Author Topic: AMZN - Amazon.com Inc.  (Read 651172 times)

Cardboard

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Re: AMZN - Amazon.com Inc.
« Reply #120 on: February 08, 2013, 10:22:54 AM »
Canadian Tire is giving you a percentage of your spending with their own money if you pay cash! So they have their own money in circulation which is exchangeable in the store. This has been going on for decades. Why is it that you guys are so in awe with whatever Amazon is doing? Is it because you guys are working in the tech industry? I simply don't get it.

Moreover, there seems to be a conviction that Amazon will kill everyone in retail and become one day the only shopping place. What is interesting, is that after something like 16 years of massive price cuts and the move away from traditional books (which a old fashioned guy like me who is not that old still prefers than pages on a screen), Barnes and Nobles, Indigo and most others are still alive and selling books in brick and mortar stores. What is happening is that no one is now making any money including Amazon. So the industry is essentially worthless to investors. So how can they possibly steal all sales from a Wal-Mart, Costco, Target, Kohl's, Sears? By rendering the entire retail industry unprofitable and worthless including their very own? 

Honestly, I shop at Amazon once in a while, but it has been mainly to buy small goods such as watches and books. I also find it useful to ship a gift directly to a relative or friend living away. That is about it. Prices are good, I will give you that, but I still prefer a traditional shopping experience for most of my goods. Now as an investor, what matters is free cash flow as Mr. Bezos keeps pointing out. However, he has never delivered especially not for the kind of valuation being attributed.

The problem with Amazon is that they are selling too low to make a decent profit or to attain a proper return on capital, which rendered impossible the validation that the original business model of having only a few very high tech warehouses shipping across the country would work. Then once it became clear that they would lose their no sales tax advantage and as a form of settlement, Mr. Bezos entered into a massive expansion plan of having warehouses everywhere to then reduce shipping cost and offer same day shipping. Once again, this model has not proven its worth yet and may never since it is massively different than the original business model.

Inventory management becomes much more complex and costly. You need to have the right goods, at the right place, at the right time in a much larger number of facilities which has to increase overall shipping costs from vendors to these warehouses: there is a difference between a truckload of some goods to Seattle vs 80 less than truck loads to warehouses across the country. Also, the number of employees, utility bills, insurance, municipal tax, conveyors/robots maintenance, other repairs, real estate ownership make costs explode. Moreover same day shipping while closer to the customer due to the warehouse location might not integrate so well with UPS and others and be more cost effective on a single shipment basis.

I imagine that they have some top notch logistical experts at Amazon figuring this out (but you can be sure that the analysts out there have no clue about this). Moreover, it would not be the first time in human history that a strong leader influenced significantly decisions on how to do things. I have seen enough financial analysis and sourcing studies to know that numbers can be "tweaked" to make one option look better than the other especially when they are close. So if the leader thinks that same day shipping is a must for consumers, you can be assured that it influences the way people think and analyze numbers despite their best ability and integrity. Here we are talking about tiny profit margins. A slight change in the logistical assumptions can a have a tremendous impact on the long term profitability of the enterprise especially when you lock yourself into a vastly larger number of locations than you used to manage.

So the reality is that so far we have seen sales grow because of an advantageous value proposition for consumers, however profits never materialized to justify the valuation. Profits have actually gotten worse which would tend to validate what I am mentioning regarding the revised business plan. Moreover, lately sales have not grown as fast as analysts and others had been expecting despite a very large expansion. It seems improbable that selling prices will be reduced further to entice more sales growth. So IMO, the moment of truth is coming since they are now selling $62 billion of goods a year and can't change much further the business model other than introducing brick and mortar stores!

