By Kevin Kelleher, contributor
FORTUNE -- No matter how much research is done before an investment, there always remains a little bit of faith when it comes time to place a trade. People may mock analysts when their forecasts are off, but the analysts who aren't pressured by their firms to dress up estimates -- which is a lot of them -- still miss the mark sometimes. Research only takes you so far. After that it's only guesswork.
Few stocks involve more guessing than Amazon (AMZN). The company is tightfisted when it comes to disclosing data or metrics. How many Kindles has Amazon sold? The company won't say. It discloses holiday shipments, but only on the peak day and not for the entire season. Amazon Web services will make an estimated $3.8 billion in revenues a year, but the company won't break it out as its own category, lumping it in with "other revenue" where it's been for years. Figuring out the division's profit margins is even more of a challenge.
When it comes to guidance, Amazon does offer it (while others like Facebook (FB) have been mute on guidance in recent quarters), but it usually offers a range you could drive a UPS truck through. Will Amazon post an operating profit or a loss this quarter? Yes. According to the company, the figure will land somewhere between a loss of $340 million to a profit of $10 million. That's a dartboard any monkey could hit.
The lack of clarity leaves investors who rely on fundamentals with an uneasy choice: either don't invest in Amazon's stock or simply trust the management that it will manage things well. Those who've opted for the latter have done pretty well for themselves. Amazon's stock is up 234% over the past five years, while the S&P 500 (SPX) is up 15%.
Amazon asks investors to trust its management in other ways. It has never paid a dividend, asserting that, "We intend to retain all future earnings to finance future growth." That also means Amazon consistently has thin profit margins and sometimes slips into a loss when it's spending heavily on that future growth. But it's earned trust because it has so consistently delivered on growth in revenue.
But it can sometimes put Amazon bulls in an awkward position. The company has always stressed free cash flow as the key financial metric to measure its health, instead of the earnings per share that is the standard gauge for many investors. Free cash flow is basically the cash the business is generating beyond the spending needed to keep growing. Amazon feels it's a better measure of whether Amazon's strategy of returning profits to customers (and not investors) is succeeding.
The problem is, the growth in Amazon's free cash flow over the past 12 months fell to $177 million, an 85% drop from the comparable period a year earlier. That's primarily because Amazon paid $1.4 billion for new offices in Seattle. But free cash flow is slowing at the same time revenue growth is: Revenues in the last quarter grew 1% on year, down from 5% in the previous quarter and 12% in the year-ago quarter.
Where Amazon is gaining is in another financial metric favored by its investors: gross margin, which grew to to 25.6% from 24% a year earlier. That means Amazon's revenue is growing faster than its core operating costs, and that previous spending appears to be paying off.
But which is it? Are rising gross margins signs that Amazon is thriving? Or are declining revenues and free cash flow signaling that it's hitting some headwinds? Unsurprisingly, the bulls are pointing to the former, and the bears are pointing to the latter. So Amazon remains one of the most divisive stocks in the tech sector.
Amazon is spending aggressively to expand in Europe as well as Asia, where it faces a formidable competitor in Alibaba. It's investing in original TV programming to compete against Netflix (NFLX) and Hulu. And it's adding to Prime benefits to reward customer loyalty. All of these plans are sound and could lead to stronger growth in coming years.
Amazon's stock has declined 6% since it reported its earnings, suggesting the bears have a stronger case for now. A little more clarity in how its business is working would help alleviate those fears and reward investors, if not with dividends or high net profit margins, then with more data to help them justify their good faith in the company.
Amazon may be heading into a period of slower revenue growth and higher capital spending. Nonetheless, the company's believers are sticking with the stock, remembering that it's never paid for very long to underestimate Jeff Bezos.
Kevin Kelleher is a writer covering finance and technology in the San Francisco Bay Area.
Yes, the social gaming company's stock is off to an ignominious start. But a closer look shows things are more complex than they first appear.
