Corner of Berkshire & Fairfax Message Board

General Category => Investment Ideas => Topic started by: Cardboard on November 02, 2012, 01:55:07 PM

Title: AMZN - Amazon.com Inc.
Post by: Cardboard on November 02, 2012, 01:55:07 PM
"You had Amazon.com last week missing on quarterly earnings, sales and Q4 forecasted sales. I should not say missing earnings because they generated losses. The stock went down briefly after hours then up huge the next day. If it had been Chipotle or any other momo stock it would have been down 20%. Incomprehensible. They had to find some excuse for the move so they talked about some mysterious beat on operating margins. I guess it had to be NA adjusted operating margins!

I actually think that Amazon is a fraud. If the stock market did not keep it high, they would have to show profits like Target, Walmart, BestBuy or any other retailer. Retailing is still their main business. Now, that the stock market keeps rewarding them just for showing sales growth, they can keep selling product at cost or below cost. Isn't illegal? With the sales tax advantage disappearing and them building warehouses everywhere to shorten delivery times, there is really no difference anymore in their retailing business with other brick and mortar retailers. There are also other issues, but that is for another discussion or thread."

Well, here is the thread! This company should be shorted into oblivion by Einhorn, Chanos and all others if they had balls. The stock market allowing this company to sell its products at a loss is creating huge issues for honest companies such as Wal-Mart, Target, Best Buy and many others who have to sell their goods at a profit to offer a return to their shareholders. Even Overstock.com has to show a profit. Apple is also suffering from this scheme since they have to sell their IPads at a profit to deliver to their shareholders. Apple's price to earnings ratio is around 11.5 now without even factoring in the very large cash pile and they are growing as fast as Amazon sales. Amazon on the other hand can sell its Kindles at a loss or near breakeven to generate sales growth and still enjoy an increasing stock price. The issue is that this goes for all their products. All of that is based on gaining market share and eventually generating massive free cash flows as claimed by Mr. Bezos.

The math simply does not add up. We are talking about a $100 billion market cap retailer with around $62 billion in sales. This is as big as Target now in terms of sales. Moreover, they are already worldwide. As we have seen recently, the rate of sales growth is coming down despite their large investments in more distribution centers and their venturing into more and more fields. If it was a conglomerate, people would trade it at a discount until management decided to re-focus in certain areas. Regarding growth, they will bump against the law of large numbers as Wal-Mart did once it reached such sales number. I think we are at the beginning of this process.

If it was a small tech company or one with a truly innovative offering, I could understand the stock to trade higher based on sales growth and the promise of future profits at high margins. However, here we are talking about a company with a market cap of $100 billion plus, generating losses and with very low operating margins, and that is when they are visible. It is retailing after all. Try finding a $100 billion market cap showing no profit on on-going basis. The disclosure on top of that is abysmal. I challenge you to tell me how much debt they had on their balance sheet as of Sept 30. While it may not be so important a number to know, for now anyway, this kind of opacity is everywhere in their disclosure. Analysts have complained about it, but they still put out very attractive targets for the stock. Why exactly remains a mystery to me.

Their cloud division is another joke. While it is used by many startups and others, it does not appear to be generating much profits either. The game is all about generating more and more revenues at break-even. It kills competition and is only possible because the stock market rewards them doing that.

The music will stop some day. Will it be due to the collection of sales taxes, retailers matching their prices, an inevitable slow down in sales growth, the stock market finally taking a show me approach or some force finally telling Amazon that enough is enough?

Cardboard     
Title: Re: AMZN - Amazon.com Inc.
Post by: beerbaron on November 02, 2012, 02:04:37 PM
Where does everybody go first when they want to buy something online? Amazon

Amazon has a near monopoly on the online retail world. I'd stay away from the bull and bear side if I were you.

BeerBaron
Title: Re: AMZN - Amazon.com Inc.
Post by: compoundinglife on November 02, 2012, 02:23:49 PM
Amazon Web Services is reason enough to not short this stock. You say its a joke, but its really not. They have a moat in cloud services that no one is currently anywhere near catching up on. It may only be a 1B business today but this a market that is just gaining momentum and they are currently poised to be the dominant public cloud provider for the for seeable future.

Even at todays valuation I would be shocked to see D.E. short Amazon. I think you raise some valid points in your post, but betting against AMZN and Bezos is IMO a very bad idea.

Title: Re: AMZN - Amazon.com Inc.
Post by: Grenville on November 02, 2012, 02:24:35 PM
Thanks for starting the thread. I'll offer these two quotes from the Amazon shareholder letters for now and add more color with time.

As the famed investor Benjamin Graham said, ‘‘In the short term, the stock market is a voting machine; in the long term, it’s a weighing machine.’’ Clearly there was a lot of voting going on in the boom year of ’99—and much less weighing. We’re a company that wants to be weighed, and over time, we will be—over the long term, all companies are. In the meantime, we have our heads down working to build a heavier and heavier company. → 2000 letter

If you could know for certain just two things--a company’s future cash flows and its future number of shares outstanding--you would have an excellent idea of the fair value of a share of that company’s stock today. (You’d also need to know appropriate discount rates, but if you knew the future cash flows for certain, it would also be reasonably easy to know which discount rates to use.) It’s not easy, but you can make an informed forecast of future cash flows by examining a company’s performance in the past and by looking at factors such as the leverage points and scalability in that company’s model. Estimating the number of shares outstanding in the future requires you to forecast items such as option grants to employees or other potential capital transactions. Ultimately, your determination of cash flow per share will be a strong indicator of the price you might be willing to pay for a share of ownership in any company. → 2001 letter
Title: Re: AMZN - Amazon.com Inc.
Post by: rimm_never_sleeps on November 02, 2012, 02:46:36 PM
I remember 5 years ago somebody I knew was shorting amazon for the exact same reasons listed in the op. I told him he was nuts.
Title: Re: AMZN - Amazon.com Inc.
Post by: Hoodlum on November 02, 2012, 02:50:30 PM
Amazon reminds me of CRM.  You know it can't go on forever but the stock price still keeps chugging along.  I have decided to avoid these type of stocks from both sides.
Title: Re: AMZN - Amazon.com Inc.
Post by: ItsAValueTrap on November 02, 2012, 03:40:23 PM
Well there are a lot of people out there (myself included) that think that online shopping will be much bigger than it is today. 

Amazon may dominate with its economies of scale.  Its IT development costs are mostly fixed.  Its costs of dealing with regulations is mostly fixed.  I live in Canada... buying from Amazon US (not the Canadian Amazon) is cool because they have a huge selection and you don't have to pay brokerage fees (in the past, brokerage fees inhibited a lot of cross-border online shopping... so what you would do is go to eBay and have the seller mark things as gifts under $20; eBay's selection is limited).  If economies of scale were the only thing that mattered, then one might expect Amazon to dominate online shopping not just in books.  I recently bought a kettle and 2 other non-book items off Amazon.ca.

*No position.  The valuation is high I agree.
Title: Re: AMZN - Amazon.com Inc.
Post by: LC on November 02, 2012, 03:43:58 PM
Two points I want to make:

1. How difficult is it to setup and operate as a cloud provider? Where is their advantage versus Google/Microsoft/Oracle? (I honestly have no knowledge in this area, it is a genuine question)

2. I agree regarding taking a short (or long) position. It seems overvalued but as Cardboard mentions when will the correction happen and how drastic will it be? It is a very risky position to enter and maintain.

My stance is the same as Hoodlum's.

Amazon Web Services is reason enough to not short this stock. You say its a joke, but its really not. They have a moat in cloud services that no one is currently anywhere near catching up on. It may only be a 1B business today but this a market that is just gaining momentum and they are currently poised to be the dominant public cloud provider for the for seeable future.

Even at todays valuation I would be shocked to see D.E. short Amazon. I think you raise some valid points in your post, but betting against AMZN and Bezos is IMO a very bad idea.
Title: Re: AMZN - Amazon.com Inc.
Post by: compoundinglife on November 02, 2012, 04:05:24 PM
Two points I want to make:

1. How difficult is it to setup and operate as a cloud provider? Where is their advantage versus Google/Microsoft/Oracle? (I honestly have no knowledge in this area, it is a genuine question)

To operate at the scale that AMZN operates at its very hard. I think this is illustrated by the fact that no one offers the same breadth of features that they provide and they are constantly launching new services and features creating a huge gap between AWS and its competitors. 

To get an idea of their size:

http://gigaom.com/cloud/just-how-big-is-the-amazon-cloud-anyway/


Quote
2. I agree regarding taking a short (or long) position. It seems overvalued but as Cardboard mentions when will the correction happen and how drastic will it be? It is a very risky position to enter and maintain.

My stance is the same as Hoodlum's.

Amazon Web Services is reason enough to not short this stock. You say its a joke, but its really not. They have a moat in cloud services that no one is currently anywhere near catching up on. It may only be a 1B business today but this a market that is just gaining momentum and they are currently poised to be the dominant public cloud provider for the for seeable future.

Even at todays valuation I would be shocked to see D.E. short Amazon. I think you raise some valid points in your post, but betting against AMZN and Bezos is IMO a very bad idea.
Title: Re: AMZN - Amazon.com Inc.
Post by: bargainman on November 02, 2012, 08:17:04 PM
I don't understand the point about "The stock market allowing this company to sell its products at a loss is creating huge issues for honest companies such as Wal-Mart, Target, Best Buy".  The stock market at this stage is probably irrelevant to the company.  They don't use the market to raise equity or debt at this stage I don't think (correct me if I'm wrong, I guess I can't say that definitively).

I would think long and hard about shorting these guys.  I'm not saying they aren't overvalued by almost every standard metric, but Jeff Bezos is not the same as the CRM CEO.  He used to work for a hedge fund, and he understands the capital markets very very well.  Take a read through some of these articles and interviews:

http://www.zurb.com/article/831/jeff-bezoss-10000-year-clock-and-thinking

Quote
It does fit into my view. Our first shareholder letter, in 1997, was entitled, 'It's all about the long term.' If everything you do needs to work on a three-year time horizon, then you're competing against a lot of people. But if you're willing to invest on a seven-year time horizon, you're now competing against a fraction of those people, because very few companies are willing to do that. Just by lengthening the time horizon, you can engage in endeavors that you could never otherwise pursue. At Amazon we like things to work in five to seven years. We're willing to plant seeds, let them grow'and we're very stubborn. We say we're stubborn on vision and flexible on details.

http://www.wired.com/magazine/2011/11/ff_bezos/all/1

They are very disruptive in tech, and a big threat to MSFT, Google, and Apple for this simple reason:

Quote
Bezos: We think it’s a unique approach in the marketplace—premium products at nonpremium prices. We’re a company very accustomed to operating at low margins. We grew up that way. We’ve never had the luxury of high margins, there’s no reason to get used to it now.

The low margins and the combination of many different businesses give them immense power.  One simple example is their servers.  Being in retail they have massive spikes in usage in December, but the rest of the year they have a lot of free bandwidth. So they have opened up all their servers to outside users.  Before they did that all those cycles were sitting idle during the off time.  But since it's essentially unused capacity they can sell that server time incredibly cheap.  There is massive stuff going on in their cloud these days.  I was at a presentation where they talked about a large biotech firm which needed to run a massive 2 month simulation using over 10,000 CPU cores.  Well they set it up one afternoon, paid Amazon a few thousand per hour or day (can't remember the price), and had 10,000 computers running on the simulation in a matter of hours.  Then when it was done, they stopped and that was that!  Imagine in the past what that would have taken?  They would have had to set up their own data center, buy and set up 10,000 computers + all the software required, and then at the end of it they would have 10,000 idle computers till the next big project.  Now, this is becoming more common practice, but the thing that gives amazon and advantage is their price.  Also their infrastructure is very interesting.  There was a famous post by a googler about this:

http://www.pcmag.com/article2/0,2817,2394561,00.asp

The post is huge and worth reading if you're a techie, but the article above summarizes it.

http://online.wsj.com/article/SB10001424052702304543904577395164138218638.html

This guy is building a clock to last 10,000 years.  He's very long term oriented.  But he's no dummy when it comes to the stock market.
Title: Re: AMZN - Amazon.com Inc.
Post by: turar on November 02, 2012, 09:48:00 PM
Bezos doesn't care much about what Mr. Market thinks. I used to work there, and one thing he would always repeat during every quarterly "All hands" meetings is somewhat along the lines of "The stock price is going up, but it's not because we're so smart. And when it dives down, it won't be because we suddenly became dumb."  He's very long term oriented. Kindle took 5 years of development before it went public.

I would not recommend shorting AMZN at any point.
Title: Re: AMZN - Amazon.com Inc.
Post by: JRH on November 02, 2012, 10:40:04 PM
The two questions armchair analysts seem to miss with Amazon:

1. What is the owner earnings yield?
2. What return is the owner getting on all that growth capex?
Title: Re: AMZN - Amazon.com Inc.
Post by: AZ_Value on November 03, 2012, 05:48:20 AM
I will echo what my friends above have said and give my 2 cents: Shorting AMZN is a very risky endeavor. Tread carefully.
Title: Re: AMZN - Amazon.com Inc.
Post by: DCG on November 03, 2012, 06:29:55 AM
For anyone who thinks Amazon doesn't have a huge moat, try to start an online retail store and compete with them and report back in a couple years.
Title: Re: AMZN - Amazon.com Inc.
Post by: Cardboard on November 03, 2012, 07:03:20 AM
Shorting Amazon is dangerous because very few are critical of it. There is a fear of it because every short got burnt and the business is mysterious in some ways. It is amazing to me how much slack they are given and yes, it looks like CRM.

I find it funny. The guy was working for a hedge fund, knows how to value companies using free cash flow, talks about Ben Graham. Actually, he knows exactly what to do to ensure that Wall Street is never able to value it properly: fast sales growth, no earnings.

What they are doing is domestic dumping. It is illegal to sell goods into another country below cost. Since they are not a country, they get away with it. Now, when I am saying that they can do it because the stock market allows them to do it, it's because no one complains about a growing stock price and especially not employees who are compensated with it. This form of compensation also reduces their operating cash cost if you don't factor in dilution. They also love to exclude these charges from show cased operating cash flow. Ask yourself this question. If Wal-Mart decided to sell at cost tomorrow and to stop its dividend, what would happen to the stock price and what would the Department of Justice do?

So what is the business model here guys? Exterminate your competitors selling your products at cost, then raise prices once they are all gone? Then once you raise prices, another joker will go public, sell at cost forever until the first one is forced to compete?

I think that soon enough, its size will bring its own undoing. It gets more complex to manage, number of users growth declines. Like any other, they will try every trick to keep growth going and that is when they will make bad investments. Already, we are seeing the cash pile declining along with sales growth.

While I agree fully that this is not an easy short, there is something fundamentally wrong with this company and some day it will unravel.

Cardboard
Title: Re: AMZN - Amazon.com Inc.
Post by: DCG on November 03, 2012, 07:36:00 AM
I agree that the current valuation is tough to justify - especially if you compare them to Walmart.

Amazon's market cap - $105B. Sales were $48B last year. Net income has averaged around $1B annually for the last 3 years.
Walmart's market cap - $244B. Sales were around $447B last year. Net income has averaged around $16B annually for the last 3 years.

The thought is that Amazon will eventually be able to stop spending to much and greatly increase their profits. Bezos is definitely looking to build Amazon for the next 100 years, not the next few years.

Title: Re: AMZN - Amazon.com Inc.
Post by: bargainman on November 03, 2012, 08:40:02 AM
Shorting Amazon is dangerous because very few are critical of it. There is a fear of it because every short got burnt and the business is mysterious in some ways. It is amazing to me how much slack they are given and yes, it looks like CRM.

I find it funny. The guy was working for a hedge fund, knows how to value companies using free cash flow, talks about Ben Graham. Actually, he knows exactly what to do to ensure that Wall Street is never able to value it properly: fast sales growth, no earnings.

What they are doing is domestic dumping. It is illegal to sell goods into another country below cost. Since they are not a country, they get away with it. Now, when I am saying that they can do it because the stock market allows them to do it, it's because no one complains about a growing stock price and especially not employees who are compensated with it. This form of compensation also reduces their operating cash cost if you don't factor in dilution. They also love to exclude these charges from show cased operating cash flow. Ask yourself this question. If Wal-Mart decided to sell at cost tomorrow and to stop its dividend, what would happen to the stock price and what would the Department of Justice do?

So what is the business model here guys? Exterminate your competitors selling your products at cost, then raise prices once they are all gone? Then once you raise prices, another joker will go public, sell at cost forever until the first one is forced to compete?

I think that soon enough, its size will bring its own undoing. It gets more complex to manage, number of users growth declines. Like any other, they will try every trick to keep growth going and that is when they will make bad investments. Already, we are seeing the cash pile declining along with sales growth.

While I agree fully that this is not an easy short, there is something fundamentally wrong with this company and some day it will unravel.

Cardboard

Have you read much about Bezos?  I'm really curious, it's an honest question.

