Tag Archives: Amazon cloud computing

Amazon Dot CON: The Bezos Con Grows With Revenues

The mainstream financial media headlines reporting Amazon’s Q2 earnings release were shamelessly pathetic:  “Amazon crushes Street forecast,” “Amazon beats again in Q2 thanks to cloud services.”  It was beyond nauseating.  The entire spectacle reminds me of the tech bubble, when companies like Cisco, Sun Microsystems and Intel would intentionally “guide” Street analysts into publishing a low consensus forecast the CFOs knew could easily be topped with accounting gimmicks.

Bezos applies all the traditional accounting gimmicks plus he’s created his own, Bezosspecifically with regard to his definition of “free cash flow.”

I don’t want to spend a lot of time on this.  I’ve wasted most of my evening untangling AMZN’s numbers as reported in its 8-K filing.  Let’s just say that if you dissect AMZN into its “product” and “AWS” components, the results are underwhelming.

Nothwithstanding the fact that AMZN intentionally guides the Street to low-ball estimates ahead of its quarterly earnings report, as you can see from the graphic below, which I created by dissecting and rearranging the sales and operating income numbers from AMZN’s 8-K filed today, AMZN’s growth numbers are underwhelming (click to enlarge):


The sales growth rates for AMZN’s AWS (cloud computing) revenues and operating income are declining rapidly.  AWS is a new business started from scratch a few years ago.  Of course it’s going to show a high rate of growth initially.  But stock analysts and the mainstream financial media make it sound like AWS is a money tree.  Yahoo Finance reports that AWS is “massively profitable” LINK.

Well, look for yourself.  The sales growth on a year over year quarterly basis has dropped precipitously from 81.5% in Q2 2015 to 58.2% in the latest quarter. This is a rapid slowdown in growth.  The yr/yr quarterly growth rate for AWS operating income, which was $718 million in the latest quarter, has plunged from 407% to 83.6%.   “Massively profitable?”  You can see that AWS’ operating income actually declined from Q4 2015 to Q1 2016.  Declined.  Cloud computing services are not seasonal.  So that would not explain the drop.

Furthermore, AMZN does not disclose how much of its “technology and content” expenses are attributed to AWS.  But its total line-item cost for this in Q2 was $3.8 billion.  Yet, AWS’ total revenues for Q2 was $2.9 billion.  To be sure, a significant portion of that $3.8 billion in tech costs go with AMZN’s online product sales.  But it’s possible that none of the expense is amortized into AWS’ cost of sales.  Bezos won’t break that out.    He was doing a similar trick with “fulfillment” before the SEC forced AMZN to include fulfillment as a separate line item in the early 2000’s.

Let’s drill down into AWS’s numbers, to the extent that Bezos’ disclosures will allow:


The chart above shows the quarter to quarter growth rates for AWS.  Again, recall that cloud computing services are not seasonal.   From 2014 to 2015, AWS’ annual growth rate was 70%.  But on an LTM basis thru Q2 2016, that growth rate has collapsed to 26%.  With operating income the decline is even more dramatic.  From 2014 to 2015, operating income grew 182%.  But this growth rate on a quarter to quarter basis for Q2 2016 has plunged  to 19%.

Bezos is the master of deceptive presentation.  But as you can see, rearranging the numbers into a more traditional financial analysis format removes any “sizzle” Bezos imposes on the numbers and reveals that AWS’s growth rate is collapsing.

Circling back to the first chart, you can see that AMZN’s overall profit margin on 90% of its revenues base – its product sales – is more or less 2%.   This profit margin is less than half the profit margin of two of AMZN’s primary competitors, Walmart and Target.  In general, retailers produce 4-5% operating profit margins.  In other words, 90% of AMZN’s revenues significantly underperform that of AMZN’s competitors.

For this investors are paying a 186x trailing p/e for a business with a rapidly declining growth rate and profit margins well below average for retailers.

Finally, the Bezos’ shamelessly promoted Free Cash Flow metric  turns out to be borderline fraudulent.   In fact, buried deep inside the footnotes to AMZN’s SEC-filed 10-K/Q is a disclosure that states that the “free cash flow” number used in AMZN’s promotional slide is not a GAAP-derived number.