Cardboard 


rmitz

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Re: AMZN - Amazon.com Inc.
« Reply #121 on: February 08, 2013, 12:02:39 PM »
Moreover, there seems to be a conviction that Amazon will kill everyone in retail and become one day the only shopping place. What is interesting, is that after something like 16 years of massive price cuts and the move away from traditional books (which a old fashioned guy like me who is not that old still prefers than pages on a screen), Barnes and Nobles, Indigo and most others are still alive and selling books in brick and mortar stores. What is happening is that no one is now making any money including Amazon. So the industry is essentially worthless to investors. So how can they possibly steal all sales from a Wal-Mart, Costco, Target, Kohl's, Sears? By rendering the entire retail industry unprofitable and worthless including their very own?

That's kind of how capitalism is supposed to work...

I love the Amazon service, as someone who doesn't drive to work or need a car regularly, it's far more convenient to have things delivered cheaply if I can't walk to my local stores and get them.  Likewise, not having to enter all my information in over and over again on different websites has a value in time and security.

None of that makes Amazon a good investment, which is an entirely different issue.

txlaw

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Re: AMZN - Amazon.com Inc.
« Reply #122 on: February 08, 2013, 02:54:13 PM »
I have to say that the most perturbing thing about AMZN is the repeated stories I read about how crappy it is to work in their distribution centers:

http://www.ft.com/intl/cms/s/2/ed6a985c-70bd-11e2-85d0-00144feab49a.html#slide0

bargainman

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Re: AMZN - Amazon.com Inc.
« Reply #123 on: February 08, 2013, 06:49:21 PM »
I imagine that they have some top notch logistical experts at Amazon figuring this out (but you can be sure that the analysts out there have no clue about this). Moreover, it would not be the first time in human history that a strong leader influenced significantly decisions on how to do things. I have seen enough financial analysis and sourcing studies to know that numbers can be "tweaked" to make one option look better than the other especially when they are close. So if the leader thinks that same day shipping is a must for consumers, you can be assured that it influences the way people think and analyze numbers despite their best ability and integrity. Here we are talking about tiny profit margins. A slight change in the logistical assumptions can a have a tremendous impact on the long term profitability of the enterprise especially when you lock yourself into a vastly larger number of locations than you used to manage.

So the reality is that so far we have seen sales grow because of an advantageous value proposition for consumers, however profits never materialized to justify the valuation. Profits have actually gotten worse which would tend to validate what I am mentioning regarding the revised business plan. Moreover, lately sales have not grown as fast as analysts and others had been expecting despite a very large expansion. It seems improbable that selling prices will be reduced further to entice more sales growth. So IMO, the moment of truth is coming since they are now selling $62 billion of goods a year and can't change much further the business model other than introducing brick and mortar stores!

Cardboard

Cardboard, I'm just surprised you would short a company with this sort of unending ability to make wallstreet believe its story.  Regardless of whether it's overvalued or not, it's a pretty great company.  Are you protected with some OTM calls to ensure you don't get killed if they keep going up?  How large of a position is this for you?  I imagine it must be quite small considering that in another thread you said you had a 99% return last year...

LC

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Re: AMZN - Amazon.com Inc.
« Reply #124 on: February 08, 2013, 07:54:11 PM »
Cardboard, I'm just surprised you would short a company with this sort of unending ability to make wallstreet believe its story.  Regardless of whether it's overvalued or not, it's a pretty great company.  Are you protected with some OTM calls to ensure you don't get killed if they keep going up?  How large of a position is this for you?  I imagine it must be quite small considering that in another thread you said you had a 99% return last year...
I won't touch the hedging discussion but I will say that Amazon is a great company for customers due to the value proposition as Cardboard said. It's a great company for employees (well, those who don't work in distribution centers). Can you imagine better resume padding than "logistics manager - amazon.com"? I think not. But it's a terrible company for shareholders. Simply put, the margins suck and there's not enough volume in the country to justify it!
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Cardboard

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Re: AMZN - Amazon.com Inc.
« Reply #125 on: February 09, 2013, 09:31:06 AM »
This dog has been hurting me since last July. So yes, had I not entered this position, I would have made 100% + last year. Now, so I am clear, I hate publishing these numbers. And I can guarantee you that it is not happening every year, although my long term record is very good. I felt that I had to disclose it for a reply to Moore, maybe a mistake.

