Looks Like AMZN Can't Justify Its Multiple

Updated from Jan. 29 with earnings report

Amazon (AMZN - commentary - Cramer's Take) beat on the top line, met consensus on the EPS line and provided muted guidance going forward.

It's that last piece (guidance) that is a no-no in this type of market given the multiple. For the quarter just ended, the company reported adjusted EPS of 48 cents on total revenue of $5.67 billion.

The company guided the first quarter to a range of $3.95 billion to $4.15 billion (consensus around $3.9 billion) and guided the full year's revenue to $19.75 billion to $19.75 billion (The Street is at $18.3 billion) yet is only forecasting very moderate operating margin expansion.

The company expects operating income in the range of $785 million to $985 million (The Street is around $960 million). There is probably some conservatism going on but, then again, as I said in the preview, AMZN has never really been able to really improve upon its margins despite significant top-line growth.

Highlights:

• Continues to spend/reinvest to drive top line (reason for margin pressure).
• Kindle (the handheld e-book reader) demand is outpacing expectations (supply constrained). To me, that's surprising, because I'm not really a fan of the product.
• Some of the margin pressure comes from offering Amazon Prime (Prime is a service where you pay $80 a year and get free shipping). This is helping to boost the top line, but on higher volumes, margins decline a little.
• Longer term, the company is very bullish on the prospects for digital books.

To conclude, it was an in-line quarter (which is bad in this environment) and OK guidance. While the top-line guidance was good, the continued cost pressure may cause some investors to reconsider paying a go-go multiple for a company that can't demonstrate any operating leverage.

Preview

Amazon will report earnings after the close Wednesday with a conference call scheduled for 5:00 p.m. EST.

Current projections call for the company to produce EPS of 48 cents on total revenue of $5.4 billion.

I think this will be a very interesting call and will hopefully shed some light into whether we are truly headed for a consumer slowdown. At 52 times forward estimates, there is very little room for any conservative talk, and I wouldn't be surprised to see the stock take a leg down on a cautious outlook. So, that said: What are the odds for a cautious outlook from a company growing earnings at 30%?

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At the time of publication, Thomas had no positions in the stocks mentioned, although holdings can change at any time without notice.

Ben Thomas, CFA, is the founder and managing principal of Waycross Partners. Waycross Partners is a long/short hedge fund that focuses on the technology and health care sectors. Before Waycross, Ben was a portfolio manager and senior equity analyst at INVESCO, where he was part of a team that managed over $20 billion in assets. While at INVESCO, he was the lead manager for the INVESCO Midcap Growth fund as well as the firm?s senior equity analyst covering technology stocks.

Prior to INVESCO, Ben worked for Banc One Securities and Prudential Securities. He graduated from the University of Kentucky with a bachelor?s degree in finance and went on to earn his MBA from Indiana University. Ben is a member of the CFA Institute and serves on the board of directors for the CFA Society of Louisville.