I use Amazon.com as follows:

1. I frequently shop at both Amazon.com, and its affiliate, Soap.com.
2. I take advantage of Amazon’s global shipping policy for relatives in Europe.
3. I sell my book “Mycroft’s Blue Book Stock Guide 2014” on Amazon.com.
4. My book is also published by Amazon’s affiliate, CreateSpace.com.
5. The book is printed on demand by Amazon, shipped to 226 countries, and is distributed to resellers and retailers through Amazon's expanded distribution system.
6. I subscribe to Amazon Prime for streaming video.
    

Amazon.com has the best customer service that I have ever encountered in the retail sector.  This is a direct reflection of the philosophy of chief executive officer, Jeff Bezos, whose main focus is on pleasing the customer.  The following example demonstrates how accessible the firm is from my own experience.  I had a marketing issue with Amazon.com concerning the digital version of my book, and I could not seem to get the right person with the right technical expertise on the phone to satisfactorily answer my question.  Finally I decided to write Mr. Bezos personally at jeff@amazon.com and within an hour, to my amazement, a senior staffer at Createspace.com called me on the phone and fully addressed the issue.

Professionally, I am a quantitative and qualitative analyst, as well as Portfolio Manager for SIA Capital Management Inc.  My area of expertise is in free cash flow analysis. Over the years, through rigorous backtesting and real world investing, I have developed a unique system for analyzing companies that goes to the core of a firm’s operations.  Being impressed with Amazon.com, I decided to run a free cash flow analysis of the company.

This analysis uses the following six free cash flow ratios:

• CapFlow
• FROIC
• Price to Mycroft Free Cash Flow
• Mycroft/Michaelis Growth Rate
• Free Cash Flow Payout Ratio
• Free Cash Flow Reinvestment Rate

Those new to this analysis can find an introduction by going here that will explain in detail how each of these ratios is calculated. When used together, these unique ratios generate a quantitative picture of a company's underlying fundamentals, taking into account both strengths and weaknesses.

The "2014 Mycroft Free Cash Flow per share" estimate, shown in the table above, is generated by taking the trailing twelve months (TTM) free cash flow result for Amazon and then adding the Mycroft Michaelis Growth Rate into the equation, in order to generate a forward looking estimate for 2014.  That growth rate is generated by using the FROIC ratio (Free Cash Flow Return on Invested Capital).  Basically FROIC tells us how efficient operations are as it zeros in on how much free cash flow is generated for every $1 of total capital employed.  Amazon has a FROIC of 3%, which means that for every $100 of invested capital, the company generates $3 in free cash flow.  Now my Mycroft/Michaelis Ratio takes that 3% and multiplies it by the firm's free cash flow reinvestment rate. The reinvestment rate that I use is a free cash flow reinvestment rate, instead of the standard one used by analysts that simply uses net income.  It is calculated as follows:

Free Cash Flow Reinvestment Rate = 100% - (Free Cash Flow Payout Ratio).

Or:

Free Cash Flow Reinvestment Rate = 100% - (Total Dividend/Total Free Cash Flow).

By replacing net income in the payout and reinvestment ratios with free cash flow, I am thus able to make my analysis more precise by incorporating capital spending (Cap Ex) into the equation.

Therefore from this we can determine that Amazon, which pays no dividend, has a reinvestment rate of 100%. Thus by taking 3% (FROIC) x 100% = 3%.  From there we add the dividend yield of 0% and we have a Mycroft/Michaelis growth rate of 3% + 0% = 3%.

Amazon’s Mycroft Free Cash Flow per share of $0.60 was generated by taking its TTM free cash flow per share and multiplying it by (100% + 3% or 1.03).  Once we have our result, we then take its current market price of $387 and divide it by $0.60 and get a Price to Mycroft Free Cash Flow result of 645.  I consider a Price to Mycroft Free Cash Flow per share result of less than 15 to be good for purchase, and anything under 7.5 to be excellent.

The higher you go above 15, the more overvalued a company becomes. I use a Price to Mycroft Free Cash Flow per share result of 22.5 as my sell price, and 45 as my short price.

An appropriately priced stock should trade around a Price to Mycroft Free Cash Flow per share result of 15. This benchmark result was determined by backtesting.

Buy (opinion) = A Price to Mycroft Free Cash Flow per share result of less than 7.5 is considered excellent (50% below the initial Hold level), and anything under 15 is attractive.

The result I give as my Buy opinion in the table above uses a Price to Mycroft Free Cash Flow per share result of 7.5.

Hold (opinion) = 15 to 22.5 (I use 15 in the table).

Sell (opinion) = 22.5 or higher (50% above the initial Hold level).  (I use 22.5 in the table).

Short (opinion) = 45 or greater. The Price to Mycroft Free Cash Flow per share result of 45 was determined by going back to the peak of the market (in the year 2000) and averaging the Price to Free Cash Flow per share results for the key players at that time.  (I use 45 in the table).

The CapFlow ratio result that you see in the first table above is an original ratio I created in order to tell me how much Capital Spending is used as a percentage of Cash Flow.  A result of less than 33% is considered ideal and with Amazon coming in at 94%, means that only 6% of the company's cash flow is actually free cash flow and can be used for such things as buying back stock.  

In conclusion, Amazon’s CapFlow result of 94% is terrible, as Mr. Bezos has decided to pour 94% of the firm’s cash flow into expanding operations, by doing such things as building new distribution centers.  Amazon’s cash flow from operations for 2012 was $4.18 billion and its capital spending was $3.78 billion, making its free cash flow, $395 million.  So if we take $4.18 billion and divide it by Amazon’s diluted shares outstanding of 462 million, you would get a cash flow per share of $9.04.  When you divide its current stock price of $387, by cash flow per share, Amazon trades at 42.80 times its cash flow per share.  Therefore if one judges Amazon solely on its Price to Cash Flow alone, the stock is not cheap.  My free cash flow per share estimate of $0.60 is actually more than twice its TTM earnings per share of $0.29, and thus Amazon has a price to earnings ratio of 1,334.  Where Amazon does shine is in its revenue growth rate and has had an average annualized growth rate of 29.55% over the last ten years, while its stock price has had an annualized growth rate of 22.5% during that same period.

Eventually Jeff Bezos will have to slow down his capital spending and generate some free cash flow, because coming in at 645 times its price to free cash flow is dangerous.  Many investors, on the other hand, support his strategy and are willing to hold as long as the company continues to have strong revenue growth. 

But God help Amazon’s stock price if its revenue growth were ever to slow. That would mean that the currently huge capital spending is squandered.  Therefore despite Amazon’s significant role in my life, it may be some time before it ends up in my clients' portfolios.  I invest based on Price to Free Cash Flow, CapFlow and FROIC.  Unfortunately, Amazon comes in with very poor results on all three counts.