Amazon posts earnings report

Amazon released its quarterly earnings report today: worldwide net sales increased 26% to $75.5 billion, but operating income decreased about 10% to $4 billion, and net income decreased 30% to $2.5 billion.

Back in February I wrote an article looking at what Amazon actually pays in income taxes, and delving a bit into the fundamentals of its business. With new numbers and an active effort in Seattle to impose a payroll tax on the company, let’s update those numbers.

This past quarter, Amazon’s income before taxes was $3.38 billion on $75.5 billion of revenues. It paid $744 million in income taxes (on top of property, B&O, employment, sales and other taxes) — an effective rate of 21.99%. That’s up significantly from the 16.99% tax rate the last time we looked, which to be fair was for a full year as opposed to just a quarter. To the extent that at least some of Amazon’s businesses are seasonal (retail certainly is), then we can expect the combination of them to have an income tax liability that fluctuates over the course of the year.

Breaking out the segments of Amazon’s business continues to be very enlightening:

Its enormous retail (aka “consumer”) business continues to suck, with only a 1.4% operating margin worldwide — worse than Kroger, and much worse than Wal-Mart. The saving grace for Amazon continues to be Amazon Web Services (AWS), which is now generating 77% of the company’s operating income with an operating margin of 30% — on par with Facebook, better than Google, and slowly catching up to Microsoft.

But on the whole, Amazon is not swimming in cash, given the size of its business operations. Jeff Bezos is mega-rich not because he’s drawing a huge paycheck; he’s mega-rich — at least on paper — because of Amazon’s stratospheric stock price. A common metric used for comparing stock prices is called the “P/E ratio,” the ratio of price-per-share to earnings-per-share; it’s thought to show investors’ confidence that the company will continue to earn money in future years.  Blue-chip stocks usually have a P/E ratio in the mid to upper teens: Kroger’s is 15.5, Lowe’s is 19, and Wal-Mart’s is 24.  Tech stocks, on the other hand, tend to be in the upper 20’s to low 30’s: Google’s P/E is 27, Facebook’s is 28, and Microsoft’s is 31.

As of this writing, Amazon’s P/E ratio is 103.

For Amazon’s AWS business alone, that would be very high. For its retail business, it’s absolutely insane. It suggests that investors believe Amazon is not only poised to continue growing rapidly, but at some point it will be practically printing money. Alternatively, it suggests that Amazon is wildly overvalued and is due for a correction. (disclosure: I don’t own any Amazon stock directly, but like many people and institutions I own shares in broad-based investment funds that include Amazon stock) There is little in the company’s fundamental numbers that would justify a P/E ratio of 103; rather, it’s an act of faith by investors in the company’s leadership, strategy, and track record for reshaping markets.


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