In two earlier posts on this blog, we talked about the way that Amazon (AMZN) reported certain expenses which it termed “technology and content.” I didn’t have much to say about that choice. They’ve been consistent in the way they report and describe this item almost from their first 10-K. But it isn’t research and development expense, and there was only one year (2006) when the phrase ‘research and development’ wandered into the description of technology and content. No, what bothers me is the way other people decide to reclassify all of this amount as R&D, and how that affects their thinking. In this post, we’ll see that the Motley Fool investment service was fooled in exactly this way.
A few years ago, Motley Fool ran a piece touting Amazon’s innovation as a reason to consider it a tech leader. The main support for this argument was AMZN’s rate of R&D spend. In the table of data, the rate of R&D spend per revenue for Amazon can only be arrived at by assuming all of Technology and Content is R&D. We already know this isn’t true, so we can add someone at S&P’s Capital IQ unit to Morningstar as having drunk some special Kool-Aid (TM) before mapping Amazon’s results into their database.
What makes the story quite piquant (to me, at least) is this quote.
When it comes to comparing Amazon with its brick-and-mortar retail competitors, one statement summarizes the dynamic perfectly: Wal-Mart (NYSE: WMT) doesn’t even bother reporting its R&D total. It’s not large enough to be an item that’s even discussed (aside from one quick mention) in its entire 10-K annual report. Clearly, Amazon is competing on a different plane.
Clearly, the author has never read an Amazon 10-K, or they would know that Amazon doesn’t report R&D expense either.
This is really quite an amazing article, since the author would like you to believe that Amazon is a tech leader even though their putative R&D spend rate is below competitors listed on the table (Apple and Google), and their point about being on a different plane than Wal-Mart is 180 degrees away from the truth.
I’m not trying (really!) to trash Motley Fool. But the main point here is that investors, even people that should be sophisticated investment journalists, rely on databases instead of the source documents of the company filing. The author could have flogged AMZN as a tech leader without making the mistakes he made. But the mistakes are there, and people reading this article will continue to get a mistaken impression.
On the other hand, an XBRL based database is never going to make this mistake.