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Beware Deteriorating Cash Flow in Netflix, Amazon, Google Earnings

Getting Amazon's Story Straight

As is the case in past quarters, Amazon's first-quarter earnings, due on Thursday, will be driven by the figures investors choose to focus on and those they decide to ignore.

For instance, Amazon shares rose nearly 50% in 2012, even as the company failed to report an annual profit.

Cash flow, previously a support to Amazon's $100 billion-plus market capitalization amid a profitless 2012, however, may turn decidedly against the e-commerce behemoth this year.

Amazon is expected to report significant negative cash flow from operations in its first-quarter earnings report, as is traditionally the case, given payments to vendors for inventory the company held and sold during the fourth-quarter holiday season.

While negative cash flow in the first quarter will not surprise investors, forecasts by some analysts that this quarter's cash payables will run beyond cash benefits from the fourth quarter of 2012 is a big change for Amazon.

Morgan Stanley analyst Scott Devitt expects Amazon will see a $5 billion cash drain in accounts payable, as the company pays slightly in excess of the $4.9 billion in inventory it received from vendors in the fourth quarter.

According to Devitt's calculations, a net accounts payable deficit in the firm's working capital over the two holiday-season impacted quarters would mark a turn from 2010 and 2011, when Amazon effectively earned a $793 million and $426 million cash spread, respectively.

It's no surprise, then, that Amazon is forecast by analysts to see its 2013 cash flow from operations fall slightly to $4.16 billion. Such a scenario, however, would be the first for Amazon since 2006, raising the prospect the company's story of solid cash flow but negligible profits may be undercut.

At a market cap of $120 billion, Amazon is valued by investors at 29 times cash flow from operations. Apple (AAPL - Get Report), on the other hand, is valued at 7.5 times its trailing 12-month operating cash flow.

Thankfully, analysts such as Devitt from Morgan Stanley caution investors from reading too much into details from Amazon's quarterly financials.

"We encourage investors to focus on the story, not one particular data point," Devitt writes, in a client note previewing earnings.

-- Written by Antoine Gara in New York
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