By Kevin Kelleher, contributor
FORTUNE -- Several months ago, things were looking very good indeed for Zynga. The casual-gaming company stood apart from other web IPOs of 2011 thanks to its "bountiful" profits. Investors were "excited" by an offering that could value the company at $20 billion.
Now that MOREDec 20, 2011 11:42 AM ET
In 2007 it was trading for nearly 50 times earnings. Today it's 10. What happened?
Perhaps the most succinct commentary on Leonid Kanopka's naive claim that Apple (AAPL) is a "bubble ready to burst" (see "A few fries short of a Happy Meal") was Nicu Mihalache's plaintive response: "Do you know what P/E is?"
The price-to-earnings ratio, as every trader knows, is the simplest way to gauge how the market values a company. A high P/E -- MOREPhilip Elmer-DeWitt - Dec 2, 2011 8:28 AM ET
Most shrug it off as a transitional aberration. Several raised their price targets.
Apple's (AAPL) fourth quarter results were the first since at least 2004 that failed to beat the analysts' consensus. A sampling of what they had to say about that:
Needham's Charlie Wolf: Not every quarter is a blowout. "The slowdown in iPhone sales in the second half of the September quarter in advance of the launch of iPhone 4S appeared to take MOREPhilip Elmer-DeWitt - Oct 19, 2011 8:37 AM ET
Apple, as hedge fund managers are well aware, is one stock that always bounces back
It's hard not to be cynical about Wall Street when you see a chart like the one at right, which traces Apple's (AAPL) share price over the past four weeks.
It not terribly surprising that the stock has shot up nearly 20% in the past two weeks to close at an all-time high Friday of $422. The iPhone 4S MOREPhilip Elmer-DeWitt - Oct 15, 2011 7:35 AM ET
Apologies to readers who complain that I lean too heavily on the work of Asymco's Horace Dediu, but this one was too good to resist.
As promised on his Critical Path podcast Wednesday, Dediu has begun comparing Apple (AAPL) in a systematic way to some of its peers, starting with Microsoft (MSFT). On Thursday he posted a pair of charts tracking Microsoft's revenue streams by segment and Apple's revenues by product over MOREPhilip Elmer-DeWitt - Sep 29, 2011 5:55 PM ET
Another striking visualization from Asymco
Nobody covering high tech today is better at turning raw data into colorful, expressive visuals than the Asymco team of Horace Dediu and Dirk Schmidt. On Tuesday Schmidt marked the end of the second Steve Jobs era by graphing the market capitalizations of Apple (AAPL) and 16 of its peers from 1997 (when Jobs returned to Apple) to 2011 (when he stepped down as CEO).
"According to his own MOREPhilip Elmer-DeWitt - Sep 29, 2011 8:03 AM ET
Click here at 5 p.m. Eastern (2 p.m. Pacific) for Apple's (AAPL) webcast of the conference call with analysts.
Thanks to setteb.it's Fabio M. Zambelli for the tip.Philip Elmer-DeWitt - Sep 26, 2011 5:05 PM ET
For as long as we have been tracking them, the bloggers have trounced the pros
On Sunday, the day after Apple's (AAPL) fourth quarter of fiscal 2011 ended, we posted preliminary revenue and EPS estimates from both Wall Street's Apple analysts and a group of amateurs we've been tracking for a couple of years.
After we posted the chart, one reader who calls himself jmmxx suggested that it would be more interesting to see how MOREPhilip Elmer-DeWitt - Sep 26, 2011 7:19 AM ET
On June 17, he told readers to buy AAPL at $320. The stock took off two days later.
We gave Andy Zaky, an independent analyst with a enviable track record, a hard time a few weeks ago.
He had just published a report on his Bullish Cross blog (reposted on Seeking Alpha) advising investors to buy Apple (AAPL) at $320. Although his three previous Apple buy signals had proved prescient, we took MOREPhilip Elmer-DeWitt - Jul 8, 2011 7:06 AM ET
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