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The biggest complaint against Amazon.com Inc. (NASDAQ:AMZN) is that it generates lots of revenue but not a lot translates to the bottom line. That has prompted many bears to suggest that investing in a $300 stock is folly because CEO Jeff Bezos doesn’t seem to care about making money.
If you are an Amazon investor, you are in the stock because you believe in the Jeff Bezos vision. He is constantly experimenting, finds what works, keeps it, and moves on. He is hunting for ways to impact the world in the most profitable way and has lots of cash flow and cash on hand to do it, because it comes from all the things that are working.
You can complain about making money, or you can recognize that EPS is less important to Bezos than cash flow. That’s why investors need to look at Amazon as the market looks at John Malone’s Liberty Media (NASDSAQ:LMCA) conglomerate. Malone is all about cash flow. That’s it.
The difference between Malone and Bezos is the former buys businesses that have great cash flow and lets them operate. Bezos develops these businesses internally and expands them. That is why profits are not the way to assess Amazon. It’s cash flow, but just for the record, Amazon made money, too.
Operating cash flow increased 25% to $6.84 billion for FY14, compared with $5.47 billion for FY13. Free cash flow decreased to $1.95 billion compared with $2.03 billion. I will take $1.95 billion any day.
Net sales increased 15% to $29.33 billion in the fourth quarter, compared with $25.59 billion in fourth quarter 2013. Excluding the $895 million unfavorable impact from year-over-year changes in foreign exchange rates throughout the quarter, net sales increased 18% compared to fourth quarter 2013.
Fourth-quarter operating income, which is another metric I look for with Liberty Media and Amazon, was $591 million compared with $510 million in the year-earlier period. Net income was $214 million in the quarter, down from $239 million, but as mentioned, that’s not what I really care about.
The full-year numbers are incredible on a sales basis, and this is where investors should pay attention. Net sales increased 20% to $88.99 billion in 2014, compared with $74.45 billion for FY13. This is amazing. Amazon generated $89 BILLION in sales. It sells EVERYTHING. That’s what part of Bezos’ vision is, to become the one-stop low-price superstore for everything.
Operating income was $178 million, compared with operating income of $745 million in 2013. Amazon’s net loss was $241 million, compared with net income of $274 million, or $0.59 per diluted share, in 2013.
It is Amazon’s Prime service that has really taken off, borrowing a page from Costco Inc. (NASDAQ:COST). Get people to pay a membership fee that is extremely high margin and gives them access to special perks, like free two-day shipping. Amazon doesn’t tell us exactly how many Prime members there are, but they did say worldwide membership grew an amazing 53%. People love the idea.
Meanwhile, Amazon has $5.26 billion of cash on hand, along with $3 billion in low-cost debt. That, along with the robust cash flow, permits them to continue to experiment and roll out new products like this massive list.
Amazon remains a very long term hold for your diversified portfolio. It’s a growth stock that will show a lot of volatility going forward, but in the long run should make you a very happy investor.
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