Why?  Because Bezos conveniently excludes the cash AMZN’s spends every quarter to pay for property and capital equipment that AMZN finances with capital leases.  He also excludes stock-based compensation, which turns out to account for about 50% of AMZN’s salary expense.   It’s highly misleading.   To give you an example, the very first slide which is shown in AMZN’s quarterly investor presentation is the  Bezos-concocted “Free Cash Flow” bar chart shown on a trailing twelve month basis:


This is the very first slide Bezos hits the market with. Talk about shameless promotion, I’ve never seen anything like this in over 30 years of financial market experience. This is more absurd than any type of misleading hype that I saw in the junk bond market.   And I thought junk bond presentations stretched the limits of credibility.

But here’s the best part.  If you strip out the ongoing cash outflows used for capital equipment and building expenditures by AMZN each quarter for the last four quarters, that “free cash flow” of $7.3 billion LTM shrivels down to $2.5 billion.   THEN, if you net out stock-based compensation for the trailing twelve months, which is a GAAP number, that Free Cash Flow metric of Bezos’ disintegrates down to just $85 million.

Pundits will argue that capital lease payments are eventually non-recurring and therefore should not be included in a free cash flow calculation.  But that argument is entirely disingenuous and highly flawed because these payments have grown from $1.8 billion in 2013 to $5.4 billion on an LTM basis through Q2 2016.   I like to call these, sarcastically, recurring “non-recurring” expenses because it falls into the “non-GAAP” earnings category that every big corporation gets away with presenting now.  Bezos clearly stretches this to the limits of the imagination.

Now, Bezos’ promoters would argue that stock-based compensation is not a use of cash and therefore should not be included in the Free Cash Flow number.  But that is patently false.  Here’s why.  The definition of free cash flow is that amount of cash flow that is available to shareholders after all cash payments are accounted for.  With stock-based compensation, AMZN hides this cash-cost to shareholders because this economic cost to shareholders does not show up until the employee registers its shares and sells them.  This increases the shares outstanding – or dilutes shareholders.

Employee stock compensation shares are registered and sold every quarter.  The amount per quarter is increasing at an increasing rate because the nominal amount of shares given as part of AMZN’s payroll increases every quarter.  Thus, the amount of shares outstanding at the end of every quarter increases.  This effectively reduces the amount of free cash flow per share that would otherwise be available to shareholders. Therefore the cost of employee stock compensation should be treated as cash cost each quarter and should be netted out from “free cash flow” just like it would be if the employee compensation were paid in cash instead of shares.  

There are several other areas in which Bezos uses creative accounting in order to bamboozle the market.   Unfortunately Wall Street, Capitol Hill and the SEC look the other way.  Wall Street because AMZN is a perpetual source of revenues.  Washingon, DC because Bezos spends millions buying Congressman and because has the use of the Washinton Post as political weapon.

There’s no way to know when the AMZN Ponzi scheme will collapse.  They all do eventually.  But I can say with certainty that, perhaps other than Tesla’s Elon Musk, Bezos is the greatest Ponzi scheme operator in history.

AMZN Is The Stock Market Bubble Poster Child

Don’t take it from me, this is a comment that was emailed to me this weekend:

Druckenmiller thinks AMZN can raise prices anytime it wants. But its entire business model is based on price as a competitive advantage. The service is quick delivery, easy order. Well most of hte big companies have easy order on the web.  Also easy delivery if you are willing to pay for it. So what’s the competitive advantage? AMZN has just about everything?

I use Amazon less now that they have to charge sales tax of 7% where I am and 10% in Chicago/Cook County. As we have discussed Amazon is losing that advantage.

I think there is a big issue of just what is Amazons competitive advantage? If it’s price–they have to attack a litany of companies, all with bigger and better balance sheets. That war could take a number of years. When do shareholders of AMZN wake up and see AMZN is not making money while Walmart is making money and pays a 3.3% dividend to boot?

This is what the stock chart looks like of a company that is in extreme bubble mode.  Go back and lookUntitled at the stock charts of every single tech stock at the peak of the internet/tech bubble.   Need I remind anyone that the NASDAQ plunged over 90% when that bubble popped?

AMZN is going to go out of business, but its stock price has disconnected completely from the reality of its underlying business model.  Stanley Druckenmiller erroneously and foolishly added rocket fuel to the stock move with assertions that were 100% incorrect.  My updated report stock report goes over this in detail.   AMAZON dot CON.

Click on the image to access this report.  I am going to raise the price again after AMZN reports Q4 and its 2015 full year at the end of January.

From my update and full reports:   As we’ll see, it’s apparent that Druckenmiller had not done any of his own research on the Company. He was likely belching out the smoke some Wall Street salesman blew up his ass. He for sure did not dissect Amazon’s financial statements filed with SEC.