You know this is exactly what Walton was accused of doing with Walmart back when they were growing.  He was selling for the lowest possible margins, and making it up in volume.  If you look here:

http://finance.yahoo.com/q/cf?s=AMZN

for 3 of the last 4 quarters, their cap ex has been higher than depreciation and both have been significantly higher than earnings.  So they are definitely putting all their cash resources into growth and being uber efficient.

Now with regards to the 'race to the bottom', this is really their competitive advantage.  I'm really surprised by their hiring.  To be honest I've heard it's a horrible, horrible place to work.  Not just in their warehouses but for their tech people too.  But somehow they seem to have some good people, so I'm not sure how they attract them.  Maybe you're right that the stock is one attraction, so wallstreet does give them an unfair advantage there.   The other thing is that good tech people will often work in horrible conditions because they want to have an impact.

Back to Bezos.. he's no dummy.  I'm pretty sure he will do the right thing and adjust.  If he doesn't see a growth opportunity any longer he will start to generate cash flow and allocate appropriately.  It's just that he sees a massive opportunity still and I agree they still have a massive opportunity.
Title: Re: AMZN - Amazon.com Inc.
Post by: LC on November 03, 2012, 09:18:12 AM
For anyone who thinks Amazon doesn't have a huge moat, try to start an online retail store and compete with them and report back in a couple years.

Here's another issue I see with Amazon, taken from the Western Union discussion:

Quote
Warren is somewhat obsessed with companies that can raise their prices on their customers.  e.g. if Moody's raised its prices, Berkshire would still pay the higher price for bond ratings.

If Western Union is lowering its prices due to its competition then maybe its moat/advantage is not that big at all.

Can Amazon raise their prices? I'm not so sure. Does that mean they don't have a moat? Not quite, if they are going to maintain themselves as the low cost/most reliable online retailer.

I think it's important to realize what type of company Amazon is trying to stabilize themselves as: the low-cost online retailer with amazing shipping service. Can they execute on this is the real story.
Title: Re: AMZN - Amazon.com Inc.
Post by: DCG on November 03, 2012, 09:43:22 AM
For anyone who thinks Amazon doesn't have a huge moat, try to start an online retail store and compete with them and report back in a couple years.

Here's another issue I see with Amazon, taken from the Western Union discussion:

Quote
Warren is somewhat obsessed with companies that can raise their prices on their customers.  e.g. if Moody's raised its prices, Berkshire would still pay the higher price for bond ratings.

If Western Union is lowering its prices due to its competition then maybe its moat/advantage is not that big at all.

Can Amazon raise their prices? I'm not so sure. Does that mean they don't have a moat? Not quite, if they are going to maintain themselves as the low cost/most reliable online retailer.

I think it's important to realize what type of company Amazon is trying to stabilize themselves as: the low-cost online retailer with amazing shipping service. Can they execute on this is the real story.

They make up for low margins with scale. It's the Walmart business model, but online.
Title: Re: AMZN - Amazon.com Inc.
Post by: rimm_never_sleeps on November 03, 2012, 11:36:48 AM
amazon will be able to raise prices. the prime membership is an annuity stream that will rise with inflation. amazon also gets a % of sales that they help initiate through their reseller community (much of the fee tied to the cost of shipping). This will rise with inflation. In other ways they have already raised prices, even if it's in penny increments on stuff they sell. people pay a premium to deal with no hassle service of amazon. I do for sure. it may be $1 on a $25 item, but they pay a premium. Amazon is working on being the world's largest and most efficient distributor of goods. That's going to be a great business in an inflationary world.

Amazon has me in many ways. I am a prime member. I buy most of my stuff from them. I buy some stuff through reseller network. And I sell stuff I bought back to other customers on their seller's market. Amazon take a cut on each of these interactions as the fulfillment agent for some of their resellers and those who sell into the Amazon customer base.
Title: Re: AMZN - Amazon.com Inc.
Post by: Grenville on November 03, 2012, 11:55:14 AM

http://www.wired.com/magazine/2011/11/ff_bezos/all/1


Nice article, thanks for posting.
Title: Re: AMZN - Amazon.com Inc.
Post by: ItsAValueTrap on November 03, 2012, 12:14:57 PM
Walmart is a little different because it used to generate huge returns on equity.  If you look on Google Finance, Walmart has outperformed many high-flying tech companies like Intel.

It is possible that online retailing is more cut-throat since consumers generally shop around based on price.  With bricks & mortar stores / before online retailing, consumers would shop based on price and convenience (distance to the store).  Consumers are also affected by things like how goods are presented and could be upsold on impulse purchases like candy and things like that.  There is more value-add in B&M than in online, so maybe you would expect that it is possible to generate higher ROE for B&M than online.

*I know that Amazon is doing some value-added things like book/production suggestions, they spam you with special deals on stuff (it worked on me... I bought Max Payne 2 because they emailed me saying it was on sale), etc.

Ultimately I see online retailing having very low margins due to cutthroat competition... online retailers have to try to make it up by turning over their inventory very quickly.  It could eventually look like what's happening to Dell once the landscape becomes more competitive.

2- Of course Amazon has other lines of business.  They are the eBay for used books.  And they are doing something very similar to eBay stores (allowing small merchants/manufacturers to sell online and have exposure to people searching for things).

3- Why would you short this?  Haha.  There are a lot of overpriced companies out there with little chance of making a profit.  Look at the Dot-Bomb 2.0 stocks (I wouldn't short those since the borrow is ridiculous).
Title: Re: AMZN - Amazon.com Inc.
Post by: Eric50 on November 03, 2012, 01:26:28 PM
Waou…. Lots of misconceptions and inaccuracies in this thread. I’ve worked at amazon in several finance positions for 7 years before I started my fund.  I left 4 years ago but I still follow the business pretty closely. I feel like I need to clarify/explain a few things:

- Re the fraud issue (Cardboard). You have to substantiate why you think it’s a fraud. In the 7 years I’ve worked there I’ve never seen any fraud. The culture there is very aggressive but people are honest. I think you are making a very strong accusation and should substantiate it;

- I don’t see why selling at a loss in order to gain market share would be a fraud…. This is a competitive market with thin margins… Competitors want to gain market share. Sometimes one has to be aggressive and there will be some payback later. I’ve seen price wars with Walmart when I worked there. Sometimes Walmart won, sometimes Amazon won. This is just the way the market works. But this is no fraud;

- Q3 was the first unprofitable quarter for amazon in years. Rereading the thread it feels like early 2000, when amazon had never made a profit…. It is now a very different business with years of growth and profit. Back when I joined in 2001 revenue was about $2.5bn with no profit, it will be above $60bn this year and profitable. Do you know any other companies that have grown that much over the past 12 years?

- Profitability has decreased recently because they are investing heavily in tech (kindle, pads, etc…) and in new fulfillment centers. FCs are the backbone of the business, a huge moat because it’s super difficult to replicate and amazon has developed over the years a huge expertise at it. It’s a significant cost now but it will pay back very nicely in the future: they’ll have the infrastructure and the competition won’t;

- I agree it’s a very expensive stock now but I would not bet against it. Growth reaccelerated 4-5 years ago and it’s still growing very nicely. It might slowdown a little bit in the future but growth will still be above average. I suspect it will be the size of walmart in 10-15 years. I have no position right now but if I had a gun against my head and was forced to take a position I’d be bearish short term but bullish long term;

- Comparing amazon to CRM is a huge error in my opinion. You should do your homework, amazon is a much better business and much less overvalued. There are much better short ideas available in the market these days (SPLK, BV, LULU, CRM, etc);

- Re cloud computing, talk to the people in that field or the small entrepreneurs who use AWS and you’ll see how they respect what amzn does;

- I think amazon’s moat keeps growing all the time: millions of people buys stuff there systematically because they they know they’ll get a good deal. The warehouse infrastructure is little talked about but is a huge moat. Kindle is locking in the digital book market;

- Bezos is a super smart guy and he’s been leading all the key innovations: free shipping under $25, prime, kindle, etc… He is long oriented and betting against him is hardly a good idea;

- Re “domestic dumping” you’d have to substantiate what you mean…

- Re “stock compensation”, please check your premises. There are no stock options issued to employees. They get stocks awards that are included in the cost;

- Re the people there, it’s a very competitive place with long hours and lots, lots of very smart people. You either like it or not. People who don’t typically don’t stay long… But it’s an exciting and challenging place. Would you rather work 9 to 5 at IBM that grows 2% a year?

The reality is that the stock is quite expensive because there aren’t so many businesses that are growing that fast, that are changing the rules of the game so much and with such a quality management.
Title: Re: AMZN - Amazon.com Inc.
Post by: Grenville on November 03, 2012, 01:59:19 PM
Waou…. Lots of misconceptions and inaccuracies in this thread. I’ve worked at amazon in several finance positions for 7 years before I started my fund.  I left 4 years ago but I still follow the business pretty closely. I feel like I need to clarify/explain a few things:
....

I appreciate the post and the insight. I enjoy learning more about the company.

Amazon is becoming an enabler for other businesses through AWS, FBA (Fulfillment by Amazon), Third party Sellers on product pages and KDP (Kindle Direct publishing).
Title: Re: AMZN - Amazon.com Inc.
Post by: ItsAValueTrap on November 03, 2012, 02:33:35 PM
Quote
- Profitability has decreased recently because they are investing heavily in tech (kindle, pads, etc…) and in new fulfillment centers. FCs are the backbone of the business, a huge moat because it’s super difficult to replicate and amazon has developed over the years a huge expertise at it. It’s a significant cost now but it will pay back very nicely in the future: they’ll have the infrastructure and the competition won’t;
I feel like people make this argument for Walmart.  Yet when I looked at Tractor Supply Company, it seems that there are new scrappy little retailers out there that are beating Walmart.  Tractor Supply is opening smaller stores in former Walmart locations.  And they aren't even the best in their niche.

Here's what the CEO of Rural King has to say:
Quote
“We compete directly against Walmart, Home Depot, Lowe’s and Tractor Supply,” Melvin explained. He said he continues to be impressed with Menard’s, which he believes is the preeminent competitor in his space.
http://www.monmouthcollege.edu/information/newsEvents/newsDetails.aspx?Channel=%2FChannels%2FCampus+Wide&WorkflowItemID=93c05545-822c-4656-9584-8363d926e7e2
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on November 03, 2012, 07:05:33 PM
- Q3 was the first unprofitable quarter for amazon in years. Rereading the thread it feels like early 2000, when amazon had never made a profit…. It is now a very different business with years of growth and profit. Back when I joined in 2001 revenue was about $2.5bn with no profit, it will be above $60bn this year and profitable. Do you know any other companies that have grown that much over the past 12 years?
Apple? Google?

- Profitability has decreased recently because they are investing heavily in tech (kindle, pads, etc…) and in new fulfillment centers. FCs are the backbone of the business, a huge moat because it’s super difficult to replicate and amazon has developed over the years a huge expertise at it. It’s a significant cost now but it will pay back very nicely in the future: they’ll have the infrastructure and the competition won’t;

Also, their investments should show up in their capex? Why is their operating income negative?

What is the impact of having to charge sales tax on their business?

- I think amazon’s moat keeps growing all the time: millions of people buys stuff there systematically because they they know they’ll get a good deal. The warehouse infrastructure is little talked about but is a huge moat. Kindle is locking in the digital book market;
Why are they increasing FCs and warehouses  if their business is moving from physical goods? Is it because they were forced to build more FCs are part of their settlement deals?

If people are shopping at Amazon because they know they get a good deal, how will Amazon be able to raise prices and margins? As soon they do, the customers and the moat is gone.
Title: Re: AMZN - Amazon.com Inc.
Post by: benchmark on November 03, 2012, 09:39:34 PM
Quote
Why are they increasing FCs and warehouses  if their business is moving from physical goods? Is it because they were forced to build more FCs are part of their settlement deals?

If people are shopping at Amazon because they know they get a good deal, how will Amazon be able to raise prices and margins? As soon they do, the customers and the moat is gone.

I think Amazon's moat on retail is really the scale and the know-hows on supply-chain and delivery, much like Walmart. In addition, the move to cloud/content/AWS is something that will pay off in the long run.
Title: Re: AMZN - Amazon.com Inc.
Post by: Eric50 on November 04, 2012, 12:13:22 AM
- Q3 was the first unprofitable quarter for amazon in years. Rereading the thread it feels like early 2000, when amazon had never made a profit…. It is now a very different business with years of growth and profit. Back when I joined in 2001 revenue was about $2.5bn with no profit, it will be above $60bn this year and profitable. Do you know any other companies that have grown that much over the past 12 years?

Apple? Google?


Yes Apple and Google but who else? And I would argue that Amazon is a much better business long term than Apple. Apple is currently red hot as it makes the cool toys that everybody wants to have, but who knows if its products are going to be that cool in 5 years? I don't know about Apple but I know that in 5 years more people will be buying stuff from amzn.

- Profitability has decreased recently because they are investing heavily in tech (kindle, pads, etc…) and in new fulfillment centers. FCs are the backbone of the business, a huge moat because it’s super difficult to replicate and amazon has developed over the years a huge expertise at it. It’s a significant cost now but it will pay back very nicely in the future: they’ll have the infrastructure and the competition won’t;

Also, their investments should show up in their capex? Why is their operating income negative?


Yes, their investments show up in capex. Capex increased by $500m yoy so far this year. Operating income is negative primarily because of the impairment of the goodwill on the living social investment (that was a huge mistake).

What is the impact of having to charge sales tax on their business?


This was a main concern of mine a few years ago as I thought it would have a huge negative impact. I'm less concerned now as I think their moat has increased. People will still be buying from amazon even if prices increase with sales tax. I thought that amazon gave up easily last year in that sales tax battle so I suspect that's a sign they aren't too worried.

Also, they are competing more and more with the physical stores with same day delivery.

- I think amazon’s moat keeps growing all the time: millions of people buys stuff there systematically because they they know they’ll get a good deal. The warehouse infrastructure is little talked about but is a huge moat. Kindle is locking in the digital book market;


Why are they increasing FCs and warehouses  if their business is moving from physical goods? Is it because they were forced to build more FCs are part of their settlement deals?


No, they are increasing the # of FCs because they know the business is growing fast and they need the infrastructure to handle the increased volume of stuff to pick/pack/ship. The range of their product lines keeps increasing.

If people are shopping at Amazon because they know they get a good deal, how will Amazon be able to raise prices and margins? As soon they do, the customers and the moat is gone.


Remember this is a retailer. It doesn't have huge margins. They make most of their money on volume. Why would they raise prices? They compete on price... I suggest you read Bezos first letter to shareholders to better understand how he thinks.
Title: Re: AMZN - Amazon.com Inc.
Post by: bennycx on November 04, 2012, 05:53:48 AM
For anyone who thinks Amazon doesn't have a huge moat, try to start an online retail store and compete with them and report back in a couple years.

Here's another issue I see with Amazon, taken from the Western Union discussion:

Quote
Warren is somewhat obsessed with companies that can raise their prices on their customers.  e.g. if Moody's raised its prices, Berkshire would still pay the higher price for bond ratings.

If Western Union is lowering its prices due to its competition then maybe its moat/advantage is not that big at all.

Can Amazon raise their prices? I'm not so sure. Does that mean they don't have a moat? Not quite, if they are going to maintain themselves as the low cost/most reliable online retailer.

I think it's important to realize what type of company Amazon is trying to stabilize themselves as: the low-cost online retailer with amazing shipping service. Can they execute on this is the real story.

Hey. First time poster here. That's exactly how I think of Amazon at the moment. Selling at almost cost IS their moat. There is almost no way they will be able to raise prices without losing this moat. Unless they capture a monopoly (ok) with very very large online retailing volume (suspect), they won't be able to make much profit from retailing.

Of course, another way to build the moat is through a whole "Amazon brand" via other tech services such as cloud etc, but the future of that is too early to tell in my books.
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on November 04, 2012, 10:00:37 AM
Yes, their investments show up in capex. Capex increased by $500m yoy so far this year. Operating income is negative primarily because of the impairment of the goodwill on the living social investment (that was a huge mistake).

Again, impairment of goodwill is not included in operating income. They lost $27M in operating income separate from the $169M writedown for the Living Social deal.

If you look at net income (including impairment of goodwill), they lost $274M this quarter. 
Title: Re: AMZN - Amazon.com Inc.
Post by: Cardboard on November 04, 2012, 11:21:31 AM
I will retract fraud. This is not the right word.

Regarding many of your points Eric50, Amazon makes liberal use of restricted stock options and this cost is not included in operating cash flow which is then used to boost the free cash flow measure. It was $597 million over the last 9 months and there are 15.6 million shares in total that eventually will be issued. Free cash flow is arguably also "incorrect" since from it, is not substracted the cost of acquisitions which many are for pure cost savings, here is the latest:

"In May 2012, we acquired Kiva Systems, Inc. for a purchase price of $678 million. In the nine months ended September 30, 2011, we acquired certain other companies for an aggregate purchase price of $738 million. The primary reasons for our 2012 and 2011 acquisitions were to improve fulfillment center productivity and to expand our customer base and sales channels. "

These acquisitions added a grand total of $17 million to their revenues so far and a loss of $50 million. These are acquisitions that should be considered as operating costs.

