The moment I look at Amazon.com, Inc. (NASDAQ:AMZN)’s logo, I am dumbstruck by the way it has stayed true to its vision of providing A-to-Z products. A leader in the e-retailing industry, Amazon has always delivered for its customers and sellers.
Recently, the company gave away millions of dollars in the form of Amazon.com, Inc. (NASDAQ:AMZN) coins virtual currency to customers using its Kindle Fire tablet that can only be used at the Amazon.com Appstore. This has left me marveling at the sheer cleverness of the company’s think tank that has designed a simple move to enhance customer loyalty.
For the first quarter of 2013, Amazon.com, Inc. (NASDAQ:AMZN) reported robust sales growth of 22%, but net income declined by 38% on a year-over-year basis. One of the concerns sighted by analysts was a huge decrease of 85% in the trailing-12 months free cash flow as compared to the year-ago period. It goes without saying that free cash flow is a highly important metric while analyzing the financial health of a company and similarly, in the case of Amazon.com, Inc. (NASDAQ:AMZN), it indicates increasing expenditures (operating and capital) without proportionate growth in revenue.
Numbers that matter
However, what really matters at this point (halfway through the second quarter) is the financial guidance for Q2 that was given by the company along with Q1 results. One of the estimates that catches my attention is operating income for the quarter, which is expected to be between a loss of $340 million and a profit of $10 million. However, this is not quite surprising because the company has been following a pessimistic outlook since early 2012 while giving guidance.
Contrary to norms of the game, Amazon.com, Inc. (NASDAQ:AMZN)’s share price has been trading in the range of $260 to $270 even after the financial guidance indicated a dull quarter. Again, this is a not strange because such a pattern has existed in the company’s stock price since good times.
Making sense of confusing numbers
Now for the most important question: what to make of these numbers? Honestly speaking, Amazon’s results have always baffled me; especially the relationship between its results and stock price. Thus, for my own convenience I have narrowed down the entire analysis to three vital areas of discussion, which are future initiatives, competitors and stock valuation. This will enable us to better predict the stock’s future direction.
A glimpse of the future
Speaking of future initiatives, one of the highly innovative things happening at Amazon includes its attempt to eliminate traditional TV with Amazon Studios. In an astute move to increase customer engagement, pilots have been released out in the open for customers who want to decide what goes into full-season production. I am not sure how is this going to play out, but nonetheless, Amazon has convincingly tried to disrupt established norms in the TV business.
Any person would take a split second if asked about Amazon’s biggest competitor. The first thing that strikes me when I compare Amazon’s and eBay Inc (NASDAQ:EBAY)’s stock is the price-earnings multiple. It is scary to see Amazon trading at a multiple of more than 1,000 (taking the first-quarter’s EPS). Even though Amazon has ventured into different businesses in the recent past, it is difficult to justify such valuation when its core competency remains similar to eBay Inc (NASDAQ:EBAY)’s.
In a major move to lure sellers away from Amazon, eBay is overhauling seller fees and working toward making the pricing system simpler. This is a biggie because eBay has not made changes to its pricing system since 2010 giving more transparency to the online merchants. If this strategy plays out well, it will promote higher seller loyalty and a stronger selling network.