essays pieces of the puzzle
Tuesday, November 27th, 2012
free money

“Every night before I go to sleep | Find a ticket, win a lottery,” sang Patti Smith in the song “Free Money” on her iconic Horses album.  That will be the dream for many tonight, with an enormous jackpot in play.

A different jackpot is pictured in the lower panel above — the one that has accrued to the shareholders of Amazon.com (AMZN) over the last four years.

The company issued three tranches of debt yesterday, paying the skimpy yields found in the corporate bond market of late, the closest thing to free money around.  But AMZN has benefited greatly from another largesse:  the willingness of its shareholders to forego bottom-line results as the company tries to crush one industry after another (in which other competitors are expected to make money).

The top panel of the chart shows the paltry numbers for the firm on a trailing basis in comparison to its market cap.  It also is easy to see that operating cash flow is pretty flat over the last three years, with free cash flow and net income down.

Another interesting fact:  According to Bloomberg, the cumulative net income for AMZN since it came public in 1997 is just over $1.8 billion.  The current market cap is sixty times that.

AMZN’s sales growth stays high (at a time when very few firms can generate much of it), but most everything else seems to come in below expectations quarter after quarter.

For those analyzing investment managers, a discussion about how and when AMZN will deliver profits on its promise will tell you a great deal about a manager’s decision making process.  You could do worse than to bring this chart and four colored pencils with you to the meeting — and have the manager draw in his or her expectations for each line for the next five years.  (Chart:  Bloomberg terminal.)

P.S.  Good luck with the lottery ticket.