Just when Amazon (AMZN)
was being written off, it is writing itself a new script, announcing a plan to
enter feature film production with streaming to customers available soon after
theatrical release. We think it's a big deal, big enough to start coverage of
the on-line retailing-entertainment behemoth with a buy recommendation.
Amazon Original Movies creative development will be led by
independent film maker Ted Hope, who co-founded and ran the production company
Good Machine. Production will begin this year and titles will be released to
Amazon's Prime Video customers 30-60 days after theatrical release. A press
release can be found here.
The movie-making business can be feast or famine, but we
think Amazon has proven it can create popular and critically praised content by
virtue of its recent Golden Globe award for the comedy-drama TV series Transparent.
Its likely focus on "indy" films should keep costs in check.
It's impossible to predict the financial outcome
of Amazon's foray into movie making, but a few examples can lend some
perspective. The general rule of thumb is that a movie needs a box office take
of double the cost of production and marketing to start making money.
"Boyhood," the Oscar-nominated coming-of-age film directed by Richard
Linklater cost about $2.4 million or more to make (about $200,000 a year over
13 years, according to Linklater) and has grossed $28.9 million worldwide,
according to Deadline.com. At the other end of the budget spectrum, Sony's
Amazing Spider-Man 2 cost $255 million to produce and $190 million to market
and grossed about $708 million worldwide, "just enough worldwide to save
the current regime at Sony," according to Deadline.
Of course it's anyone's guess what the percentage of hits,
break-evens and flops will be, but creating content as well as just purveying
it has certainly served Amazon (and Netflix and cable channels) well on the
small screen.
Meanwhile, valuing Amazon shares is difficult if not
impossible given startling revenue growth and equally startling lack of
profitability. We'll take a stab at it anyway. Since we can't use
price-to-earnings multiples, price-to-cash flow multiples could help, but they
are by any perspective way rich. In the 12 months ending Sept. 30, Amazon
reported $1.077 billion in free cash flow compared with the $388 million in the
12 months ended Sept. 30, 2013. At yesterday's closing price, the company
traded at a whopping 124 times trailing 12 months' free cash flow. But the case
can be made that Amazon is reasonably priced and even cheap at a price-to-sales
ratio of 1.56. In the last 52 weeks, Amazon shares have traded between $408 and
$284. Its current price is just $5 above that low.
A pithy rundown of the Amazon cash machine and investors'
disenchantment with the model can be found here at the Harvard
Business Review. In sum, Amazon's cash conversion cycle, that is, the
difference between when it gets paid and when it pays suppliers and retail
partners, though still wide, has nevertheless been shrinking.
We'll spare you the tables and charts; you can find them in
a million places if pictures speak to you more than they do to us. The chief
investor concern, in our view, is stalling growth. In the latest reported
quarter, revenue increased 20% year-over-year, compared with 24% growth in the
2013 period. For the nine months reported so far, revenue has grown 22%
compared with 23% in 2013. The fourth quarter will be reported Jan. 29.
According to Yahoo, analysts are expecting $29.73 billion vs. $25.59 billion
last year, a 16% year-over-year growth rate.
Another headwind is the tax inquiry by the
European Union into Amazon's Luxembourg
The shares have skidded in the past 52 weeks, down 27.6%.
Through the first 20 days of 2015 they have shed 6.7%. Our assumption is that
once the movie production and streaming business delivers a hit and recharges
growth, investors will reward the company with a more "Amazonian"
stock price. Hurray for Hollywood
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