Amazon.com’s Accounting Pornography

Amazon.com’s Accounting Pornography by Dave Kranzler – Investment Research Dynamics

I wrote the following analysis on Amazon.com’s GAAP accounting manipulation for Seeking Alpha…

Amazon.com (AMZN) released its earnings on Thursday, February 1st after the market closed. The headline net income number was $3.85/share. This blew away Wall Street’s estimate of $1.85/share, which is a bit peculiar since the traditional “beat the Street” earnings game is accomplished by guiding Wall Street analysts to an earnings consensus that is slightly below the posted result.

The revenue growth rate was truly impressive. For Q4 2018 vs. 2017, revenues jumped 38.2%. For the full year, revenues grew 30.8%. However, without question AMZN’s free 2-day shipping associated with its Prime membership is the driving force behind sales growth. But at what cost? The table below shows AMZN’s revenue growth rate plus cost and operating margins from 2005 – 2007. The data is from AMZN’s 10-k filings.

Cost of fulfillment is the cost of de-stocking an item and getting it to the customer’s doorstep. The fourth line item above shows fulfillment costs over time. As you can see, the cost of fulfillment as a percentage of revenues has doubled since 2006. For every dollar of revenue, AMZN spends nearly 23 cents getting inventory delivered to end-users.

Including fulfillment as part of the Cost of Sales, which technically is the correct way to account for the fulfillment cost, AMZN’s true gross margin is 22.8% vs the 37% that it is given credit for generating. As points of comparison, last year Walmart, Target and Best Buy had gross margins of 24%, 29.5% and 23.6%, respectively.

The interesting question for me is, what would AMZN’s sales look like if it charged for delivery on all Prime-related sales under $50. For instance, most of my Prime purchases from AMZN are under $30. These are purchases I would not make from AMZN if the item wasn’t going to show up in two days at no extra cost. Instead I would just run out to the local store for the same item at the same cost. The point here is that AMZN “buys” revenues by providing 2-day free shipping to Prime members. In fact, in 2015, it was estimated that AMZN loses $1-2 billion annually on Prime shipping. AMZN has significantly more Prime members now than in 2015, which implies that the losses from free shipping are even greater now.

You can read the rest of this article here:   Amazon’s Deceptive Accounting Games

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Dave Kranzler

I spent many years working in various analytic jobs and trading on Wall Street. For nine of those years, I traded junk bonds for Bankers Trust. I have an MBA from the University of Chicago, with a concentration in accounting and finance. My goal is to help people understand and analyze what is really going on in our financial system and economy. You can follow my work and contact me via my website Investment Research Dynamics. Occasionally, I publish on Seeking Alpha too. As a co-founder and principal of Golden Returns Capital, LLC Mr. Kranzler co-manages the Precious Metals Opportunity Fund, a metals and mining stock investment fund.