Regarding hedging, I am not hedged directly on AMZN. However, I am fully invested and considering BAC and AIG warrants, I would be levered if not for some shorts (actually, I am still net 100% + long on a notional basis). There is always the possibility that this thing takes off to infinity but, you would need an even more exuberant market with more liquidity. That seems somewhat improbable. I also keep my shorts always smaller than my long positions since when the position moves against you, unlike a long one, it gets larger.

On capitalism, I don't think at all that Amazon represents it, not anymore. With capitalism, there is an incentive to make a profit when you enter into any enterprise. Return on equity is what determines what is the best option for you on where to deploy your capital. Please stick with me.

Let's take an example, what would you say if Coca-Cola decided tomorrow to take its net profits down to breakeven by reducing its selling prices for 16+ years in order to gain market share and eventually kill Pepsi? If Pepsi refused to follow suit, it's quite possible that Coca-Cola would show large sales growth. However seeing this, it's quite probable that Pepsi would also cut its prices in the same manner and eventually no one would want to invest in either company: there would be no dividend, no return on capital or equity. The stock prices would likely plummet to next to nothing or trade very low until both companies would regain their senses. Now, I know that this is not the best example since some would never switch to the other brand at any price but, replace it with two crazy hotel owners in a small town, being the only two available, if you prefer. 

That is basically what Amazon has been able to do over all these years in the name of sales growth and clearly, they would be totally incapable based on current numbers to raise their prices to a level that would produce enough profits to justify the current valuation. They are growing sales above 20% a year, for now anyway. Assuming a P/E of 25, they would need $4.5 billion in net profits. To get this kind of profitability, they would have to increase now their selling prices on all items by 11%. What do you think would be the impact on sales growth in such competitive markets? Could sales actually decrease from current level under such scenario? What would then happen to the P/E? If the P/E comes down to 15, then net profits would have to be $8 billion and selling prices would have to increase by 18.7%.

Of course, some will mention the very large investments being made now! Where and how do you cut operating expenses by $7 billion without hurting current sales? Please show me. $4.5 billion in net profits is also a 7.3% net margin. Do you have a slight idea on know how hard this would be to achieve? For comparison, Wal-Mart has a net margin of 3.5%, Target of 4.2% and Costco of 1.7%.

The only reason why Amazon has been able to do it is because they have always been considered a start-up. A start-up can have no profit for a period of time or until sales have reached a critical level to reach profitability and reward the earlier investors who had foreseen the pot of gold down the road. The issue is that Amazon is no longer a small start-up. Sales have reached $62 billion a year and sales growth is now decelerating to the low 20% range despite massive investments. It is showing all the signs of a company that has attained some form of maturity. And that is why it is no longer representing capitalism and that eventually the music will stop unless profits are appearing in a major way and soon.

I sense a growing chorus of people questioning them now: more negative articles, some analysts. Some are also getting fed up of them continually missing all expectations and providing very poor disclosure. What do you think would happen if a guy like Einhorn finally decided to go short on them and present a strong thesis in public? What if Goldman issues a sell recommendation? The thing looks like a bubble ready to pop on any negative sentiment coming from a strong source. There is absolutely nothing holding up the stock price to such elevated levels other than faith and greed. They are considered like a can't do no wrong company or like Apple was at $600 or $700, but they have nowhere near the level of net cash to support the stock and have no profit.   

I still view the company as having an intrinsic value. It is not a zero unless the current massive increase in the number or warehouses or the new distribution model is a disaster (and could be) since it has been able to attract users or customers, its technology is top notch and they have net assets (although only $8.2 billion), but it remains just one alternative for people to shop. Normally, in capitalism everyone is more or less happy. The consumer likes the value proposition, competitors keep trying to be the one satisfying the consumer and competitors all make decent returns. At its size, Amazon is well past the point of proving to the earlier investors that it can produce decent net margins. And Mr. Bezos unless you don't know, free cash flow equals net earnings when you don't manipulate numbers and when a company has attained some form of maturity.