"Operating income is negative primarily because of the impairment of the goodwill on the living social investment (that was a huge mistake)."

This is incorrect as stated also by valueInv. The impairment of goodwill is included in the equity-method investments which is below the line and not at all part of operating income.

"Also, they are competing more and more with the physical stores with same day delivery."

This IMO will cause the most issues with Amazon and a huge change from when you used to work there. Offering same day delivery is a nice feature for consumers, but terrible for them on an operating cost standpoint. If you have a warehouse in every decent size city, then where is the advantage vs a Wal-Mart, Home Depot or other when you add to it shipping costs? Inventory management turns into a different beast especially with their extremely large offering, the investment in physical location and staffing explodes. It becomes a very different business model than what they had before and they still will never obtain the "instant gratification" and social aspect of shopping.

Wal-Mart is actually testing this feature with their online site. However, they already have warehouses everywhere or the physical infrastructure in place. If they figure how to manage it properly, I would say that they are ahead of Amazon. Also, with Target, Best Buy and others now offering to match their prices I think that they are in for a rude awakening on sales and profitability. Sales tax will also play a significant role, but this is being dismissed or should I say not being addressed by management as in the last conference call. We should see in future quarters as now the largest state, California and others are just starting to force them to charge taxes.

Regarding profitability, Amazon will be barely profitable this year. Their guidance for Q4 operating margin is from minus $490 million to positive $310 million. Assuming $0 since it would be a "beat", operating income for 2012 would be $271 million or an operating margin of 0.4%. EPS would be around $0.35 on a $232 stock or a 660 P/E (this too excludes the LivingSocial losses). In other words, they expect to breakeven on the Holiday Season quarter for mostly a retailer with $62 billion in sales. Makes no sense. If I exclude stock compensation, operarting margin would be 1.9%. Should I exclude more since other expenses have grown faster than sales lately for so called "future investment"? Where do I stop?

According to my S&P 500 guide, Wal-Mart reached such sales level in 1994 and had a return on equity of 23.9% and an operating margin of 6.5% while being hit by large depreciation amounts and all the costs associated with "brick and mortars" which apparently is a high cost of doing business vs the Amazon business model. It grew sales 22% the next year. In other words, Amazon should be demonstrating leading retailing margins and high sales growth since their business model is now apparently the lowest cost way. The numbers show otherwise. Operating margins were 4.6% in 2009, 4.1% in 2010, 1.8% in 2011 and 0.4% this year. Sales growth from 2009 to 2010 were 40%, 2010-2011: 41% and this year 29%. So more investments or higher cost per $ of sale and declining sales growth in a growing economy?

IMO, if goods were sold at a price to generate reasonable margins like a Wal-Mart, sales would decline. So the business model is not the lowest cost because if it was, there would be no problem to make money along the way and grow market share. So they have to resort to "dumping" their goods at cost (operating costs, not just cost of goods sold) to generate sales and hopefully find enough cash flow through it to continue their expansion plan without depleting their cash pile. Unfortunately, it is coming down now and will become more and more noticed by the investment community.

I am short as well LULU and CRM, so I guess we agree on these, but not on AMZN.

Cardboard

Title: Re: AMZN - Amazon.com Inc.
Post by: Sportgamma on November 04, 2012, 02:58:20 PM

I believe the subject of off balance sheet debt has not been brought up on this thread yet. There is an article by a short on seeking alpha on how "Amazon.com is using external entities to handle a good portion of its capex, so that it doesn't have to recognize the cash outflows associated with that capex."

http://seekingalpha.com/article/656591-amazon-com-s-hidden-debt

@Eric50, since you have experience on working at the finance department at Amazon, your comments on this subject would be much appreciated.
Title: Re: AMZN - Amazon.com Inc.
Post by: Eric50 on November 04, 2012, 10:14:57 PM
I will retract fraud. This is not the right word.

Thank you. This is what originally triggered my response.

Regarding many of your points Eric50, Amazon makes liberal use of restricted stock options and this cost is not included in operating cash flow which is then used to boost the free cash flow measure. It was $597 million over the last 9 months and there are 15.6 million shares in total that eventually will be issued. Free cash flow is arguably also "incorrect" since from it, is not substracted the cost of acquisitions which many are for pure cost savings, here is the latest:

"In May 2012, we acquired Kiva Systems, Inc. for a purchase price of $678 million. In the nine months ended September 30, 2011, we acquired certain other companies for an aggregate purchase price of $738 million. The primary reasons for our 2012 and 2011 acquisitions were to improve fulfillment center productivity and to expand our customer base and sales channels. "

These acquisitions added a grand total of $17 million to their revenues so far and a loss of $50 million. These are acquisitions that should be considered as operating costs.

I don't disagree with you. It's fine with me as long as we know it and it's consistent over time.

"Operating income is negative primarily because of the impairment of the goodwill on the living social investment (that was a huge mistake)."

This is incorrect as stated also by valueInv. The impairment of goodwill is included in the equity-method investments which is below the line and not at all part of operating income.


I agree this is a worrying trend. I suspect the loss is driven by the Q3 labor ramp up in all the new FCs and higher tech charges (new hires).

"Also, they are competing more and more with the physical stores with same day delivery."

This IMO will cause the most issues with Amazon and a huge change from when you used to work there. Offering same day delivery is a nice feature for consumers, but terrible for them on an operating cost standpoint. If you have a warehouse in every decent size city, then where is the advantage vs a Wal-Mart, Home Depot or other when you add to it shipping costs? Inventory management turns into a different beast especially with their extremely large offering, the investment in physical location and staffing explodes. It becomes a very different business model than what they had before and they still will never obtain the "instant gratification" and social aspect of shopping.

Wal-Mart is actually testing this feature with their online site. However, they already have warehouses everywhere or the physical infrastructure in place. If they figure how to manage it properly, I would say that they are ahead of Amazon. Also, with Target, Best Buy and others now offering to match their prices I think that they are in for a rude awakening on sales and profitability. Sales tax will also play a significant role, but this is being dismissed or should I say not being addressed by management as in the last conference call. We should see in future quarters as now the largest state, California and others are just starting to force them to charge taxes.

Amazon charges a fee with same day delivery. Why would it be terrible for them on an operating cost standpoint? They'll make money out of it.

I think they are very good operationally and will be competitive on cost (more than Walmart as they won't have to deal with an existing structure and can optimize for same day delivery). I'm sure there are lots of people who will be happy to order something in the morning and have it deliver to their home sometimes in the afternoon, even for a small fee. They'd avoid a trip to the nearest Walmart, Target, etc.

I agree sales tax is the big unknown. It might be the trigger that makes the stock tank.


Regarding profitability, Amazon will be barely profitable this year. Their guidance for Q4 operating margin is from minus $490 million to positive $310 million. Assuming $0 since it would be a "beat", operating income for 2012 would be $271 million or an operating margin of 0.4%. EPS would be around $0.35 on a $232 stock or a 660 P/E (this too excludes the LivingSocial losses). In other words, they expect to breakeven on the Holiday Season quarter for mostly a retailer with $62 billion in sales. Makes no sense. If I exclude stock compensation, operarting margin would be 1.9%. Should I exclude more since other expenses have grown faster than sales lately for so called "future investment"? Where do I stop?

According to my S&P 500 guide, Wal-Mart reached such sales level in 1994 and had a return on equity of 23.9% and an operating margin of 6.5% while being hit by large depreciation amounts and all the costs associated with "brick and mortars" which apparently is a high cost of doing business vs the Amazon business model. It grew sales 22% the next year. In other words, Amazon should be demonstrating leading retailing margins and high sales growth since their business model is now apparently the lowest cost way. The numbers show otherwise. Operating margins were 4.6% in 2009, 4.1% in 2010, 1.8% in 2011 and 0.4% this year. Sales growth from 2009 to 2010 were 40%, 2010-2011: 41% and this year 29%. So more investments or higher cost per $ of sale and declining sales growth in a growing economy?

IMO, if goods were sold at a price to generate reasonable margins like a Wal-Mart, sales would decline. So the business model is not the lowest cost because if it was, there would be no problem to make money along the way and grow market share. So they have to resort to "dumping" their goods at cost (operating costs, not just cost of goods sold) to generate sales and hopefully find enough cash flow through it to continue their expansion plan without depleting their cash pile. Unfortunately, it is coming down now and will become more and more noticed by the investment community.

I am short as well LULU and CRM, so I guess we agree on these, but not on AMZN.



Re guidance, the philosophy is - as many other fast growing businesses - under-promise, over-deliver. so I would not take that too seriously.

You are making some good points on profitability. The way I see it is that management knows about that but wants to build up the infrastructure and the market shares. They might be in a phase of building, growing, almost regardless of profits. Back in 1998 the motto was "get big fast"; the goal was to grow the top line as fast as possible and not to worry about the bottom line. It lasted a couple of years. Once they got the volume they wanted, they started to get serious and look at the cost. After the correction of 2000 it paid off nicely for the shareholders. We might be in a similar phase, with heavy investments and little attention to the bottom line. Knowing the quality of management, I suspect it will pay off over time, maybe also after a heavy correction.

As I said before if I were forced to take a position now, I would be short. This would be more a valuation short as I do not see any catalyst (the only one I could see is a negative impact of collecting sales tax). I wish you well with that trade; you might be right. But long term, I really believe amazon is making the right choices and that it will be even more dominant in 10-15 years.


Title: Re: AMZN - Amazon.com Inc.
Post by: Eric50 on November 04, 2012, 10:16:36 PM

I believe the subject of off balance sheet debt has not been brought up on this thread yet. There is an article by a short on seeking alpha on how "Amazon.com is using external entities to handle a good portion of its capex, so that it doesn't have to recognize the cash outflows associated with that capex."

http://seekingalpha.com/article/656591-amazon-com-s-hidden-debt

@Eric50, since you have experience on working at the finance department at Amazon, your comments on this subject would be much appreciated.

This was after my time there. Your guess is as good as mine.
Title: Re: AMZN - Amazon.com Inc.
Post by: Grenville on November 06, 2012, 07:25:00 AM
Amazon adds a monthly option for prime membership at 7.99 vs 79/year.
Title: Re: AMZN - Amazon.com Inc.
Post by: Grenville on November 13, 2012, 07:26:38 AM
Short but nice interview with Amazon Studios chief:

Why He Ditched Posh Hollywood Perks: 10 Questions With Amazon Studios Chief Roy Price
http://www.wired.com/business/2012/11/amazon-studios-roy-price/ (http://www.wired.com/business/2012/11/amazon-studios-roy-price/)

Some topics from the interview:
1. Amazon Studios - Enabler lowering cost of movie/tv production
2. Culture at Amazon
3. Frugality

From the interview:
1.  "The idea that we’ll put ideas in front of actual movie and TV customers and see if they like it. That can be a huge opportunity for certain projects. Movies cost a lot, and [movie executives] would like to have some assurance that people are going to be interested. Sometimes original stories have a more difficult time because they’re more speculative and require more risk. Our system can de-risk those projects, actually put them in front of customers and get a reaction."

2. "Embracing change is central to Amazon’s DNA. You wouldn’t think you would have to explain to people that things change, but you really do. Some people just truly, totally believe it, and some people secretly harbor doubts. It’s core to Amazon’s culture that we want to innovate and think big and it’s great to be at a place like that."

3."Wired: Was it tough switching from going out for these long sushi lunches, or whatever it is in Hollywood, versus, OK, I’m in a desk that’s made out of plywood in Seattle?

Price: Well, I just flew 11 hours yesterday back to Seattle from our dev center in Edinburgh, Scotland, where they’re doing some of the engineering for some of the new things we’ll be launching over the next year. I sat there in row 42 in coach of the plane, so I can assure you that the cultures are fairly different."
Title: Re: AMZN - Amazon.com Inc.
Post by: Grenville on November 17, 2012, 02:01:45 PM
Nice article on Bezos in Fortune's article naming him Business Person of the Year

Amazon's Jeff Bezos: The ultimate disrupter
http://management.fortune.cnn.com/2012/11/16/jeff-bezos-amazon/ (http://management.fortune.cnn.com/2012/11/16/jeff-bezos-amazon/)

items from the article:
+ Meetings where the first 30 minutes are in silence reading a 6 page memo
+ Cash compensation is low for employees, employees buy their own lunches
Title: Re: AMZN - Amazon.com Inc.
Post by: Grenville on November 19, 2012, 07:48:46 AM
Amazon removed the 7.99/month option on prime, looks like it was a "test".

http://www.slashgear.com/amazon-axes-monthly-prime-option-19257510/ (http://www.slashgear.com/amazon-axes-monthly-prime-option-19257510/)
Title: Re: AMZN - Amazon.com Inc.
Post by: Grenville on November 26, 2012, 06:32:52 PM
Amazon is raising 3bln in debt for the first time in over 10 years.

0.65% Notes due 2015 - 750mln
1.20% Notes due 2017 - 1bln
2.50% Notes due 2022 - 1.25bln

http://www.sec.gov/Archives/edgar/data/1018724/000119312512480847/d439592dfwp.htm (http://www.sec.gov/Archives/edgar/data/1018724/000119312512480847/d439592dfwp.htm)
Title: Re: AMZN - Amazon.com Inc.
Post by: Grenville on November 27, 2012, 08:02:02 AM
Good, short article in Wired about Amazon Web Services and its origins. Also a little about its competitors in Google and Microsoft.


The Cult of Amazon: How a Bookseller Invented the Future of Computing
http://www.wired.com/wiredenterprise/2012/11/amazon/ (http://www.wired.com/wiredenterprise/2012/11/amazon/)

Also this week is Amazon's Web Service Conference where you can sign up for the live feeds from the head of AWS, the CTO and Bezos.
Title: Re: AMZN - Amazon.com Inc.
Post by: StubbleJumper on November 27, 2012, 09:25:32 AM
Amazon is raising 3bln in debt for the first time in over 10 years.

0.65% Notes due 2015 - 750mln
1.20% Notes due 2017 - 1bln
2.50% Notes due 2022 - 1.25bln

http://www.sec.gov/Archives/edgar/data/1018724/000119312512480847/d439592dfwp.htm (http://www.sec.gov/Archives/edgar/data/1018724/000119312512480847/d439592dfwp.htm)


I've never paid any attention to AMZN at all, but now my curiosity is piqued.  I always thought that AMZN consisted of a website and almost zero physical inventory, which has always been the criticism of their purported moat (ie, a website costs very little to develop and there's not much inventory, so the theory has always gone that somebody could replicate AMZN for only a modest capital investment).  What on earth do they need $3B of debt for?  I thought this was a cash machine with basically no capital requirements...

Just curious.


SJ
Title: Re: AMZN - Amazon.com Inc.
Post by: Hoodlum on November 27, 2012, 09:40:12 AM
They likely need to build more regional warehouses now as they are loosing their tax advantage for out of state shipments. 
Title: Re: AMZN - Amazon.com Inc.
Post by: txlaw on November 27, 2012, 09:45:50 AM
Amazon is raising 3bln in debt for the first time in over 10 years.

0.65% Notes due 2015 - 750mln
1.20% Notes due 2017 - 1bln
2.50% Notes due 2022 - 1.25bln

http://www.sec.gov/Archives/edgar/data/1018724/000119312512480847/d439592dfwp.htm (http://www.sec.gov/Archives/edgar/data/1018724/000119312512480847/d439592dfwp.htm)


I've never paid any attention to AMZN at all, but now my curiosity is piqued.  I always thought that AMZN consisted of a website and almost zero physical inventory, which has always been the criticism of their purported moat (ie, a website costs very little to develop and there's not much inventory, so the theory has always gone that somebody could replicate AMZN for only a modest capital investment).  What on earth do they need $3B of debt for?  I thought this was a cash machine with basically no capital requirements...

Just curious.


SJ

See Grenville's post on AWS.
Title: Re: AMZN - Amazon.com Inc.
Post by: rimm_never_sleeps on November 27, 2012, 09:47:41 AM
Amazon is raising 3bln in debt for the first time in over 10 years.

0.65% Notes due 2015 - 750mln
1.20% Notes due 2017 - 1bln
2.50% Notes due 2022 - 1.25bln

http://www.sec.gov/Archives/edgar/data/1018724/000119312512480847/d439592dfwp.htm (http://www.sec.gov/Archives/edgar/data/1018724/000119312512480847/d439592dfwp.htm)

no brainer. but one question. what are the buyers of these bonds thinking?
Title: Re: AMZN - Amazon.com Inc.
Post by: rimm_never_sleeps on November 27, 2012, 09:51:47 AM
Amazon is raising 3bln in debt for the first time in over 10 years.

