Amazon (NASDAQ: AMZN) trades at about 22 times earnings and about 30 times the earnings expected of it over the next year. Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL) trades at about 18 times earnings and about 27 times forward. For both, next year costs more than last year.
Ordinarily, that arithmetic means one thing -- profits are expected to fall. This Rare Signal Is Flashing Again. In 2009, a "Double Down" signal flashed for a little-known chipmaker called Nvidia.
For the first time in years, that same "Total Conviction" signal is flashing for a company 1/100th the size of Nvidia. Continue » And these aren't struggling businesses. So either the market expects earnings to decline at two of the largest companies on Earth, or the trailing numbers aren't what they appear.
It's mostly the second, though I'd stop short of calling either stock cheap once the reason is on the table. Amazon earned $62.6 billion in the second quarter, up from $18.2 billion a year earlier. The release itself flags what happened, noting the quarter "includes non-operating pre-tax other income of $53.4 billion, primarily from our investments in Anthropic." That windfall is nearly double the operating income Amazon produced in the same three months.
And it sits inside the year of earnings the 22-times multiple divides by. Take it out, and the stock stops looking cheap. The operating business is a different story, and an impressive one.
Operating income rose 43% year over year to $27.5 billion even as trailing-12-month free cash flow swung to a $7.6 billion outflow, on net purchases of property and equipment that ran $66.1 billion higher than the year before. Amazon Web Services (AWS) grew 37% to $42.2 billion, its fastest pace in 18 quarters. The spending is the forward story.
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