People always say that wall street bashed Amazon for growth over profits but I don't think that's true. Amazon has always been endowed with a massive earnings and sales ratio.
If wall street had been bashing Amazon, you'd think their stock would have been muddling along with low multiple over the past 20 years.
It's always been about free cash flow, Bezos was wise enough to call it their North star since the very beginning, see his 2004 letter [0].
Neither earnings for a company that aggressively reinvests nor sales for a company that's a mixed bag of cloud computing (high margin) and retailing/logistics (low margin) make much sense as compass.
If you look at Amazon's price-to-FCF multiples[1], while Ben Graham would surely pass, it is not as expensive as their price-to-earnings make it seem, IMO (a non-holder of AMZN).
>[Segment title] Our Most Important Financial Measure: Free Cash Flow Per Share
> Amazon.com’s financial focus is on long-term growth in free cash flow per share. Amazon.com’s free cash flow is driven primarily by increasing operating profit dollars and efficiently managing both working capital and capital expenditures. We work to increase operating profit by focusing on improving all aspects of the customer experience to grow sales and by maintaining a lean cost structure. [...] This focus on free cash flow isn’t new for Amazon.com. We made it clear in our 1997 letter to shareholders—our first as a public company—that when “forced to choose between optimizing GAAP accounting and maximizing the present value of future cash flows, we’ll take the cash flows.” I’m attaching a copy of our complete 1997 letter and encourage current and prospective shareowners to take a look at it.
Free cash flow is money in the bank. if that grows, you or any company is by default alive. The higher the free cash flow, the more growth the company can finance from operations. Profitability is something different. A company can be profitable and cash flow positive (something Amazon is and always was), non-profitable and cash flow positive (not necessarily bad if the company grows, because it is fair to assume losses come from growth), profitable and cash-negative (which is a problem as operations need to be financed by debt, even small market hick-ups impacting profits can kill those companies) or non-profitable and cash negative (those companied are usually dead already).
Important to note, that is free cash-flow from operations, not including cash flow from financing rounds and the like.
The key point is that timing of expenses vs revenue significantly impacts cash flow. A growing business can lose money on every sale and quite literally make it up in (acceleration of) volume till they grow large/efficient enough to have profitable unit economics.
For a brief example to hopefully illustrate why that matter, a pretty basic business would be to buy stuff, make a thing, and sell your widgets. If it takes you 6mo to turn every $1 into $1.30 in that business then you have pretty amazing unit economics but still might struggle with cash flow; if sales just double in a given year or two you won't have enough velocity of money to build the things people are buying without additional investments or cash reserves. Contrast that with a net-60 payment for your materials and a 30-day pre-order for your hyped up widgets. At any given point in time you'll have exactly (not actually exactly I don't think, I'd have to do the math, this might depend on how fast sales increase or decrease) twice as much money in the bank (because it's tied up in other people's accounts for a total of half the time) and a high enough velocity of money to nearly triple your sales every year (supposing you can find buyers for your product).
Additional money in the bank can have super-linear value for because of the extra options available. If you're struggling to pay rent and wages this month and a great deal on the lathe you need crops up then you might quite literally not be able to take advantage of that cheaper machine at the moment and be forced to pay more later when you can actually afford it. Or if you're able to efficiently utilize cash to grow your business you can just use those cash reserves to grow more quickly. In any case, cash flow is typically a good thing to have.
That isn't to say that profits and whatnot don't matter (especially on sufficiently large timescales), but they don't impact the day-to-day functioning of the business directly like cash flow does.
I think that's a mischaracterization. It's not short term profits, it's short term performance. Amazon and Tesla are still evaluated quarter-to-quarter, and if they stumbled in their growth numbers they'd still get killed.
Hmm, but people also say "the market is forward looking". It's quite clear Wall Street loves growth (over the last decade, at least) and isn't at all obsessed with short-term profits.
There is a massive almost limitless supply of money at the moment, and you cannot put it into a savings account so you have to bring it to the stock markets.
I agree. There was a narrative for a long time that was more or less remarking that their profits appeared low, but their investment in growth was exceptionally high. I’m not sure anyone didn’t see what was happening there, though some people doubted their potential for a long time.
Indeed, most articles I've read about Amazon and Wall Street have (for literal decades now) talked about how Amazon was doing uniquely well and was uniquely trusted by wall street among growth companies.
If wall street had been bashing Amazon, you'd think their stock would have been muddling along with low multiple over the past 20 years.