0.65% Notes due 2015 - 750mln
1.20% Notes due 2017 - 1bln
2.50% Notes due 2022 - 1.25bln

http://www.sec.gov/Archives/edgar/data/1018724/000119312512480847/d439592dfwp.htm (http://www.sec.gov/Archives/edgar/data/1018724/000119312512480847/d439592dfwp.htm)


I've never paid any attention to AMZN at all, but now my curiosity is piqued.  I always thought that AMZN consisted of a website and almost zero physical inventory, which has always been the criticism of their purported moat (ie, a website costs very little to develop and there's not much inventory, so the theory has always gone that somebody could replicate AMZN for only a modest capital investment).  What on earth do they need $3B of debt for?  I thought this was a cash machine with basically no capital requirements...

Just curious.


SJ

how would a retailer of this scale have no physical inventory? their moat is their distribution might. that means they have lots and lots of inventory. and no they don't need the $3b. but a cfo would have to be insane to not borrow at 2% when he can make over 10% on it? there is an old adage. do your borrowing when you don't need the money, not when you do.

https://twitter.com/CoryTV

read his tweets on $amzn
Title: Re: AMZN - Amazon.com Inc.
Post by: txlaw on November 27, 2012, 09:52:31 AM
Amazon is raising 3bln in debt for the first time in over 10 years.

0.65% Notes due 2015 - 750mln
1.20% Notes due 2017 - 1bln
2.50% Notes due 2022 - 1.25bln

http://www.sec.gov/Archives/edgar/data/1018724/000119312512480847/d439592dfwp.htm (http://www.sec.gov/Archives/edgar/data/1018724/000119312512480847/d439592dfwp.htm)


I've never paid any attention to AMZN at all, but now my curiosity is piqued.  I always thought that AMZN consisted of a website and almost zero physical inventory, which has always been the criticism of their purported moat (ie, a website costs very little to develop and there's not much inventory, so the theory has always gone that somebody could replicate AMZN for only a modest capital investment).  What on earth do they need $3B of debt for?  I thought this was a cash machine with basically no capital requirements...

Just curious.


SJ

Btw, to say that somebody could replicate AMZN for only a modest capital investment is pretty crazy.  It's not just a website. 

AMZN is the new Costco.
Title: Re: AMZN - Amazon.com Inc.
Post by: tengen on November 27, 2012, 09:59:40 AM
Amazon does carry a lot of inventory but it is all hidden away in highly automated warehouses.  Check out this youtube video  (http://www.youtube.com/watch?v=i6H7nfHjHtY). It doesn't sound like a great place to work (http://articles.mcall.com/2011-09-18/news/mc-allentown-amazon-complaints-20110917_1_warehouse-workers-heat-stress-brutal-heat).
Title: Re: AMZN - Amazon.com Inc.
Post by: DCG on November 27, 2012, 10:07:55 AM
Amazon is raising 3bln in debt for the first time in over 10 years.

0.65% Notes due 2015 - 750mln
1.20% Notes due 2017 - 1bln
2.50% Notes due 2022 - 1.25bln

http://www.sec.gov/Archives/edgar/data/1018724/000119312512480847/d439592dfwp.htm (http://www.sec.gov/Archives/edgar/data/1018724/000119312512480847/d439592dfwp.htm)


I've never paid any attention to AMZN at all, but now my curiosity is piqued.  I always thought that AMZN consisted of a website and almost zero physical inventory, which has always been the criticism of their purported moat (ie, a website costs very little to develop and there's not much inventory, so the theory has always gone that somebody could replicate AMZN for only a modest capital investment).  What on earth do they need $3B of debt for?  I thought this was a cash machine with basically no capital requirements...

Just curious.


SJ

Huh? Amazon carry's huge amount of inventory, operates around 100 fulfillment centers around the world, has large data centers and customer service centers around the world, and has a good amount of subsidiaries.
Title: Re: AMZN - Amazon.com Inc.
Post by: compoundinglife on November 27, 2012, 10:57:27 AM
Amazon is raising 3bln in debt for the first time in over 10 years.

0.65% Notes due 2015 - 750mln
1.20% Notes due 2017 - 1bln
2.50% Notes due 2022 - 1.25bln

http://www.sec.gov/Archives/edgar/data/1018724/000119312512480847/d439592dfwp.htm (http://www.sec.gov/Archives/edgar/data/1018724/000119312512480847/d439592dfwp.htm)


I've never paid any attention to AMZN at all, but now my curiosity is piqued.  I always thought that AMZN consisted of a website and almost zero physical inventory, which has always been the criticism of their purported moat (ie, a website costs very little to develop and there's not much inventory, so the theory has always gone that somebody could replicate AMZN for only a modest capital investment).  What on earth do they need $3B of debt for?  I thought this was a cash machine with basically no capital requirements...

Just curious.


SJ

Not only do they carry inventory. But they also warehouse inventory for their partners. You can start your own online store and Amazon will hold your inventory and do the order fulfillment for you. They also have some of the largest data center capacity on earth, that costs money, but they have been able to fund that so far from cash coming in the door.

IMO makes sense for them to get the money now when its cheap even if they don't have an immediate use for it.
Title: Re: AMZN - Amazon.com Inc.
Post by: Cardboard on November 27, 2012, 01:27:05 PM
They are like the old Sears catalogue years ago. Just fancier because you order on your screen, more goods are available including from other vendors and the delivery is faster. Although, Sears still made money delivering goods to their customers. These guys lose money or barely breakeven in the name of gaining market share.

You know, it is funny. I was watching CNBC on Friday and these guys had the most queries on Google or likely meaning the most visited online retailing site. When you are #1 in a business, would you not expect to see a profit? Do you think that Wal-Mart lost money with their online sales on Friday? It is the same excuse as with Salesforce.com. One day, they will cut expense and profits will surge. When is that one day? When do you decide to have enough market share and what will be the profit margins by then? Salesforce.com is lead by a major promoter, Amazon.com is lead by a ex-hedge fund manager. Should tell you a lot already.

Then they started AWS or a fairly unrelated business to them to confuse a little more the analysts. Now, there are two rapidly growing enterprises under the same roof. You can't really tell the future profitability of either one, but it has to be worth 100's of billions.

Regarding the new debt, $1.16 billion of it is to pay for its headquarter in Seattle.

Cardboard
Title: Re: AMZN - Amazon.com Inc.
Post by: Hoodlum on November 27, 2012, 02:45:26 PM
In Canada online retailers ship most of their product directly from a distributor's warehouse with the retailers packing slip.   It never enters a retailers warehouse.   This is a trend that seems to be increasing.

Most online retailers are also using a 3rd party for processing orders.  CommerceHub seems to be the most popular in Canada.
Title: Re: AMZN - Amazon.com Inc.
Post by: compoundinglife on November 27, 2012, 02:59:47 PM
In Canada online retailers ship most of their product directly from a distributor's warehouse with the retailers packing slip.   It never enters a retailers warehouse.   This is a trend that seems to be increasing.

Most online retailers are also using a 3rd party for processing orders.  CommerceHub seems to be the most popular in Canada.

Yup. This is commonly referred to as "drop shipping". I had an online retail site in a niche business for a while and used various distributors/manufacturers for drop shipping items that we did not want to keep in inventory. Some of the distributors we used for drop shipping in turn used a warehouse or logistics management company to outsource fulfillment and shipping from the warehouse.
Title: Re: AMZN - Amazon.com Inc.
Post by: StubbleJumper on November 27, 2012, 03:37:58 PM
Amazon is raising 3bln in debt for the first time in over 10 years.

0.65% Notes due 2015 - 750mln
1.20% Notes due 2017 - 1bln
2.50% Notes due 2022 - 1.25bln

http://www.sec.gov/Archives/edgar/data/1018724/000119312512480847/d439592dfwp.htm (http://www.sec.gov/Archives/edgar/data/1018724/000119312512480847/d439592dfwp.htm)


I've never paid any attention to AMZN at all, but now my curiosity is piqued.  I always thought that AMZN consisted of a website and almost zero physical inventory, which has always been the criticism of their purported moat (ie, a website costs very little to develop and there's not much inventory, so the theory has always gone that somebody could replicate AMZN for only a modest capital investment).  What on earth do they need $3B of debt for?  I thought this was a cash machine with basically no capital requirements...

Just curious.


SJ

how would a retailer of this scale have no physical inventory? their moat is their distribution might. that means they have lots and lots of inventory. and no they don't need the $3b. but a cfo would have to be insane to not borrow at 2% when he can make over 10% on it? there is an old adage. do your borrowing when you don't need the money, not when you do.

https://twitter.com/CoryTV

read his tweets on $amzn


Obviously some level inventory is required, but I always had a fuzzy understanding that the business model was predicated on a very high inventory turnover ratio...

When you say that they can borrow at 2% and make more than 10%, what investment did you have in mind for the $3B?  Are you suggesting that AMZN was inappropriately scaled and this will increase the volume of their operations, or are you suggesting that this will change their expense profile?

I must confess that I've never looked at it simply because it was priced so high for so long...
Title: Re: AMZN - Amazon.com Inc.
Post by: rimm_never_sleeps on November 27, 2012, 03:43:27 PM
I am saying they will use that $3b at an after tax cost of less than 2% and earn way more than that by investing the capital in the business. that's basic EVA stuff. Even if they just bought prime real estate with it they would earn over 2%. it's a no brainer, which is why most every blue chip company out there is borrowing money now. Amazon is a growth company in it's prime---it will find a use for this capital. When you can borrow at 2% you do it. It's unprecedented the rates blue chip companies are borrowing for. borrowing $3b at 2% gives them the flexibility to buy rather than lease. that's just one example.
Title: Re: AMZN - Amazon.com Inc.
Post by: StubbleJumper on November 27, 2012, 03:43:41 PM
Amazon is raising 3bln in debt for the first time in over 10 years.

0.65% Notes due 2015 - 750mln
1.20% Notes due 2017 - 1bln
2.50% Notes due 2022 - 1.25bln

http://www.sec.gov/Archives/edgar/data/1018724/000119312512480847/d439592dfwp.htm (http://www.sec.gov/Archives/edgar/data/1018724/000119312512480847/d439592dfwp.htm)


I've never paid any attention to AMZN at all, but now my curiosity is piqued.  I always thought that AMZN consisted of a website and almost zero physical inventory, which has always been the criticism of their purported moat (ie, a website costs very little to develop and there's not much inventory, so the theory has always gone that somebody could replicate AMZN for only a modest capital investment).  What on earth do they need $3B of debt for?  I thought this was a cash machine with basically no capital requirements...

Just curious.


SJ

Btw, to say that somebody could replicate AMZN for only a modest capital investment is pretty crazy.  It's not just a website. 

AMZN is the new Costco.


Agreed, it's more than a website.  But the argument has always gone that the market cap drastically exceeds tangible assets, implying that if somebody were given a fraction of the $100b market cap he could build a website buy some warehouse facilities, procure some inventory and effectively establish a similarly scaled operation.  Of course, the intangible assets are the more significant element and are more difficult to replicate.

SJ
Title: Re: AMZN - Amazon.com Inc.
Post by: StubbleJumper on November 27, 2012, 03:49:27 PM

Regarding the new debt, $1.16 billion of it is to pay for its headquarter in Seattle.



Okay, that makes sense.  That leaves a little less than $2b to fund organic growth....I guess that'll be for some more warehouse facilities....
Title: Re: AMZN - Amazon.com Inc.
Post by: ItsAValueTrap on November 27, 2012, 05:39:11 PM
Their plan to buy their own headquarters seems a little crazy... $644/sqft seems very overpriced.
Quote
The world's largest Internet retailer plans to buy a complex of 11 buildings in the trendy South Lake Union area, comprising 1.8 million square feet of office space, for $1.16 billion from Microsoft Corp co-founder Paul Allen's investment firm.

Based on the value of the deal, Amazon is paying the highest ever price for an office building over 100,000 square feet in Seattle at around $644 per square foot. That is more than double the average rate of $308 per square foot for the city's office space, according to Real Capital Analytics.
http://www.huffingtonpost.com/2012/10/05/amazon-headquarters-116-billion_n_1944202.html

On the other hand, isn't it obvious that online shopping will play a much larger role in the future?  I shop at Amazon (and other online retailers... eBay etc. etc.).  So do many people I know.

Unless they are extremely incompetent or that there is fraud going on (though you'd figure they would raise equity), you'd figure that Amazon's economics are decent.  They might be bleeding the short-term to drive adoption of the Kindle?
Title: Re: AMZN - Amazon.com Inc.
Post by: txlaw on November 27, 2012, 05:58:38 PM
Amazon is raising 3bln in debt for the first time in over 10 years.

0.65% Notes due 2015 - 750mln
1.20% Notes due 2017 - 1bln
2.50% Notes due 2022 - 1.25bln

http://www.sec.gov/Archives/edgar/data/1018724/000119312512480847/d439592dfwp.htm (http://www.sec.gov/Archives/edgar/data/1018724/000119312512480847/d439592dfwp.htm)


I've never paid any attention to AMZN at all, but now my curiosity is piqued.  I always thought that AMZN consisted of a website and almost zero physical inventory, which has always been the criticism of their purported moat (ie, a website costs very little to develop and there's not much inventory, so the theory has always gone that somebody could replicate AMZN for only a modest capital investment).  What on earth do they need $3B of debt for?  I thought this was a cash machine with basically no capital requirements...

Just curious.


SJ

Btw, to say that somebody could replicate AMZN for only a modest capital investment is pretty crazy.  It's not just a website. 

AMZN is the new Costco.


Agreed, it's more than a website.  But the argument has always gone that the market cap drastically exceeds tangible assets, implying that if somebody were given a fraction of the $100b market cap he could build a website buy some warehouse facilities, procure some inventory and effectively establish a similarly scaled operation.  Of course, the intangible assets are the more significant element and are more difficult to replicate.

SJ

Let's set the market cap aside, as that is not particularly useful for determining how the business is actually set up or how a new entrant would practically be able to attack the AMZN moat, which results from both tangible and intangible assets, and also results from structural advantages that allow AMZN to be a low cost provider of physical and digital goods (21st century retail business model, brand/customer relationships and, most importantly, scale).  I personally think that AMZN is at nosebleed valuations, and I doubt that any new entrant could ever get seed money to try to attack an AMZN at the same valuation as AMZN.  Now, existing companies, such as WMT, could potentially use their resources to attack AMZN's moat.

The cash that is being borrowed by AMZN is fungible with the cash they generate through ops, and the proceeds will be used "for general corporate purposes."  So while it is true that AMZN is buying a new headquarters building, the real question is whether incoming cash (whether through debt issuance or CFFO) is being deployed such that it generates a return on investment or protects current level of profits (economic earnings at AMZN are obscured by growth investment). 

Most likely possible uses for cash are both for growth and maintenance capex -- it's hard to separate the two in AMZN's case because of the potential cannibalization of physical good sales by digital goods sales (e.g., book and media sales):

-New warehouses and fulfillment centers to ship physical product, perhaps in the US, but just as likely in international markets.
-Robots to further automate their distribution
-Computing/storage hardware and datacenter facilities for the utility computing biz (Amazon AWS is the infrastructure on which many people's Web services run -- e.g., Netflix, Dropbox), content sale/rental biz, etc. 
-Acquisitions?  (Does anyone have good data on what ROIs resulted from Zappos or Quidsi deals?)
Title: Re: AMZN - Amazon.com Inc.
Post by: Grenville on November 27, 2012, 11:30:31 PM
What on earth do they need $3B of debt for?  I thought this was a cash machine with basically no capital requirements...

Here are some of my thoughts for what it's worth on where they might use the capital.
+ 1.16bln for the HQ that they are buying from Vulcan. It's a set of buildings in South Lake Union that were built in the last three years. They are all next to each other. Bezos answered a question at the annual meeting (it was quoted in something I read) that they decided  to buy the buildings because it was getting harder to find space so close together for the growing rank of employees.
+ I remember seeing a figure somewhere that each fulfillment center is ~100mln
+ They are opening two more fulfillment centers in California (Tracy & Patterson both near SF) in addition to the recently opened one in San Bernardino
http://www.latimes.com/business/money/la-fi-mo-amazon-opening-distribution-center-20121127,0,5209399.story (http://www.latimes.com/business/money/la-fi-mo-amazon-opening-distribution-center-20121127,0,5209399.story)
+ Small business loans to FBA merchants
+ More data centers (recently opened an availability zone in Australia)
+ Acquisitions (Brazil online site maybe)
+ Dry powder for a share buyback (960mln in Q1'2012 at ~ $180/share)

Amazon is in expansion mode along a number of fronts. The retail business is expanding both here and abroad. The content creation and distribution business is growing with both Kindle readers and Kindle fires which are top selling items. Amazon web services continues to expand across the globe. The computing power grows to support Amazon's retail and content business while supporting 3rd party businesses.

I've also attached the employee numbers and they are growing much faster than one would expect for supporting just the retail business. I don't think Amazon just hires people because they can. They have faced tough times in the past and they seem to be stingy with their spending. Also I don't think they are raising debt because it's cheap. If they were, they could raise much more than 3bln.

