Tuesday, May 15, 2012

Amazon, Apple, and Margin of Safety

A follow up to this post on Amazon (AMZN).

Amazon 1st Quarter 2012 10-Q

The following Amazon numbers sure look kind of small (to say the least) next to the $ 11.6 billion that Apple (AAPL) earned in its latest quarter. Amazon's Q1 income after tax over the past three years was as follows:

Q1 2010: $ 301 million
Q1 2011: $ 218 million
Q1 2012:  $  41 million

Nice trend by the way. The $ 41 million Amazon earned represents roughly what Apple earned on average during every 8 hour period of last quarter yet Apple's enterprise value is only ~ 4.3x Amazon's.

Makes sense, right?

In addition to the $ 41 million, Amazon did make some money in the 1st quarter of 2012 on equity method investment activity. This resulted in a gain for Amazon of $89 million (making net income $ 130 million) and comes from companies in which Amazon has a minority equity stake.

The quality and sustainability of those earnings seems not at all clear to me. Since, at least in most of the preceding quarters, equity method investment activity has generally generated small losses it would be nice to have some more clarity on this source of net income.

Is the $ 89 million a one time gain or does it represent something more sustainable?

The company bought back $ 960 million of stock in the 1st quarter of 2012 or many times what they earned. In fact, the company bought back a total of $ 1.24 billion of stock over the past 12 months. Remarkably, even with these actions, share count still rose a bit compared to where it was in the 1st quarter of 2011.*

At the current share count and using yesterday's closing price Amazon's market value is bit over $ 102 billion.

Amazing.

This may all work out very well in the long run but the margin of safety principle certainly isn't the first thing that comes to mind.

Adam

No position in AMZN; long position in AAPL

Related posts:
Amazing Amazon
Barron's on Bezos: Time to Reign in Amazon's CEO?
Amazon's Jeff Bezos On Inventing & Disrupting
Amazon Sells Kindle Fire Below Cost
Technology Stocks

* Shares outstanding can rise even when there's a share buyback due to stock option dilution. The share count of Amazon has grown more than 20% over the past decade.
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