generous. But it does show Amazon is not getting a totally free pass on profitability.

Free Cash Flow (FCF)

This is the same chart as above, but with FCF added. FCF is not being used to value the stock.

Through 2011, cash from operations and FCF were tracking very closely (changes by percentage, not numbers). In 2012, the company started using a greater percentage of its operating cash flow for investments in growth.

Profit Margins

Amazon’s 2012 operating and profit margins were 1.11% and -.06%, respectively. The company has been sacrificing margin for growth. Here’s the 10-year picture for quarterly profit margin:

Surf Those Amazonian Waves

Rather than get ruffled about the “unfairness of it all,” you can turn the fact that analysts are human — and thus subject to human nature just like the rest of us — into an advantage.

Amazon stock? I’d not be a buyer at this level because I don’t have enough “higher-risk money” sitting around. But if I owned it, I’d certainly be not be a seller.

The article Bezos’ Amazonian Wall Street Leash originally appeared on and is written by BA McKenna.

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