Right. Amazon (AMZN) is the greatest thing since sliced bread. Like millions of others, I use it practically every day. And it was nice to see that it made a profit—-thin as it was at 0.4% of sales—–in the second quarter.
But the instantaneous re-rating of its market cap by $40 billion in the seconds after its earnings release had nothing to do with Amazon or the considerable entrepreneurial prowess of Jeff Bezos and his army of disrupters. It was more in the nature of financial rigor mortis——-the final spasm of the robo-traders and the fast money crowd chasing one of the greatest bubbles still standing in the casino.
And, yes, Amazon's $250 billion market cap is an out and out bubble. Notwithstanding all the “good things it brings to life” daily, it is not the present day incarnation of General Electric (GE) of the 1950s, and for one blindingly obvious reason. It has never made a profit beyond occasional quarterly chump change. And, what's more, Bezos—– arguably the most maniacal empire builder since Genghis Khan—–apparently has no plan to ever make one.
To be sure, in these waning days of the third great central bank enabled bubble of this century, GAAP net income is a decidedly quaint concept. In the casino it's all about beanstalks which grow to the sky and sell-side gobbledygook. Here's how one of Silicon Valley's most unabashed circus barkers, Piper Jaffray's Gene Munster, explains it:
Next Steps For AWS… SaaS Applications? We believe AWS has an opportunity to move up the cloud stack to applications and leverage its existing base of AWS IaaS/PaaS 1M + users. AWS dipped its toes into the SaaS pool earlier this year when it expanded its offerings to include an email management program and we believe it will continue to extend its expertise to other offerings. We do not believe that this optionality is baked into investors' outlook for AWS.
Got that?
Instead, better try this. AMZN's operating free cash flow in Q2 was $621 million—–representing an annualized run rate right in line with its LTM figure of $2.35 billion. So that means there was no cash flow acceleration this quarter, and that AMZN is being valued at, well, 109X free cash flow!
Moreover, neither its Q2 or LTM figure is some kind of downside aberration. The fact is, Amazon is one of the greatest cash burn machines ever invented. It's not a start-up; it's 25 years old. And it has never, ever generated any material free cash flow——notwithstanding its $96 billion of LTM sales.
During CY 2014, for example, free cash flow was just $1.8 billion and it clocked in at an equally thin $1.2 billion the year before that. In fact, beginning with net revenues of just $8.5 billion in 2005 it has since ramped its sales by 12X, meaning that during the last ten and one-half years it has booked $431 billion in sales. But its cumulative operating free cash flow over that same period was just $6 billion or 1.4% of its turnover.
