Amazon: Amazon's shareholders shouldn't be blaming Amazon. Despite some sparkling growth, the online retailer's shares tumbled 13 per cent in after-market trading on July 22 following the company's second-quarter results announcement. Shareholders grumbled about higher costs and low margins - but investing heavily in the business makes sense. What doesn't is the overly generous multiple the market has attached to the stock.
The company was being valued by investors at about 40 times estimated forward earnings. Such a multiple presupposes perfection. It also can encourage a stampede for the door when even the smallest shortfall from expectations comes along. The April-to-June period wasn't even all that bad. Sales grew at a heady pace - 41 per cent more than the same quarter last year. And, net income rose 46 per cent. The ostensible problem was that the company's net margin remains pitifully low. At 3.2 per cent, it lags even Walmart's.
The company certainly isn't holding out the promise of increased operating leverage. While Amazon says sales may grow up to 40 per cent in the next quarter, operating profit will rise only 24 per cent at most. Even considering Amazon's history of conservative bottom-line predictions, the gap indicates lean margins will persist.
Yet, it's pretty clear what Amazon is trying to do. The company is hiring scads of people and making investments in everything from TV marketing campaigns to overseas warehouses. That's expensive. And, selling new products takes time before they become profitable.
While investors are clearly annoyed, they shouldn't be surprised. Margins are actually higher than they were in the same quarter last year. Moreover, Amazon has good reason to choose delayed gratification. Its average annual return on invested capital has been around 50 per cent over the past several years. If management thinks it makes sense to put its money into growth, shareholders should give them the benefit of the doubt - and then some.
If 46 per cent earnings growth in a 15-year-old company is enough to panic investors, it's the investors, not the company, who have some explaining to do.