Cardboard

Eric50

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Re: AMZN - Amazon.com Inc.
« Reply #126 on: February 09, 2013, 12:30:10 PM »
Cardboard, I enjoy your posts, but I think you are making several mistakes:

- On shorting. The key for successful shorting is timing. If you short based just on valuation I doubt you can be very successful. Remember Keynes: ďthe market can stay irrational longer than one stays solvent.Ē Iím not sure when it is going to be a good time to short amazon; I donít see a catalyst yet. It might have been the spike after Q4 earnings announcement a couple of weeks ago.

- Also on shorting Iíd like to point out the risk of shorting when the central bank is printing heavily. This is barely discussed on this board but the Fed is printing $85bn a month. It provides a flow of liquidity that has to go somewhere. Very tough environment to short, you are swimming against the tideÖ On the other hand, when the market reverts, itís going to be paradise for the short sellersÖ But again it emphasizes the importance of timing when one shorts stocks.

- On using your personal experience as a customer. Thatís marketing 101: itís not because you personally like or donít like a product/service that it will be successful or not. Look around you, there are more and more people buying more and more stuff on the internet. Itís clearly a trend and there were numerous articles on that trend in the financial media around thanksgiving. I live in a wealthy suburb of Seattle and I see lots and lots and more and more of prime customers buying stuff from amazon several times of week, including amazonfresh. (Prime was actually a key trigger in the massive customer behavior change a few years ago: customers used to buy pretty much only media products, the introduction of prime led to much more diverse purchases).

- On capex spending. I think amazon is currently building a huge infrastructure that will give it a key competitive advantage in the future. They are about to get the spine to handle much higher volumes. This will lead to higher margin. Probably in the short term as the bulk of the investments has been made.

Growth might have slowed in Q4 but the more I think about it, the more Iím optimistic about amazon in the long term. Growth might reaccelerate in the future as it did in 2008. I think 10-15 years from now it will be bigger than Wallmart and the largest company on earth.

Iím not sure this has been discussed on this thread or this board, but there has been a good bullish case discussed here:

http://www.scribd.com/doc/98208572/ValueXVail-2012-Josh-Tarasoff

Bottom up line: I suspect youíll be successful with your short position when the overall market realizes the insane game played by the central banks and the stock market corrects (even though amazon margins are likely to improve in the short term). Hopefully it will become super cheap and provide an entry point!

bargainman

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Re: AMZN - Amazon.com Inc.
« Reply #127 on: February 09, 2013, 06:25:56 PM »
Cardboard, you make good points, but I think you are too early.  There are negative articles on amazon for sure.  But I think it's still early in the game.  Bezos is famous for being very very long term oriented, heck, he's building a 10,000 year clock in the mountains.  He thinks that's his main advantage.  It's still early in the transformation from people shopping in person vs online.  The entire video and media industry is still transforming to digital.  Amazon is also just getting into the start of the cloud SAAS, IAAS and PAAS industries, and they are becoming the gorilla in the room.  They are becoming the highest scale infrastructure for a lot of startups, a lot of large companies etc in the cloud, no one is even close as far as I can tell.  Heck, NFLX is basically in bed with them even though they are their biggest competitor.  I don't know if anyone will be able to catch them, as this is very sticky.  They are basically gearing up to take on MSFT, IBM, GOOG, AAPL, ORCL, but their advantage is they come from a low margin world and don't feel the need to up their margins. It's still very very early in that arena, and they are building an unsurmountable lead in terms of the infrastructure and scale they are able to build.  Their revenues are about the same as TGT and COST, but about 20% those of walmart.  Plus they are not only expanding in retail but transforming the media industry, and transforming the tech industry.  They still have a long long way to go there.

Now that's just looking at the business, not the numbers or the valuation.  I just think they have a long enough runway.  I do think eventually the stock will dive and they will have to focus on turning a profit, but I wouldn't bet on it happening within the next year or 2, especially with the reality of their SAAS AWS business.  At the very least I would take on FOTM calls to protect it so that it's at max a 100% loss for you.  If that's possible, I haven't looked at all the strikes available. 