Also in 2011 they had about 5bln in inventory at year end versus 42bln in product sales.
Title: Re: AMZN - Amazon.com Inc.
Post by: Grenville on November 27, 2012, 11:32:44 PM
Amazon does carry a lot of inventory but it is all hidden away in highly automated warehouses.  Check out this youtube video  (http://www.youtube.com/watch?v=i6H7nfHjHtY). It doesn't sound like a great place to work (http://articles.mcall.com/2011-09-18/news/mc-allentown-amazon-complaints-20110917_1_warehouse-workers-heat-stress-brutal-heat).

Thanks for the link on the bad conditions in one of the warehouses. I hope that's been fixed. Doesn't make sense to have that situation both for employees or employers.
Title: Re: AMZN - Amazon.com Inc.
Post by: Liberty on November 28, 2012, 10:50:54 AM
New amazon product:

http://aws.amazon.com/redshift/
Title: Re: AMZN - Amazon.com Inc.
Post by: compoundinglife on November 28, 2012, 02:44:49 PM
From the AWS conference going in Vegas right now:

http://venturebeat.com/2012/11/28/netflix-ceo-reed-hastings-we-want-to-be-the-biggest-business-in-the-world-100-on-amazon-web-services/
Title: Re: AMZN - Amazon.com Inc.
Post by: rimm_never_sleeps on November 28, 2012, 03:33:37 PM
From the AWS conference going in Vegas right now:

http://venturebeat.com/2012/11/28/netflix-ceo-reed-hastings-we-want-to-be-the-biggest-business-in-the-world-100-on-amazon-web-services/

I believe this is why he is no longer on the msft board.
Title: Re: AMZN - Amazon.com Inc.
Post by: Grenville on November 28, 2012, 07:39:07 PM
Here is a link to Andy Jassy, head of AWS, keynote presentation at the first AWS Re:Invent Conference today.
http://youtu.be/8FJ5DBLSFe4 (http://youtu.be/8FJ5DBLSFe4)

I encourage anyone who doesn't know much about AWS or who wants to know more to watch the presentation.

Interesting parts:
+ Good conversation with Reed Hastings (36min mark)
+ Dropped pricing on S3 storage service 25%
+ Computing is shifting to a utility model
+ The last comment on how the Obama campaign utilized AWS is also interesting (1hr22min mark)
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on November 30, 2012, 12:39:23 AM
So we got two companies who want to build empires, don't care about profits and a lot of cash:

http://venturebeat.com/2012/11/29/google-amazon-cloud-pricing/

This is going to end well.
Title: Re: AMZN - Amazon.com Inc.
Post by: rmitz on November 30, 2012, 06:16:08 AM
So we got two companies who want to build empires, don't care about profits and a lot of cash:

http://venturebeat.com/2012/11/29/google-amazon-cloud-pricing/

This is going to end well.

The big effect of a price war will be to influence customers to go off of their own infrastructure faster...when the rates eventually go up they will have pain.
Title: Re: AMZN - Amazon.com Inc.
Post by: Grenville on November 30, 2012, 07:22:41 AM
Video of Jeff Bezos from the conference. Nothing groundbreaking. I enjoyed the talk after the first 5-10min
http://www.youtube.com/watch?v=O4MtQGRIIuA (http://www.youtube.com/watch?v=O4MtQGRIIuA)

Interesting topics covered:
+ Running a low margin business
+ Use of Japanese lean principles in the fulfillment centers (some good anecdotes)
+ Long term thinking

Good summary article of the topics covered:
http://news.cnet.com/8301-1001_3-57556330-92/bezos-amazon-web-services-is-lean-manufacturing-for-it/ (http://news.cnet.com/8301-1001_3-57556330-92/bezos-amazon-web-services-is-lean-manufacturing-for-it/)
Title: Re: AMZN - Amazon.com Inc.
Post by: txlaw on December 01, 2012, 08:58:54 AM
Article about the views of AWS Chief Data Scientist.

http://gigaom.com/data/why-amazon-thinks-big-data-was-made-for-the-cloud/
Title: Re: AMZN - Amazon.com Inc.
Post by: txlaw on December 01, 2012, 09:10:18 AM
Pretty interesting.  GOOG just bought a company based out of Waterloo that provides temporary lockers for deliveries of online purchases.

http://blog.bufferbox.com/
Title: Re: AMZN - Amazon.com Inc.
Post by: rimm_never_sleeps on December 01, 2012, 09:57:00 AM
very small purchase, probably to improve delivery service options at their play store for the increasing number of devices they will be selling.
Title: Re: AMZN - Amazon.com Inc.
Post by: Grenville on December 01, 2012, 04:33:03 PM
How Amazon Followed Google Into the World of Secret Servers
http://www.wired.com/wiredenterprise/2012/11/amazon-google-secret-servers/ (http://www.wired.com/wiredenterprise/2012/11/amazon-google-secret-servers/)

Article on how many big players are cutting out middlemen for servers and switches. They are building them direct in Asia and ordering chips directly from Intel and others.

The article also quotes Chris Pinkham, who built EC2 in its early days in South Africa.
Title: Re: AMZN - Amazon.com Inc.
Post by: Grenville on December 03, 2012, 11:09:11 AM
Good article on Amazon's distribution center growth and strategy. Also talks about the limited use of Kiva robots for now.

Amazon Plans Carefully Its Distribution Capacity Growth
http://logisticsviewpoints.com/2012/12/03/amazon-plans-carefully-its-distribution-capacity-growth/ (http://logisticsviewpoints.com/2012/12/03/amazon-plans-carefully-its-distribution-capacity-growth/)

"Since a highly-automated warehouse would take months longer to complete, Amazon uses warehouse automation sparingly to preserve scalability."

Another article on Kiva:
Amazon's Robotic Future: A Work in Progress
http://www.businessweek.com/articles/2012-11-30/amazons-robotic-future-a-work-in-progress (http://www.businessweek.com/articles/2012-11-30/amazons-robotic-future-a-work-in-progress)
Title: Re: AMZN - Amazon.com Inc.
Post by: stylized_fact on December 03, 2012, 11:00:53 PM
Good article on Amazon's distribution center growth and strategy. Also talks about the limited use of Kiva robots for now.

Amazon Plans Carefully Its Distribution Capacity Growth
http://logisticsviewpoints.com/2012/12/03/amazon-plans-carefully-its-distribution-capacity-growth/ (http://logisticsviewpoints.com/2012/12/03/amazon-plans-carefully-its-distribution-capacity-growth/)

"Since a highly-automated warehouse would take months longer to complete, Amazon uses warehouse automation sparingly to preserve scalability."

Another article on Kiva:
Amazon's Robotic Future: A Work in Progress
http://www.businessweek.com/articles/2012-11-30/amazons-robotic-future-a-work-in-progress (http://www.businessweek.com/articles/2012-11-30/amazons-robotic-future-a-work-in-progress)

I'm not short, nor do I plan to be, but if there's anything I consider to be questionable about Amazon as an investment, it's the risk that their management is growing increasingly out of touch by pursuing "pioneering" developments (R&D science projects) while competitors like Walmart mimic whatever is useful in Amazon's innovation, and Google engages in an arms race with them in cloud computing.  Bezos loves to tout his customer focus, but it's clear that what's most important to this guy is advanced technology.   His snobbery seems likely to prevent them from ever succeeding with a consumer device.
Title: Re: AMZN - Amazon.com Inc.
Post by: txlaw on December 05, 2012, 06:59:45 AM
Here is a link to Andy Jassy, head of AWS, keynote presentation at the first AWS Re:Invent Conference today.
http://youtu.be/8FJ5DBLSFe4 (http://youtu.be/8FJ5DBLSFe4)

I encourage anyone who doesn't know much about AWS or who wants to know more to watch the presentation.

Interesting parts:
+ Good conversation with Reed Hastings (36min mark)
+ Dropped pricing on S3 storage service 25%
+ Computing is shifting to a utility model
+ The last comment on how the Obama campaign utilized AWS is also interesting (1hr22min mark)

I started watching last night and hope to finish over the course of the week.  So far, it's even better than an Apple keynote!  The JPL/NASA presentation was pretty badass.

I'm really surprised at how good AMZN has become at marketing.  Still wouldn't buy (or short) it.
Title: Re: AMZN - Amazon.com Inc.
Post by: bargainman on December 07, 2012, 09:07:34 PM
Really good article on Bezos.  Good insight into how he thinks.  It's from a few weeks ago.

http://management.fortune.cnn.com/2012/11/16/jeff-bezos-amazon/?iid=obinsite
Title: Re: AMZN - Amazon.com Inc.
Post by: Grenville on December 12, 2012, 09:55:46 AM
Amazon beginning to test out service offering in Seattle. The one mentioned is a TV installation service conducted by a third party.

http://gizmodo.com/5967752/amazon-wants-to-ship-you-a-laborer-to-install-your-purchases (http://gizmodo.com/5967752/amazon-wants-to-ship-you-a-laborer-to-install-your-purchases)
Title: Re: AMZN - Amazon.com Inc.
Post by: Grenville on January 10, 2013, 09:44:39 AM
Really cool feature added by Amazon for MP3s based on what you've bought on Amazon as a cd or mp3. They give you free cloud access to stream or download 256kb/s rip of the music.

"Introducing “Amazon AutoRip” – Customers Now Receive Free MP3 Versions of CDs Purchased From Amazon – Past, Present and Future"
http://phx.corporate-ir.net/phoenix.zhtml?c=176060&p=irol-newsArticle&ID=1773251&highlight= (http://phx.corporate-ir.net/phoenix.zhtml?c=176060&p=irol-newsArticle&ID=1773251&highlight=)

“What would you say if you bought music CDs from a company 15 years ago, and then 15 years later that company licensed the rights from the record companies to give you the MP3 versions of those CDs… and then to top it off, did that for you automatically and for free?” said Jeff Bezos, Amazon.com Founder and CEO. “Well, starting today, it's available to all of our customers – past, present, and future – at no cost. We love these opportunities to do something unexpected for our customers.”
Title: Re: AMZN - Amazon.com Inc.
Post by: rkbabang on January 15, 2013, 09:11:43 AM
Really cool feature added by Amazon for MP3s based on what you've bought on Amazon as a cd or mp3. They give you free cloud access to stream or download 256kb/s rip of the music.

"Introducing “Amazon AutoRip” – Customers Now Receive Free MP3 Versions of CDs Purchased From Amazon – Past, Present and Future"
http://phx.corporate-ir.net/phoenix.zhtml?c=176060&p=irol-newsArticle&ID=1773251&highlight= (http://phx.corporate-ir.net/phoenix.zhtml?c=176060&p=irol-newsArticle&ID=1773251&highlight=)

“What would you say if you bought music CDs from a company 15 years ago, and then 15 years later that company licensed the rights from the record companies to give you the MP3 versions of those CDs… and then to top it off, did that for you automatically and for free?” said Jeff Bezos, Amazon.com Founder and CEO. “Well, starting today, it's available to all of our customers – past, present, and future – at no cost. We love these opportunities to do something unexpected for our customers.”

If you already have the CD it isn't much effort to rip it yourself though.  This doesn't give you anything you don't already have.  The two exceptions I can think of are 1: you bought the CD years ago and lost it or 2: you bought it to give as a gift to someone else so you don't own it at all.  In both cases you do not have the CD, but you now have access to the mp3s.   The only other case this would make a difference is if you're computer does not have a CD-ROM drive, but most computers do.
Title: Re: AMZN - Amazon.com Inc.
Post by: racemize on January 15, 2013, 09:13:25 AM
Well, if you had 25 or 50 CDs, ripping them would take some effort.  It's nice, but I'm already all digital anyway, and I didn't buy them from Amazon in the first place, sooooo I'll just see myself out.
Title: Re: AMZN - Amazon.com Inc.
Post by: rkbabang on January 15, 2013, 09:29:14 AM
Well, if you had 25 or 50 CDs, ripping them would take some effort.  It's nice, but I'm already all digital anyway, and I didn't buy them from Amazon in the first place, sooooo I'll just see myself out.

That's pretty much my point.  Who has a music collection on CDs and hasn't ripped them already?  Unless they don't want the digital version of them, then this Amazon feature is of no use.   It would be convenient I suppose if you were buying new music, but I wouldn't pay more for this feature.    Not that I've purchased a CD in many years anyway.    My kids have lists of songs they want to buy, not albums.   And Most of us old folks already own all the music we want or need (I've already got 3000 or so of my favorite songs on my ipod).    Who exactly buys CDs?
Title: Re: AMZN - Amazon.com Inc.
Post by: txlaw on January 15, 2013, 10:02:52 AM
http://www.cbsnews.com/video/watch/?id=50138922n

60 minutes piece on robots and job growth.  Shows Kiva Systems robots at work.  Kiva is owned by AMZN.
Title: Re: AMZN - Amazon.com Inc.
Post by: Grenville on January 15, 2013, 11:48:38 AM
Well, if you had 25 or 50 CDs, ripping them would take some effort.  It's nice, but I'm already all digital anyway, and I didn't buy them from Amazon in the first place, sooooo I'll just see myself out.

That's pretty much my point.  Who has a music collection on CDs and hasn't ripped them already?  Unless they don't want the digital version of them, then this Amazon feature is of no use.   It would be convenient I suppose if you were buying new music, but I wouldn't pay more for this feature.    Not that I've purchased a CD in many years anyway.    My kids have lists of songs they want to buy, not albums.   And Most of us old folks already own all the music we want or need (I've already got 3000 or so of my favorite songs on my ipod).    Who exactly buys CDs?

This may not change your opinion on the service, but I forgot the feature of scanning your itunes library and adding those songs automatically to your Amazon Cloud Player in 256kbps. It's a nice feature to backup your music in the cloud and download it in high quality.

"In July, Amazon added new scan and match technology that enables customers to import music into Amazon Cloud Player by scanning their iTunes and Windows Media Player libraries and matching songs on their computers to Amazon’s music catalog. All matched songs – even music purchased from iTunes or ripped from CDs – are upgraded to high-quality 256 Kbps audio and are made available instantly in customers’ Cloud Player libraries, making it even easier for customers to enjoy their entire music collection anywhere."
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on January 29, 2013, 01:51:32 PM
This is what happens when you miss analyst expectations:

http://www.google.com/finance?client=ig&q=NASDAQ:AMZN

Oh wait, never mind.  ::)
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on January 29, 2013, 03:27:54 PM
I smell mushrooms:

http://venturebeat.com/2013/01/29/amazon-cfo-tom-szkutak-takes-the-fifth-on-just-about-every-important-question/
Title: Re: AMZN - Amazon.com Inc.
Post by: Cardboard on January 31, 2013, 10:22:59 AM
5 brokerage houses rushed yesterday to upgrade the stock following these: "much better than anticipated operating margin". I have not seen any discussion about valuation regarding these upgrades in the press. It is a game of: if the results appear good, then put a price target 20 to 30% above the current price.

Now, regarding the results, they were abysmal. They missed on sales, earnings and forecast for two quarters in a row now. For any normal company, tech or not, this would have resulted in a roughly 20% drop in the share price. Not for Amazon with its current $121 billion market cap. It has to be the most manipulated stock on the market.

Now, getting back to these "amazing" operating margins, they reported $405 million in operating income in the fourth quarter which is the most important for any retailer, read most profitable. For the year, it was only $676 million and that is on $61 billion in sales. You can add back stock compensation of $833 million if you like since the way it is portrayed by Amazon, it is not a real cost. The operating income is still no good for what is described as a leader in the business. And certainly way too low to justify a market cap of $121 billion.

We also keep hearing about investments affecting costs. It is funny because investments are normally CAPEX and increasing costs due to more buildings to maintain and the hiring of more staff become on-going costs. Also, normally when you make heavy investments, it shows in sales growth. Interestingly enough, sales growth has declined to 22% in the 4th quarter. Are we are starting to see the law of large numbers slowing them down?

And please, don't tell me about Amazon being a Costco or Wal-Mart. These two great firms always made a significant profit margin after taxes despite them growing at very fast rates for decades. 

Anyway, the numbers and valuation don't add up. I am losing money on this short so far and it sucks, but I think that I will be proven right long term. If there was a hint of doubt on their profitability or just about 10% of the attention that is paid daily on Apple's future, this stock would plummet.

Cardboard
Title: Re: AMZN - Amazon.com Inc.
Post by: txlaw on January 31, 2013, 10:43:22 AM
Cardboard, you're a smart guy.  Why the heck are you wasting your time shorting a company like AMZN?  Are you not finding any suitable long ideas?
Title: Re: AMZN - Amazon.com Inc.
Post by: ItsAValueTrap on January 31, 2013, 10:50:43 AM
Is Amazon intentionally losing money on part of its business?  (e.g. Kindle)

If you separate out the online retailing aspect of its business from the intentionally money-losing parts of the business, what would the right valuation be?

Sometimes companies have money-losing segments that make them hard to analyze.  A few businesses in the world intentionally lose money trying to hit a critical mass... webVan (total failure), new media formats like BluRay and HD-DVD, Microsoft with its Bing search engine, Starbucks (kind of; they were unprofitable when they started), etc.

