I saw little that looked encouraging in the second-quarter report that Amazon (AMZN) - Get Amazon.com, Inc. Report released after the bell Thursday. While I'm mindful of the stock's "cult status," all of the fundamentals and valuation figures that I'm seeing point to selling the stock.
- While North American e-commerce sales accelerated 26.5%, Amazon Web Services saw its gains slow to 42%. After all, the cloud sector is beginning to get crowded thanks to Alphabet (GOOG) - Get Alphabet Inc. Class C Report , (GOOGL) - Get Alphabet Inc. Class A Report , Microsoft (MSFT) - Get Microsoft Corporation Report and others.
- Amazon Web Services saw its EBITD margin decline quarter over quarter, something that probably won't please tech investors (who normally disdain margin compression).
- AMZN's total sales rose $7.5 billion in the quarter, but EBITD only added $118 million. This is a 1.6% conversion of incremental revenue to EBITD, which would be a monumental disaster for any business except this one.
- AMZN sells at about 212x EPS. That's a big number for a $500 billion-or-so company.
- The EBITD multiple is 37x.
- Amazon builds things, but doesn't generate an economic profit. AMZN's free cash flow isn't growing, either.
- Interest grew 8% sequentially, while pretax declined 44%.
- Amazon paid a heavy tax rate, but earnings per share were down 78%.
- The company has 492 million shares outstanding and a market value of about $500 billion. However, AMZN has $14 billion of net cash. That leads to a roughly $486 billion enterprise value.
Beyond my concerns with Thursday's earnings report, I see secular challenges for Amazon as well. For example:
- Amazon is facing an existential antitrust threat. The company is (finally) attracting some media and political attention for its business practices.
- AMZN is currently disrupting the auto-parts and appliances businesses, and it has big plans for food retailing. The company might very well have too many opportunities -- or perhaps it's creating a massive smokescreen, using profit generation to mask underlying business problems.
- Third-party sellers are avoiding taxes on the Amazon platform.
- AMZN is attracting a sizable stable of enemies.
- Old-line retailers like Walmart (WMT) - Get Walmart Inc. Report and Best Buy (BBY) - Get Best Buy Co., Inc. Report have proven that they can compete against the company.
- The market rotation away from the FANG stocks might have already begun.
The Bottom Line
As I expressed in my recent columnBuying Into Retail Seems Like Best Bet Amid Latest Sector Rotation, I'm on the side of the underdogs when it comes to Amazon. To me, it looks like Amazon's best days as an investment might be behind it.
Amazon shares fell 2.3% to $996.21 early Monday afternoon.
(A version of this column originally appeared at 8:28 p.m. ET July 27 on Real Money Pro, our premium site for Wall Street professionals. Click here to get great columns like this from Doug Kass, Jim Cramer and other writers even earlier in the trading day.)
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