by Dave Kranzler of Investment Research Dynamics
I’m already fatigued and disgusted with Christmas promotions. They’re everywhere now, including every other ad on television. I’ve come to loathe the holiday season because of the extreme materialism and consumerism into which it has degenerated.
That said, Wall Street has overlooked or ignored an interesting aspect reflected in Amazon.com’s Q3 earnings circus. Amazon is now desperate to generate sales growth. The Company announced that it waived the $25 minimum spending requirement for free shipping during the “holiday season.” This move devalues the $119 annual fee for a Prime account, other than the fact that non-Prime free shipping will be regular mail rather than 2-day. As a colleague remarked, “at least for the holiday season Prime becomes nothing more than low-level streaming service.” Moreover, the free shipping will annihilate AMZN’s gross and operating profits.
In 2001, FASB removed the “pooling” method of accounting for mergers which required the financials of the combined entity to be historically restated to reflect the numbers from both companies. From Q3 2017 to Q3 2018, AMZN optically has generated a huge year-over-year quarterly growth rate because AMZN’s income statement prior to late Q3 2017 did not include WF numbers. This fact is buried in a disclosure in the SEC filings but, of course, not mentioned by analysts or the dopes on financial television.
But AMZN will be hurt going forward because every quarter, starting with Q4 2017, contains a full quarter of Whole Foods numbers. The consequence of this for AMZN is that, optically, the “growth rate” in AMZN’s revenues will fall significantly in year-over-year quarterly comparisons. Thus, the year-over-year year quarterly comparisons thru Q3 2018 show a much higher growth rate visually even though the comparisons are not “apples to apples” (e.g. Q2 2018 included WF numbers, Q2 2017 did not). Going forward, WF’s numbers will “dilute” the growth rate of AMZN’s revenues. One of the reasons AMZN’s stock was massacred in the previous week’s market sell-off is because AMZN guided the Q4 growth rate lower.
While some of AMZN’s competitors – like Target – are offering free shipping without a spending requirement, the move by Amazon is a act of desperation designed to generate sales growth. AMZN’s stock price is and always has been tied to revenue growth rate. Anyone who has bothered to pull apart the financials to the extent I have knows that AMZN burns cash every quarter. I opined a few years ago that AMZN’s stock would be demolished once the Company reaches a point at which sales growth approaches zero or declines.
AMZN’s stock plunged $252 (14.1%) in the first three trading days after AMZN reported Q3. It would have tanked even more if it wasn’t “saved” by the massive short-squeeze rally last week. But it’s down another 4.1% today – after hitting its head on its 200 dma. If the stock market heads south, the decline is AMZN’s stock price is just getting started…