2- How can they not make money in online retailing? 

Their used books business should be an amazing business with extremely high margins (to me, it is like a mini-eBay).

Their new books business should be a good business.  Books are high margin items and they don't have inventory and bricks&mortar costs like the traditional bookstores that they are putting out of business.
Title: Re: AMZN - Amazon.com Inc.
Post by: ShahKhezri on January 31, 2013, 10:59:09 AM
5 brokerage houses rushed yesterday to upgrade the stock following these: "much better than anticipated operating margin". I have not seen any discussion about valuation regarding these upgrades in the press. It is a game of: if the results appear good, then put a price target 20 to 30% above the current price.

Now, regarding the results, they were abysmal. They missed on sales, earnings and forecast for two quarters in a row now. For any normal company, tech or not, this would have resulted in a roughly 20% drop in the share price. Not for Amazon with its current $121 billion market cap. It has to be the most manipulated stock on the market.

Now, getting back to these "amazing" operating margins, they reported $405 million in operating income in the fourth quarter which is the most important for any retailer, read most profitable. For the year, it was only $676 million and that is on $61 billion in sales. You can add back stock compensation of $833 million if you like since the way it is portrayed by Amazon, it is not a real cost. The operating income is still no good for what is described as a leader in the business. And certainly way too low to justify a market cap of $121 billion.

We also keep hearing about investments affecting costs. It is funny because investments are normally CAPEX and increasing costs due to more buildings to maintain and the hiring of more staff become on-going costs. Also, normally when you make heavy investments, it shows in sales growth. Interestingly enough, sales growth has declined to 22% in the 4th quarter. Are we are starting to see the law of large numbers slowing them down?

And please, don't tell me about Amazon being a Costco or Wal-Mart. These two great firms always made a significant profit margin after taxes despite them growing at very fast rates for decades. 

Anyway, the numbers and valuation don't add up. I am losing money on this short so far and it sucks, but I think that I will be proven right long term. If there was a hint of doubt on their profitability or just about 10% of the attention that is paid daily on Apple's future, this stock would plummet.

Cardboard

Agree completely, this is my largest short ever at 12.5% of assets.  I was at 4% 2 weeks ago, and added significantly at 276 and 269 a week ago.  Now avg at 263. 

Also thinking of adding to my CRM short, current avg at 165.
Title: Re: AMZN - Amazon.com Inc.
Post by: bargainman on January 31, 2013, 07:34:31 PM
wow..  the streets are covered with really smart value guys who shorted great companies on valuation.  It's a game I will never ever play.  If I ever short it will be by buying puts (limited downside) not shorting stock (unlimited downside, and accelerating downside as the stock goes up).  If I were either of you, I'd make sure to buy some leap OTM calls in case, assuming they aren't too hard to get (thereby turning the short position into a synthetic put and limiting your loss potential).  This is a dangerous game you're playing...  IMHO.  Amusingly there is another value investor with a reasonable record (won hulbert's recent award iirc) who is long amzn.
Title: Re: AMZN - Amazon.com Inc.
Post by: longinvestor on February 01, 2013, 07:37:28 AM
FWIW, want to share my view as an Amazon customer. I've no earthly idea what all this means for the stock price. Zero interest in that.

Somehow or other, Amazon has become my most frequent shopping location. I started buying "exotic" items which would typically make me go from store-to-store to find, then I started buying into Electronic items and then into "large" items. Heck, I've been sending Gift Cards to folks (used to be iTunes Gift cards before). The shopping convenience is unmatched. Most of the stuff I buy are new items, mostly branded. Speed of delivery is fanatastic almost without exception. The $79 prime membership is easily paid by not driving. (Two gas fillings per year).

Packaging is something I've worried about a little and they have to work on this more. Also they need to come up with shipping and handling options of large items especially thru my front door and into the house. Cannot see how they can handle more volume of large stuff without local arrangements. UPS / Fedex is unwieldy for this. And the other thing I think about is returns, again of large items. I came very close to doing something like this and decided against.

And I'm not a 20-something customer, I know several in that demography that buy everything from Amazon. Hearing that city dwellers are more and more into this kind of shopping.  My Amazon spend is in 4 digits now! It was in 2 digits a short while back. And I don't like to overspend, Walmart/Sam's club and two low cost local groceries are it for me. Amazon is doing something right!

 

Title: Re: AMZN - Amazon.com Inc.
Post by: infinitee00 on February 01, 2013, 09:20:12 AM
I actually have the opposite experience. After Amazon started charging sales tax in my state, I have been finding less and less reason to buy from Amazon. In fact, I have decided not to renew my Prime membership after the membership ends this year. I live in a big city so most of the Walmarts, Costcos and Best Buys are located close to work or home. With Best buy matching prices for any electronics item on Amazon, I see less reason to buy on Amazon compared to just picking up the stuff from the local Best Buy. I have purchased several items ( >$100) this year from Costco, Baby'srus or Bestbuy which were priced the same or lower than Amazon but without the inconvenience of waiting 2 business days for the product. I bought a nexus 7 tablet for my mom last month and the cheapest price was being offered by Staples. Even, friends who previously would buy most of their electronic items from Amazon have been finding better value at other stores.

Yes, I have to agree that the shopping experience is really good and I still find the best prices for new or used paper books on Amazon, but when I am buying a TV, or a stroller/car-seat for my kid, I prefer to buy it from a store so that if the product turns out to be a lemon, I can return it and get another one the same day. Just the thought of returning a TV or a stroller makes me not want to buy from Amazon anymore. Previously the 0% sales tax would sort of convince me to disregard the inconvenience, especially for higher priced items, but now I don't see much reason for it ( the cheapskate that I am ;)). Yes, I know not everyone is price sensitive and most of what I am saying is anecdotal. But, if there are more people like me, then Amazon does have something to worry about.

Title: Re: AMZN - Amazon.com Inc.
Post by: txlaw on February 01, 2013, 09:45:30 AM
Pretty interesting announcement.

http://paidcontent.org/2013/02/01/sorry-netflix-and-hulu-amazon-gets-exclusive-streaming-rights-to-downton-abbey/

I also noticed that the Prohibition documentary by Ken Burns only appears to be on AMZN, and not on NFLX. 

In related news, NFLX's House of Cards is being released this weekend, I believe.  I'm looking forward to watching it.
Title: Re: AMZN - Amazon.com Inc.
Post by: Liberty on February 03, 2013, 09:25:49 AM
http://www.theatlantic.com/business/archive/2013/02/why-amazon-is-special-and-apple-is-not-in-1-paragraph/272791/
Title: Re: AMZN - Amazon.com Inc.
Post by: DCG on February 03, 2013, 10:41:10 AM
http://www.theatlantic.com/business/archive/2013/02/why-amazon-is-special-and-apple-is-not-in-1-paragraph/272791/

I agree with all their points, but at some point valuation has to come into play when talking about the stock price.
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on February 03, 2013, 01:01:01 PM
http://www.theatlantic.com/business/archive/2013/02/why-amazon-is-special-and-apple-is-not-in-1-paragraph/272791/

I agree with all their points, but at some point valuation has to come into play when talking about the stock price.
The best description of Amazon I've seen so far- "a charity financed by shareholders " .
Title: Re: AMZN - Amazon.com Inc.
Post by: Palantir on February 03, 2013, 01:24:15 PM
I respect that Amazon may have great, profitable days ahead. That being said, if the argument is that "AMZN is not very profitable because it is spending on the future", shouldn't it at least show some growth in OCF that's balanced out by CapX?

Title: Re: AMZN - Amazon.com Inc.
Post by: jjsto on February 04, 2013, 10:02:05 AM
Another interesting article on amazon/apple:

http://www.eugenewei.com/blog/2012/11/28/amazon-and-margins
Title: Re: AMZN - Amazon.com Inc.
Post by: siddharth18 on February 04, 2013, 04:32:15 PM
A new perspective on valuing AMZN http://quinzedix.blogspot.com/2013/02/the-forest-for-trees.html
Title: Re: AMZN - Amazon.com Inc.
Post by: Cardboard on February 04, 2013, 07:44:05 PM
Very clever way to justify the unjustifiable! Add back: intangibles amortization, spending on marketing for growth! and spending on technology for growth! to get to EBIT. Not EBITDA, but EBIT. Which brings another error since they are spending massively on CAPEX or bypassing the income statement and the depreciation charge will keep on rising for years to come. So the current depreciation charge is likely too low within EBIT unless the new warehouses and other CAPEX spending really don't require much upgrades over time.

So basically what this is guy is saying is that all the acquisitions that they are making and all extra spending on marketing and technology do not add to the current top line neither do they hurt the bottom line. They should just be ignored to get to a truer picture of cash generating ability.

The reality is that growth slowed to 22% on the top line in the 4th quarter or the biggest one for a retailer and that is despite a lot of spending on more warehouses to distribute more goods, lots of adds on television and more offering than ever which is also true at AWS (explaining some of the additional spending on technology). Again, something does not add up. If sales had gone up 40%, then one could argue that the additional spending was a temporary surge to gain more sales and market share that would then translate into more cash flow with a return to more normal spending. What seems to be happening instead is that the company is spending more cash to gain fewer sales than it previously did. As I mentioned before, $62 billion in sales is roughly Target. And even if internet sales keep on growing, they will not surpass total retail sales. Then you have to consider that Wal-Mart, Costco, Target, Best Buy and all others won't just stay put waiting for Amazon to steal all their sales. They too have internet sites, have distribution centers and warehouses and a few are now offering to match Amazon prices all year long at their brick and mortar stores.

So competition is rising while Amazon is now being hit with sales tax which increases its prices and at a time when they are heavily investing or adding permanent on-going costs to their structure. I see a squeeze to their margins which are already inadequate, then if Wall Street ever wakes up, stock related compensation will become tough to accept for most employees. It will finally be recognized as a true cost on the income statement. Just ask an Apple employee today about stock compensation and how they feel about it.

The fairy tale would then be ended and we should see that Bezos never created anything worthwhile, but just a brand name selling items below their true cost or one necessary to earn a reasonable return on capital. The guy talks a lot about free cash flow, the long term and serving customers. Kind of sound like the Level 3 story. Lots of promises, but you never really see the free cash flow showing up. They stopped believing Crowe when sales never really materialized in a big way. I wonder what will happen when sales only go up 10% a year at Amazon. 

Cardboard
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on February 04, 2013, 09:02:44 PM
Another interesting article on amazon/apple:

http://www.eugenewei.com/blog/2012/11/28/amazon-and-margins


Only problem - Google is using the same strategy in the same market.
Title: Re: AMZN - Amazon.com Inc.
Post by: Grenville on February 04, 2013, 10:47:51 PM
http://www.cbsnews.com/video/watch/?id=50138922n

60 minutes piece on robots and job growth.  Shows Kiva Systems robots at work.  Kiva is owned by AMZN.

Thanks for posting. I finally got around to watching this today. Interesting to see how unemployment will be impacted by automation.
Title: Re: AMZN - Amazon.com Inc.
Post by: ItsAValueTrap on February 05, 2013, 01:12:10 PM
Quote
The fairy tale would then be ended and we should see that Bezos never created anything worthwhile, but just a brand name selling items below their true cost or one necessary to earn a reasonable return on capital.

I think you're crazy.  ;)

In general, I think that it's pretty obvious that online retailing will crush many parts of traditional retailing (though not all of it).  It's fundamentally more efficient.  Take Newegg for example... they are privately owned and have a cost advantage over bricks and mortar retailers.  They tried to go public so you can actually read their financials.
http://www.sec.gov/Archives/edgar/data/1341704/000119312509198581/ds1.htm
Online retailing in general is profitable, viable without living off of the stock market, and rapidly growing.

2- Amazon is special.  I presume that their scale gives them a margin advantage (e.g. reducing shipping costs by having warehouses and distribution centers everywhere).  If newegg were to start selling books and Amazon were to start selling computer parts... I would bet on Amazon winning that battle.  In categories where they overlap (e.g. dSLR cameras), I believe that Amazon is beating newegg on prices and # of reviews.

The ultimate winner in online retailing will likely be the company that is best at playing the economy of scale game... probably Amazon.  I don't want to short the #1 company in any field... even if the stock does goes down it's probably not worth it to short the company (may go up several times before going down, may take a very long time to collapse, may not collapse to 0, etc.).

Quote
Just ask an Apple employee today about stock compensation and how they feel about it.
They've seen their shares skyrocket in value over the past several years and are very happy that they have Apple shares?

I don't think it matters too much if you pay employees in cash or shares... one can be swapped for the other*.  If you pay employees in shares, you avoid costly underwriting fees, incentives are slightly better aligned, and many human beings hold their shares because people tend to stick to the default option (see Richard Thaler's book Nudge).
Title: Re: AMZN - Amazon.com Inc.
Post by: berkshiremystery on February 06, 2013, 04:37:54 AM
It's always good to have some free float on which you don't have to pay interest.

Amazon launches virtual currency
2013-02-06

Amazon, the world's largest online retailer, plans to introduce virtual currency that can be used for purchases on the Kindle Fire tablet to entice more developers to create programs for the device.

http://www.smh.com.au/digital-life/tablets/amazon-launches-virtual-currency-20130206-2dy4a.html
Title: Re: AMZN - Amazon.com Inc.
Post by: rkbabang on February 06, 2013, 07:21:47 AM
If newegg were to start selling books and Amazon were to start selling computer parts... I would bet on Amazon winning that battle.  In categories where they overlap (e.g. dSLR cameras), I believe that Amazon is beating newegg on prices and # of reviews.

Newegg might not sell books, but Amazon does sell computer parts and does beat Newegg on prices.  I like newegg and want them to succeed, because I like the management.  They actually fight patent trolls that most companies just roll over and pay.*

But whenever I shop around for computer parts I end up buying at Amazon.com because it is significantly cheaper.  I recently bought a new motherboard, processor, 16GB of RAM, a 1TB hard drive, a 120GB solid state drive, a DVD-writer, a copy of Windows8 Pro, and some other stuff as well.  And in every case I found it cheaper on Amazon.  I wouldn't want to be in any business that competes with them.


*How Newegg crushed the “shopping cart” patent and saved online retail (http://arstechnica.com/tech-policy/2013/01/how-newegg-crushed-the-shopping-cart-patent-and-saved-online-retail/2/)

"Newegg's Chief Legal Officer Lee Cheng, it's a huge validation of the strategy the company decided to pursue back in 2007: not to settle with patent trolls. Ever.

"We basically took a look at this situation and said, 'This is bullshit,'" said Cheng in an interview with Ars. "We saw that if we paid off this patent holder, we'd have to pay off every patent holder this same amount. This is the first case we took all the way to trial. And now, nobody has to pay Soverain jack squat for these patents."

"It's actually surprising how quickly people forget what Lemelson did. [referring to Jerome Lemelson, an infamous patent troll who used so-called "submarine patents" to make billions in licensing fees.] This activity is very similar. Trolls right now "submarine" as well. They use timing, like he used timing. Then they pop up and say, "Hello, surprise! Give us your money or we will shut you down!" Screw them. Seriously, screw them. You can quote me on that."
Title: Re: AMZN - Amazon.com Inc.
Post by: hyten1 on February 06, 2013, 07:57:10 AM
Just something i thought i share

i have been a long time amazon user (prime membership too)

however here are some interesting facts:

1. amazon prices changes all the time, its very annoying as a consumer, i know why they do it but its annoying to me, i always wonder whatever product i am looking at if the price  is good or now, there are service online that will track a products price change on amazon. the price change can be significant

2. overtime i have notice amazon doesn't always have the best price (for a long time i did). Now i always comparison shop between a few places and buy from whoever has the best overall price (price, shipping, service etc). I have notice recently walmart.com beat amazon in price on quite a few things, however i have only tried it on toys, household items, baby stuff recently so obviously can't say for every item.

but at the end of the day amazon doesn't always have the best price, surprising i have been shifting many  of my household item purchase recently to walmart.com

just some info

hy
Title: Re: AMZN - Amazon.com Inc.
Post by: DCG on February 06, 2013, 08:00:08 AM
We have a prime membership, so the 2-day shipping is a big reason why we shop there. Their shipping times often even exceed those expectations.

I live in Vermont (not exactly near a major airport or shipping hub). I ordered something on Amazon last week at around 8:00pm. The package was delivered around noon the next day. Not really sure how they pull stuff like this off, but they do.
Title: Re: AMZN - Amazon.com Inc.
Post by: racemize on February 06, 2013, 08:02:48 AM
They are shipping wizards.  I've done some patents for them that are amazing, and a friend of mine worked on their shipping algorithms for a few years.  They often know more about shipping centers than the carriers (e.g., they identify problems before UPS/Fed Ex does).
Title: Re: AMZN - Amazon.com Inc.
Post by: ItsAValueTrap on February 06, 2013, 11:07:24 AM
Quote
Newegg might not sell books, but Amazon does sell computer parts and does beat Newegg on prices.  I like newegg and want them to succeed, because I like the management.  They actually fight patent trolls that most companies just roll over and pay.*
Thanks for the comments!  I live in Canada, which is an online retailing backwater.  I can clearly see that some prices listed on amazon.ca are higher than amazon.com (e.g. Jlabs earbuds, which I bought recently).  In the US, online retailing is much more advanced (more selection, lower prices).

