Is Amazon (AMZN) in trouble?
That was my first question upon reading the company's first-quarter 2022 earnings press release this morning. Amazon's disclosure is legendary among those of us nerds who still analyze quarterly numbers. The key figure, what we nerds call the "Amazon Adjustment," is to add (or, really, to subtract) the cost of finance leases against a company's free cash flow. Believe it or not, Amazon doesn't go select a parcel of land and construct a warehouse like the Amish would build a barn. It is slightly more complex from a financial perspective, and not doing the Amazon Adjustment is a classic trap that many analysts fall into.
Tesla (TSLA) is a perfect example. Their Lingang, China facility is run on an operating lease from the local government. Most of those who "follow" TSLA by worshiping Elon Musk's every tweet fail to make this simple adjustment to TSLA's financials. If done -- Gordon Johnson, CEO of GLJ Research, is one of the few who do -- TSLA's returns on capital are actually quite poor. I perform a similar analysis on TSLA in the reports I write for OHM Research in Sao Paulo.
But, unsurprisingly, Amazon's finance department does the Amazon Adjustment, and I applaud them for transparency. In the first quarter, on a trailing-12 month basis, Amazon's adjusted free cash flow was a negative $22.279 billion. So, how long can Amazon keep burning cash at that rate? Not long. As of March 31, Amazon had only $66.3 billion of cash and marketable securities on its balance sheet, down dramatically from the $96 billion AMZN showed on its balance sheet at year-end 2021.
So, Amazon can manage that cash burn for a couple years, but from a financial perspective, remedial actions need to be taken, such as:
- No more share repurchases. This is a frivolous expenditure that really doesn't impact core operations, and can easily be jettisoned. Amazon's "purchases of marketable securities'' line of its cash flow statement totaled $1.764 billion vs. $14.765 billion in the first quarter of 2021. So, they are getting it, albeit slowly.
Stop growing so darn much. Amazon recorded $14,951 billion in capital expenditures in the first quarter of 2022 vs. $12.082 billion in same period last year, and on the adjusted basis, AMZN's trailing-12-month rate of capital expenditure (including finance leases) was $57.951 billion in the first quarter of this year compared with operating cash flow of $39.324 billion on the same basis. That's an $18 billion financing hole on an annualized basis. Also, that rolling capital expenditure figure was $55.396 billion in fourth quarter of the last year, so, again, I am not seeing any financial discipline from AMZN management here.
Stop hiring so many people. In the first quarter of 2022, Amazon's worldwide headcount was 1.622 million vs. 1.271 million in the same time last year -- and 1.608 million at year end.
So, Amazon management is 0-for-3 in the awareness department. Amazon's online store sales fell 1% year-on-year in the first quarter to $51.129 billion, an extraordinary rate of decline from the fourth-quarter's (granted, that is the Christmas quarter) rate of $66.075 billion, which was basically flat with the same quarter in 2020's level.
This company is not growing. So why is AMZN management spending like it is? It's Katie-bar-the door for AMZN stock now. Be careful if you own it. At that cash-burn rate and the "ex-growth" sales rate, I can't even get AMZN to be worth a trillion dollars, which would be just under $2,000 per share. A more reasonable valuation for AMZN shares would be $1,500.
AMZN is a member of my "FKBGT" short portfolio, which is here. AMZN has declined 17.2% since I initiated that portfolio on April 13, and I see no reason to cover that short now based on last night's dreadful earnings release.