Just IMHO.  If your last year's return is any indication, you're a much much better investor than I am, but I do have a pretty deep background in tech and have read a lot about Bezos, so hopefully some of this perspective helps.  I have seen another very smart tech savy investor do a very convincing short thesis on amazon, and he also got killed...  It just seems like a short needs a very good amount of timing ability, and presents a theoretical increasing maximum risk.  Doing that on a great company seems like a dangerous proposition...

rmitz

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Re: AMZN - Amazon.com Inc.
« Reply #128 on: February 11, 2013, 07:18:27 AM »
On capitalism, I don't think at all that Amazon represents it, not anymore. With capitalism, there is an incentive to make a profit when you enter into any enterprise. Return on equity is what determines what is the best option for you on where to deploy your capital. Please stick with me.

My point about capitalism is that it is the nature of all businesses that do not have differentiating factors to have their margins approach zero over time.  So AMZN driving down margins is actually very capitalistic.  Now, money flocking to AMZN for investment is *not*, I grant you; I agree that they should not be valued so highly.

Quote
Let's take an example, what would you say if Coca-Cola decided tomorrow to take its net profits down to breakeven by reducing its selling prices for 16+ years in order to gain market share and eventually kill Pepsi? If Pepsi refused to follow suit, it's quite possible that Coca-Cola would show large sales growth. However seeing this, it's quite probable that Pepsi would also cut its prices in the same manner and eventually no one would want to invest in either company: there would be no dividend, no return on capital or equity. The stock prices would likely plummet to next to nothing or trade very low until both companies would regain their senses. Now, I know that this is not the best example since some would never switch to the other brand at any price but, replace it with two crazy hotel owners in a small town, being the only two available, if you prefer.

Seems like we actually agree.  The action is capitalistic in general, though the investment reactions are irrational.  I think there is some differentiating value in AMZN, via network effects and overall quality.  I don't think it's nearly as big as the pricing would indicate though.

rkbabang

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Re: AMZN - Amazon.com Inc.
« Reply #129 on: February 11, 2013, 08:04:42 AM »
On capitalism, I don't think at all that Amazon represents it, not anymore. With capitalism, there is an incentive to make a profit when you enter into any enterprise. Return on equity is what determines what is the best option for you on where to deploy your capital. Please stick with me.

My point about capitalism is that it is the nature of all businesses that do not have differentiating factors to have their margins approach zero over time.  So AMZN driving down margins is actually very capitalistic.  Now, money flocking to AMZN for investment is *not*, I grant you; I agree that they should not be valued so highly.

Quote
Let's take an example, what would you say if Coca-Cola decided tomorrow to take its net profits down to breakeven by reducing its selling prices for 16+ years in order to gain market share and eventually kill Pepsi? If Pepsi refused to follow suit, it's quite possible that Coca-Cola would show large sales growth. However seeing this, it's quite probable that Pepsi would also cut its prices in the same manner and eventually no one would want to invest in either company: there would be no dividend, no return on capital or equity. The stock prices would likely plummet to next to nothing or trade very low until both companies would regain their senses. Now, I know that this is not the best example since some would never switch to the other brand at any price but, replace it with two crazy hotel owners in a small town, being the only two available, if you prefer.

Seems like we actually agree.  The action is capitalistic in general, though the investment reactions are irrational.  I think there is some differentiating value in AMZN, via network effects and overall quality.  I don't think it's nearly as big as the pricing would indicate though.

That is how I see it as well.  As a customer I hope they do keep expanding into other areas and keep their margins low.   Looking at it as an investor the stock looks to have a touch too much tulip-bubble quality about it.  Keep buying it because it always goes up.  It doesn't matter what you pay you can always sell it for more.  This isn't to say I'd short it though.  Sorry Cardboard, I think you're both right & crazy (maybe gutsy is a better word).  Remember that when you are time constrained, sometimes being correct isn't enough.