Quote
I've done some patents for them that are amazing, and a friend of mine worked on their shipping algorithms for a few years.  They often know more about shipping centers than the carriers (e.g., they identify problems before UPS/Fed Ex does).
It seems like Amazon's business might be very difficult to duplicate?  It seems like there is a lot of expertise that goes into keeping margins down... getting free advertising from your website, doing IT cheaply, having the software to manage moving your products from warehouse to warehouse, etc. etc.  And of course significant capex in having multiple warehouses/distribution centers.

Quote
but at the end of the day amazon doesn't always have the best price, surprising i have been shifting many  of my household item purchase recently to walmart.com
What do you think walmart's chances are of becoming the dominant online retailer? 
Title: Re: AMZN - Amazon.com Inc.
Post by: hyten1 on February 06, 2013, 11:16:11 AM
ItsValueTrap,

well it depends on how you defined "dominant online retailer", walmart.com is already up there, its #4 base on this website http://www.internetretailer.com/top500/list/

i mean amazon.com is obviously the leader, you also get the feeling its not just a brochure website (walmart.com has more of that feel) but for norm items, everyday items (low margin) i don't care, i want the best price (price + shipping)

all i can say is amazon.com doesn't always have the best value (price + shipping) the price difference can be substantial.

i don't know how its going to play out btw walmart and amazon.

EDIT: But shoppers beware, amazon prices change can be significant, for example a flat screen i bought about 6mo ago, i track it for about 3 month before the price change can get upwards of $400.

this is actually very annoying for example, i buy in bulk the vaires toliet paper, paper towels from amazon, the price constantly changes, many time you have to switch the product from one list to another. its pretty annoying. then again prob most retailer do this. i always have to end up calculating $ per sheet of toilet paper to compare etc.

hy
Title: Re: AMZN - Amazon.com Inc.
Post by: hyten1 on February 06, 2013, 11:22:42 AM
here is an example, everyones favorite book

http://camelcamelcamel.com/Tap-Dancing-Work-Practically-Everything/product/1591845734

price changes 15.95 to 18.45 within span of 1 mo

this is what i mean by, i never know everytime i get on amazon if the price i am seeing is the best/good price, espeically for items i don't buy very often.

hy
Title: Re: AMZN - Amazon.com Inc.
Post by: rkbabang on February 06, 2013, 11:40:18 AM
here is an example, everyones favorite book

http://camelcamelcamel.com/Tap-Dancing-Work-Practically-Everything/product/1591845734

price changes 15.95 to 18.45 within span of 1 mo

this is what i mean by, i never know everytime i get on amazon if the price i am seeing is the best/good price, espeically for items i don't buy very often.

hy

I know what you are saying, but if you need toilet paper today you buy the best deal you can find today.  It is of no consequence what the price was last month or next week.   Think about this statement:


"here is an example, everyones favorite stock <insert price quote>. price changes 15.95 to 18.45 within span of 1 mo. this is what i mean by, i never know everytime i log onto my broker if the price i am seeing is the best/good price, espeically for companies i don't buy very often."


Title: Re: AMZN - Amazon.com Inc.
Post by: hyten1 on February 06, 2013, 11:44:29 AM
rkbabang

i hear ya, i guess we are just different, i would wait for the good price

as for things i need right away, i usually buy in bulk and i usually start checking prices before i really need it, so i have the luxury of waiting ... for sometime, obviously not forever.

somethings i wait for a while like the flat screen, if i bought the day i was thinking of buying vs waited for 3 months i saved over $300 :)

what can i say i am cheap, obviously i don't do this for everything

i also comparison shop, so sometimes walmart have i best value (i get it there) sometimes amzn as better value (i get it there)

this is almost like a sport, i wonder how much i really save at the end of the day :)

hy
Title: Re: AMZN - Amazon.com Inc.
Post by: hyten1 on February 06, 2013, 11:50:16 AM
sorry i can't resist look at this tv

with last 1 mo, price range from 999.99 to 1400!!!

http://camelcamelcamel.com/Samsung-UN60EH6000-60-Inch-1080p-120Hz/product/B0074FGWJC
Title: Re: AMZN - Amazon.com Inc.
Post by: rkbabang on February 06, 2013, 01:29:00 PM
rkbabang

i hear ya, i guess we are just different, i would wait for the good price

We are not that different at all, I sometimes spend months researching a purchase and waiting for a price.  Just not usually on toilet paper.
My point was that I expect prices on any property to shift back and forth as supply and demand shift.  This is true just as much for toilet paper as it is for real estate or stocks.  I'd rather Amazon always quote me their best possible price rather than stick with a higher one.
Title: Re: AMZN - Amazon.com Inc.
Post by: hyten1 on February 06, 2013, 01:47:01 PM
rkbabang,

i hear ya, agree.

hy
Title: Re: AMZN - Amazon.com Inc.
Post by: rkbabang on February 07, 2013, 12:45:22 PM
Amazon.com is creating a digital currency.  It looks like it will be only for Kindle apps at first, but it is interesting that they are calling them "Amazon Coins" not "Kindle Coins" so they may have larger plans.

Introducing Amazon Coins: A New Virtual Currency for Kindle Fire (http://www.amazonappstoredev.com/2013/02/introducing-amazon-coins.html)
Title: Re: AMZN - Amazon.com Inc.
Post by: JRH on February 07, 2013, 01:57:36 PM
Amazon.com is creating a digital currency.  It looks like it will be only for Kindle apps at first, but it is interesting that they are calling them "Amazon Coins" not "Kindle Coins" so they may have larger plans.

Introducing Amazon Coins: A New Virtual Currency for Kindle Fire (http://www.amazonappstoredev.com/2013/02/introducing-amazon-coins.html)

They should announce a set supply and commit to growing the "Amazon Coin base" at a steady 3% a year, and gold would have some new competition for a store of purchasing power. ;)

I'll refrain from making any jokes about Amazon placing full-reserve banking rules on the Amazon Coin, but anyone else can jump in if they want to.
Title: Re: AMZN - Amazon.com Inc.
Post by: wellmont on February 07, 2013, 02:34:31 PM
is this a way to confuse customers by getting them to purchase in virtual currency forcing them to translate back to real dollars (which of course they won't do). I submit that it's also a way to capture float. unless someone can explain that it's not?
Title: Re: AMZN - Amazon.com Inc.
Post by: rkbabang on February 08, 2013, 06:24:03 AM
is this a way to confuse customers by getting them to purchase in virtual currency forcing them to translate back to real dollars (which of course they won't do). I submit that it's also a way to capture float. unless someone can explain that it's not?

I'm sure you are correct.  I wonder though in addition to that if they also plan on competing with paypal someday.  Allowing exchange of these outside of Amazon.com.  Just speculation.  Of course if they want to keep the number of Amazon Coins to a known quantity backed by something of value (books?) and let the exchange rate with other currencies float in the market to compete with bitcoins or something like that, that would be interesting as well.  I've never had a position in AMZN, but I find it a fascinating company to watch.
Title: Re: AMZN - Amazon.com Inc.
Post by: JRH on February 08, 2013, 07:01:57 AM
is this a way to confuse customers by getting them to purchase in virtual currency forcing them to translate back to real dollars (which of course they won't do). I submit that it's also a way to capture float. unless someone can explain that it's not?

I'm sure you are correct.  I wonder though in addition to that if they also plan on competing with paypal someday.  Allowing exchange of these outside of Amazon.com.  Just speculation.  Of course if they want to keep the number of Amazon Coins to a known quantity backed by something of value (books?) and let the exchange rate with other currencies float in the market to compete with bitcoins or something like that, that would be interesting as well.  I've never had a position in AMZN, but I find it a fascinating company to watch.

I'm 99% sure they would fix the price (exchange rate) and let the quantity float, rather than the opposite.  Far more friendly for users and easier to understand.  Having said that, it is interesting to consider the possibility of a new floating currency (fixed quantity, floating price) being introduced by Amazon.  One of the key characteristics a currency has to have to become accepted is to be easily exchangeable for things people commonly want or need.  I'd argue that Amazon (along with eBay and maybe Walmart?) are in as good a position to do that as anyone in the consumer market by integrating the exchange of currency back to dollars and the purchase of X good for delivery into a single mouse click.  The clicker doesn't even have to know the intermediate step is occurring.  Maybe all they know is that the money they were holding in Amazon Coins held its value better than their checking account.  And heck, maybe the intermediate step never even occurs if the seller (whether it be Amazon or someone else) would rather just get paid in Amazon Coins.

All playful conjecture.
Title: Re: AMZN - Amazon.com Inc.
Post by: Cardboard 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 
Title: Re: AMZN - Amazon.com Inc.
Post by: rmitz 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.
Title: Re: AMZN - Amazon.com Inc.
Post by: txlaw 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
Title: Re: AMZN - Amazon.com Inc.
Post by: bargainman 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...
Title: Re: AMZN - Amazon.com Inc.
Post by: LC 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!
Title: Re: AMZN - Amazon.com Inc.
Post by: Cardboard 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
Title: Re: AMZN - Amazon.com Inc.
Post by: Eric50 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: “the market can stay irrational longer than one stays solvent.” I’m not sure when it is going to be a good time to short amazon; I don’t see a catalyst yet. It might have been the spike after Q4 earnings announcement a couple of weeks ago.

- Also on shorting I’d 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 tide… On the other hand, when the market reverts, it’s going to be paradise for the short sellers… But again it emphasizes the importance of timing when one shorts stocks.

- On using your personal experience as a customer. That’s marketing 101: it’s not because you personally like or don’t 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. It’s 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 I’m 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.

I’m 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 you’ll 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!
Title: Re: AMZN - Amazon.com Inc.
Post by: bargainman 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...
Title: Re: AMZN - Amazon.com Inc.
Post by: rmitz 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.
Title: Re: AMZN - Amazon.com Inc.
Post by: rkbabang 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.
Title: Re: AMZN - Amazon.com Inc.
Post by: Cardboard on February 11, 2013, 09:18:33 AM
"...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."

The main reason why they have been able to sustain their build out despite no margin is because the stock market has believed in them and it has also allowed them to access the debt market. It is all about confidence. On the latest debt issuance, S&P was positive on them and Moody's was negative because of missing free cash flow to support the debt. And if you think that the equity market does not matter to them, $8.35 billion has come from equity issuance since its founding vs a book value of $8.2 billion. Only $1.9 billion came from retained earnings and there is $1.8 billion that was used to buy-back stock explaining the gap. The rest is other comprehensive loss. The issuance of restricted stock also helps them over time since they say that this cost is unimportant, so it is overlooked. It also makes employees pretty happy when it vests and the stock has appreciated quite a bit from the day they received it. If it goes down, they may not like the deal so much and demand cash payments.

So if debt and stock markets turn more cautious, internally generated cash will become crucial to continue this build out. People looking at cash flow and the cash pile may say wow! 2012 was a very good year, but it wasn't. Cash flow minus capital expenditures and acquisitions was negative $350 million. This despite a lot of, and I mean a lot of extending current cash payments into the future and trying to reduce inventories and accelerating cash collection. This kind of thing works well when you grow fast, but when sales growth slows watch-out! Regarding the cash pile, it has grown by $1.9 billion. Looks good until you realize that they have taken on $2.8 billion more in debt. So the cash has to come from somewhere to continue the expansion. They have net cash on the balance sheet that they can use up, but Wall Street may get nervous if it continues to decrease. Down close to $1 billion last year.

Another fallacy is their unsurmountable lead in terms of the infrastructure and scale that they are building. For perspective, the net sum invested in the entire business when you exclude cash is a whopping $21.1 billion. Un-depreciated, that is $23.6 billion. Apple has $137 billion in cash and Google $45 billion with both having next to no debt. Do you think that these two players don't have the human capital and financial wherewithal to re-create an Amazon? This is not Coca-Cola or Marlboro that we are talking about here. There is no craving or impulse buying. It is just a retailer doing business via direct mailing competing purely on cost, efficiency and name recognition. There is AWS, but how quickly and easily do you think that other tech players could create that?

Now of course, no one has re-created this infrastructure because they all see that it is making little money, if any at all, and that the new model is likely to make things worse. So they are letting Mr. Bezos build his empire which yes, is a problem long term in terms of market share, name recognition, unless other retailers such as Wal-Mart, Costco, Best Buy and all others figure a way to be more efficient and to slow them down via the growth of their own net infrastructure and reducing their selling price at the stores. Interestingly, it seems to have happened this Holiday season.

The other problem for Amazon is that they are effectively shut out from the largest and fastest growing market in the world: China. They have tried, but it seems that they have a pretty fierce opponent already with a monster market share relative to what they have themselves in the U.S.

http://seattletimes.com/html/businesstechnology/2020320189_kindlelesschinaxml.html   

The treatment of employees is also another major issue. I have never seen a successful tech company treating its employees like shit. A desk made out of plywood? Pretty low salaries other than for a few cashing restricted stocks? Maybe that it is a good place to get a head start in life or to grab some experience, then to move on to some greener pastures. It just does not seem like a long term winning formula. Even in the ultra competitive world of retail, employers understand the need to treat employees properly: to avoid errors, to be more friendly to customers. Costco pays their employees really well and Wal-Mart despite the low pay tries its best to have good morale at the store to entice customers to come back.

Finally, regarding the "short" catalyst, none was present at Apple at $700. Maybe that IPad sales were disappointing? Here I have two and maybe more. They missed forecasts in a major way for 2 quarters in a row. Will it take a third one?

Anyhow, I guess that I have stated my case and that we may have to agree to disagree.

Cardboard
Title: Re: AMZN - Amazon.com Inc.
Post by: Grenville on February 12, 2013, 04:48:24 AM
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

Interesting article. Thank you for posting it.
Title: Re: AMZN - Amazon.com Inc.
Post by: PlanMaestro on February 13, 2013, 04:53:08 PM
Estimate of the Kindle's current profits.

(http://farm9.staticflickr.com/8101/8471067473_af4b137d03.jpg)
Title: Re: AMZN - Amazon.com Inc.
Post by: Grenville on March 20, 2013, 10:06:50 AM
Just started watching this interview with Warren Buffett. He has some interesting comments re:Amazon & Jeff Bezos at the 3min mark.

http://www.pymnts.com/briefing-room/commerce-3-0/the-innovation-project-2013/warren-buffett-video/ (http://www.pymnts.com/briefing-room/commerce-3-0/the-innovation-project-2013/warren-buffett-video/)
Title: Re: AMZN - Amazon.com Inc.
Post by: Grenville on March 20, 2013, 10:27:26 AM
From another thread.

thanks for the video. I believe Berkshire funded some of AMZN's bonds several years ago, too.

Didn't know that, so I did some digging and here are some articles in regards to the bond purchase and a letter Buffett wrote to Bezos praising him for expensing stock options. It looks like the bonds were bought at Geico.

"Buffett praises Amazon, then buys its debt"
http://articles.chicagotribune.com/2003-04-12/business/0304120174_1_junk-bonds-warren-buffett-berkshire-hathaway (http://articles.chicagotribune.com/2003-04-12/business/0304120174_1_junk-bonds-warren-buffett-berkshire-hathaway)

"Warren Buffett Puts His Money Where His Mouth Is"
http://articles.sun-sentinel.com/2003-04-08/business/0304070608_1_berkshire-hathaway-warren-buffett-amazon-com (http://articles.sun-sentinel.com/2003-04-08/business/0304070608_1_berkshire-hathaway-warren-buffett-amazon-com)
Title: Re: AMZN - Amazon.com Inc.
Post by: txlaw on April 01, 2013, 08:13:20 AM
Perhaps you AMZN shorts may get your catalyst sooner rather than later?

http://www.fastcompany.com/3007586/most-innovative-companies-2013/googles-same-day-delivery-service-goes-live-san-francisco

http://www.bloomberg.com/news/2013-04-01/amazon-reign-as-most-expensive-stock-seen-ending-on-profit-tech.html
Title: Re: AMZN - Amazon.com Inc.
Post by: muscleman on April 01, 2013, 09:07:48 AM
Cardboard, I  think this will become a lousy short, if you have actually opened a position.
Imagine you were the owner of a business, wouldn't you love to have the opportunity to kill other players? But this is generally very costly to do, and you can easily kill yourself.
However, the fact that the market gives AMZN a lousy valuation gives them the chance to keep selling at or below cost, in order to kill other players. After that, they could easily improve their profit margin.
On the other hand, if you were only allowed to make your bets on one position, what is the better expected return, long SHLD, or short AMZN?
Title: Re: AMZN - Amazon.com Inc.
Post by: txlaw on April 15, 2013, 06:34:49 AM
Bezos' letter to shareholders:

http://www.sec.gov/Archives/edgar/data/1018724/000119312513151836/d511111dex991.htm
Title: Re: AMZN - Amazon.com Inc.
Post by: DCG on April 15, 2013, 09:00:02 AM
Impressive. Thanks for posting.
Title: Re: AMZN - Amazon.com Inc.
Post by: PlanMaestro on April 15, 2013, 10:58:39 AM
http://www.scribd.com/doc/98208572/ValueXVail-2012-Josh-Tarasoff
Title: Re: AMZN - Amazon.com Inc.
Post by: blainehodder on April 15, 2013, 12:10:44 PM
http://www.scribd.com/doc/98208572/ValueXVail-2012-Josh-Tarasoff

The author points out "Investing for growth depresses margins", but then assigns fat margins as "normalized" with minimal discussion of what the resulting effect will be on growth.  Does the author think growth is a function of margins or not?  Doesn't it go both ways?

This is fantasy analysis:

Quote
Normalized EBIT margin 7%
Normalized EBIT 3,474
Less: Taxes @30% 1,042
NOPAT - LTM2,432
Assumed growth rate 40%
Title: Re: AMZN - Amazon.com Inc.
Post by: Grenville on April 15, 2013, 11:40:51 PM
Bezos' letter to shareholders:

http://www.sec.gov/Archives/edgar/data/1018724/000119312513151836/d511111dex991.htm

I liked the letter, but not as interesting as past letters.

On another note, I've been having issues with Amazon instant video for a couple of weeks where I haven't been able to get the 5.1 audio through my ps3. It was annoying enough that I tried Netflix. The Netflix interface and experience is much nicer. The 5.1 audio also works with Netflix. I've been contacting Amazon for the last couple of weeks regarding the issue without much luck. They have given me some monetary credits for the issue, but I just want the audio. The instant video was important in convincing me to sign up for prime.
Title: Re: AMZN - Amazon.com Inc.
Post by: Hielko on April 16, 2013, 03:06:56 AM
http://www.scribd.com/doc/98208572/ValueXVail-2012-Josh-Tarasoff

The author points out "Investing for growth depresses margins", but then assigns fat margins as "normalized" with minimal discussion of what the resulting effect will be on growth.  Does the author think growth is a function of margins or not?  Doesn't it go both ways?

This is fantasy analysis:

Quote
Normalized EBIT margin 7%
Normalized EBIT 3,474
Less: Taxes @30% 1,042
NOPAT - LTM2,432
Assumed growth rate 40%
No, it doesn't go both ways. According to the author the fat margins are already here, but just not visible in the financial statement because money is directly reinvested (at very attractive rates). So you do have both at the same time, it's only not directly visible.
Title: Re: AMZN - Amazon.com Inc.
Post by: Grenville on June 18, 2013, 12:35:32 PM
Amazon’s Invasion of the CIA Is a Seismic Shift in Cloud Computing
http://www.newspressnow.com/news/local_news/article_9238aec8-85e9-5edf-8142-4a8567fc5301.html (http://www.newspressnow.com/news/local_news/article_9238aec8-85e9-5edf-8142-4a8567fc5301.html)

Amazon is building their cloud solution onsite at the CIA, which is very different than their current solutions. Pretty interesting. The GAO link in the article provides some additional details.



On another note, my prime video is working again with full audio and now they have subtitles. Still not as clean an interface as netflix but I'm happy with the 5.1 again.
Title: Re: AMZN - Amazon.com Inc.
Post by: Shawn on June 18, 2013, 12:42:22 PM
The valuations for Amazon are ridiculous. Indigo Books and Music is a superior investment and IMO the better company.
Title: Re: AMZN - Amazon.com Inc.
Post by: ScottHall on June 18, 2013, 04:00:54 PM
The valuations for Amazon are ridiculous. Indigo Books and Music is a superior investment and IMO the better company.

The better company? I am very skeptical of that, but I'll hear you out.
Title: Re: AMZN - Amazon.com Inc.
Post by: AchilliesValue on June 18, 2013, 04:37:54 PM
I used to wonder about the AMZN valuation but I came across these comments from a well known VIC member on CSinvesting that makes you think a bit. Keep in mind the comments are a few years old.

Quote
charlie479   12/20/11 11:25 PM AMZN one of the best companies I forgot to say that I chuckled thinking about the analyst making the “I want to buy Amazon at 100x earnings” pitch. I suppose that doesn’t necessarily make it mispriced but the earnings power is certainly higher than current GAAP net income. I think they could easily raise their prices by $0.63 per each $25 order (not exactly the same thing, but if Super Saver shipping was $0.63 instead of free, would that really change shopper behavior?). If they managed the business to maximize current profits like this, that $0.63 increase per $25 would double earnings. If sales grow like they did the past 12 months then suddenly the multiple isn’t looking so crazy. I’m not saying this makes AMZN one of the top half dozen stock investments in the world but the p/e might not be awful if your thesis is right.

I’ve occasionally wondered if someone could beat Amazon if they had $80 billion. I don’t think they could take over the #1 spot but I do think they could become competitive in a lot of areas. I would probably use the $80 billion to start several category-specific internet retailers, develop a large selection within that category, and drive turnover by capturing mind share as the expert in that category and as the lowest price seller, initially at losses. This is more or less the Amazon playbook, and companies like Diapers.com (before being bought), Newegg, and Blue Nile have managed to carve out niches. I bet there will be more. I think if VCs or public markets are willing to lose enough money for awhile, it isn’t that hard to replicate the warehouse network and other logistical moats.

Another reason to temper the who-needs-another-pipeline thought I posed in the previous comment is that consumers sometimes choose retailers for reasons other than price and selection. Certain bricks and mortar retailers will always have an advantage in terms of convenience (e.g. convenience stores, insightful eh?). And customers like to touch and try on certain products, like clothes, so I don’t see Amazon getting anything close to 50% share in those categories. Freshness matters, too, so it’s not clear grocery can be effectively penetrated by Amazon, and I bet that is a large portion of the Global Retail sales denominator. So, perhaps the current internet retail number at 3% is lower than what most people think, but maybe the maximum theoretical internet retail percentage is also lower than what most people think.

charlie479  12/20/11 10:47 PM AMZN one of the best companies

I think Amazon is one of the most admirable companies in the world. It has the expense advantages in rent and labor over B&M retailers that you mention, and it has cost advantages over other internet retailers as well. The massive sales volume makes the fixed cost percentages very low, and the inventory turnover in many products is so high that it can accept lower gross margins and still generate higher ROIC than competitors who charge a larger markup. The lower markup attracts more customers and generates more volume, which only reinforces the edge. It is the higher-turn/lower-markup Borsheim’s dynamic that Buffett describes.

The advantages aren’t limited to cost either. The high turnover also allows them to carry a huge number of SKUs at adequate ROIC, so they can offer customers the widest selection in many categories. For certain categories, after I browse Amazon and then Wal-Mart, I’ll come away feeling that Wal-Mart doesn’t have much of a selection. It’s hard to make Wal-Mart look narrow. Amazon is the first/last place many people shop because they know it has the widest selection and it’s likely to have that selection in stock.

Another non-price advantage is that they’re the most trusted internet retailer. I actually think those customer satisfaction ratings might be understating the difference. Their return policy and customer service is great. Even if a product is available from discountworldxyz.com at a slightly cheaper price, I’ll pay more to get it through Amazon because I know it’ll be the product I ordered, or else I’ll be able to return it. Who wants to deal with negotiating shipping costs or return policies with anyone else? I don’t think this is simply Amazon being more generous than discountworldxyz.com. They have the low-cost structure described in paragraph #1 that allows them to accept higher return costs while still generating better ROICs. I also suspect that their extensive review database reduces some of the likelihood of returns.

I think many retailers like Best Buy are at such a severe selection and cost disadvantage (even adjusting for sales tax) that their businesses are in trouble in the long-term. I even worry about beloved Costco. I no longer have no-price-comparison-needed-let’s-just-buy faith when walking down the aisles at Costco because Amazon has better prices frequently enough to make me doubt. More broadly, as someone who is cheering for the Costcos (no financial rooting interest, I just root for them because I admire them), I worry that Amazon will get to such scale one day that it’ll be a more efficient overall system for one UPS guy to drive from the Amazon warehouse and cruise through your neighborhood dropping off everything you and your neighbors need for the week. That might sound crazy but the current system of having you and all your neighbors separately drive SUVs 15-20 minutes to Costco to each walk through the aisles hand-picking and then checking out, doesn’t sound that efficient by comparison. I haven’t read anything about Bezos explicitly saying that’s his endgame but I wouldn’t be surprised if that’s in the 10 year wish list. If they end up with the cheapest and widest pipeline, there might not be much need for other pipelines.
Title: Re: AMZN - Amazon.com Inc.
Post by: Grenville on July 05, 2013, 11:56:18 AM
Amazon increasing prices. Will have to wait and see what happens to gross margins for proof.


As Competition Wanes, Amazon Cuts Back Discounts
http://www.cnbc.com/id/100866228 (http://www.cnbc.com/id/100866228)
Title: Re: AMZN - Amazon.com Inc.
Post by: compoundinglife on July 25, 2013, 10:19:22 AM

"Amazon Beat Out IBM And Won A $600 Million Cloud Computing Contract With The CIA"

http://www.businessinsider.com/amazon-vs-ibm-in-a-battle-for-the-cloud-2013-7
Title: Re: AMZN - Amazon.com Inc.
Post by: DTEJD1997 on July 25, 2013, 01:52:46 PM
TIME TO BUY!!!!!!!

They only lost $.02/share this last quarter!

When this company grows up & becomes a big player, they are going to earn money.

All the naysayers will be chagrined when this happens.  I'm going to sell all my beanie babies and parlay the profits into AMZN.

Hmmm...seriously.

The company is now steadily LOSING money.   I just don't get it....
Title: Re: AMZN - Amazon.com Inc.
Post by: Kraven on July 25, 2013, 02:02:00 PM
The company is now steadily LOSING money.   I just don't get it....

They make it up on volume though.
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on July 26, 2013, 08:05:14 AM
TIME TO BUY!!!!!!!

They only lost $.02/share this last quarter!

When this company grows up & becomes a big player, they are going to earn money.

All the naysayers will be chagrined when this happens.  I'm going to sell all my beanie babies and parlay the profits into AMZN.

Hmmm...seriously.

The company is now steadily LOSING money.   I just don't get it....

Don't call it losing money. There is a more fancy business name for it - "commoditizing the complement".  ;)
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on July 26, 2013, 08:06:03 AM
Makes you wonder:

http://venturebeat.com/2013/07/25/dear-amazon-shareholders-please-wake-the-hell-up/
Title: Re: AMZN - Amazon.com Inc.
Post by: ScottHall on July 30, 2013, 03:43:27 PM
Makes you wonder:

http://venturebeat.com/2013/07/25/dear-amazon-shareholders-please-wake-the-hell-up/

It does not, really. The author states that publicly traded companies must hold earnings calls. That is untrue - some of this board's favorites never hold them.
Title: Re: AMZN - Amazon.com Inc.
Post by: Liberty on July 30, 2013, 04:31:12 PM
http://www.ft.com/intl/cms/s/2/ed6a985c-70bd-11e2-85d0-00144feab49a.html#slide0

Piece on working conditions in an Amazon warehouse in the UK.

(Sorry if it's a repost)
Title: Re: AMZN - Amazon.com Inc.
Post by: siddharth18 on July 30, 2013, 04:42:18 PM
I've got no position in AMZN but it's obvious how, in the short run, AMZN is more like an efficient charity and less like a profit-maximizing business. The company has a self-imposed mandate to sell goods at cost which translates into a blessing for consumers but a curse for the competitors. Heck, I'm sure Bezos would sell goods BELOW cost if it can ensure a swift death of many competitors at once.

The starry eyed stockholders of AMZN are convinced that Bezos is an infallible genius - a modern day Sam Walton - who just needs time. So here you have a company with the cheapest financing (as implied with an astronomic valuation) that is racing to build/strengthen its moat. Future is uncertain, but it's true that a strong moat will carry the company through rough waters.

Current stockholders have got to wonder - when will the moat-building stop and profit-making start? Will the moat be strong enough to keep consumers when the making profit actually becomes an agenda at Amazon? If, heaven forbid, revenue stops growing (or worse, drops) when margins increase - what might happen to a stock trading at 3000+ P/E multiple?

I'm sure a lot of shareholders have gotten smug due to the astronomical increase year-after-year that, but if things go awry (either with the company, or with Wall Street's perception) things would get very ugly, very fast.
Title: Re: AMZN - Amazon.com Inc.
Post by: petec on July 31, 2013, 04:18:08 AM
In fairness, *gross* margins look like they've been rising so a focus on profitability by raisiung prices might not slow revenue growth.   Not a holder and never will be at this valuation.
Title: Re: AMZN - Amazon.com Inc.
Post by: ajc on July 31, 2013, 10:52:18 AM
http://www.ft.com/intl/cms/s/2/ed6a985c-70bd-11e2-85d0-00144feab49a.html#slide0

Piece on working conditions in an Amazon warehouse in the UK.

(Sorry if it's a repost)

Thanks for posting (I especially enjoyed the comments section).

Worked in one of these near London in the past - tough work, but rewarding for the best who end up making it (I prefer to get others to do the work for me, so let's just say I didn't qualify!) and one amazingly & ruthlessly efficient place.

Not buying all that bitching though, given that I've been there and done that (no free t-shirt - who would've guessed?).
Those old guys at the Lea Hall Miners’ "Welfare" Centre and Social Club are just something else - an awesome example of how complaining for its own sake is sometimes the de facto national sport in this part of the world.
Title: Re: AMZN - Amazon.com Inc.
Post by: bargainman on July 31, 2013, 08:29:26 PM
I've got no position in AMZN but it's obvious how, in the short run, AMZN is more like an efficient charity and less like a profit-maximizing business. The company has a self-imposed mandate to sell goods at cost which translates into a blessing for consumers but a curse for the competitors. Heck, I'm sure Bezos would sell goods BELOW cost if it can ensure a swift death of many competitors at once.

Bezos had a letter refuting this charity claim:

http://www.dailyfinance.com/on/amazon-ceo-bezos-annual-letter-shareholders/
Title: Re: AMZN - Amazon.com Inc.
Post by: LC on July 31, 2013, 08:55:05 PM
I don't think Amazon is a charity...I think they just realize that winning the retail business is a lot easier by undercutting everyone and weaning everyone off big-boxes by offering great shipping options.

Would I love to own Amazon? Absolutely. In a heartbeat. I think their moat is probably like the 5th layer of hell.

At this price? Not quite.
Title: Re: AMZN - Amazon.com Inc.
Post by: siddharth18 on July 31, 2013, 10:20:19 PM
I've got no position in AMZN but it's obvious how, in the short run, AMZN is more like an efficient charity and less like a profit-maximizing business. The company has a self-imposed mandate to sell goods at cost which translates into a blessing for consumers but a curse for the competitors. Heck, I'm sure Bezos would sell goods BELOW cost if it can ensure a swift death of many competitors at once.

Bezos had a letter refuting this charity claim:

http://www.dailyfinance.com/on/amazon-ceo-bezos-annual-letter-shareholders/

Yeah. He's convinced he can pull this off with a long enough horizon. Guess time will tell, although I must say he's a very very shrewd man and if I was forced to guess, I'd say he will be much ahead in 10 years than he is now. I would never dare bet against him - he understands exactly what he needs to do and what he needn't, that is - maintain a long term horizon and treat market (and by extension, short term AMZN holders) as his servant, not as his master.


I don't think Amazon is a charity...I think they just realize that winning the retail business is a lot easier by undercutting everyone and weaning everyone off big-boxes by offering great shipping options.

Would I love to own Amazon? Absolutely. In a heartbeat. I think their moat is probably like the 5th layer of hell.

At this price? Not quite.

It isn't. It's just that it seems like one, superficially and in the short term. I'd love to be Bezos' partner too, but only on fair terms. The problem right now for me is - AMZN doesn't appear like a screaming buy unless I justify using radical and extreme assumptions that may or may not materialize.

When you see Buffett praising Bezos (and not just in that interview, but back in 2003 when Amazon accounted for stock options as an expense) he's wishing inside to invest in him or someone like him with an unrelenting pursuit to long term success.
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on July 31, 2013, 11:45:50 PM
I've got no position in AMZN but it's obvious how, in the short run, AMZN is more like an efficient charity and less like a profit-maximizing business. The company has a self-imposed mandate to sell goods at cost which translates into a blessing for consumers but a curse for the competitors. Heck, I'm sure Bezos would sell goods BELOW cost if it can ensure a swift death of many competitors at once.

Bezos had a letter refuting this charity claim:

http://www.dailyfinance.com/on/amazon-ceo-bezos-annual-letter-shareholders/

That is nothing but a sales pitch from the CEO. His competitors are far bigger than him and have more cash than him. If he tries that, Amazon will, starve out far before his competitors do. The more areas he tries that in, the more he quickly he will burn cash.
Title: Re: AMZN - Amazon.com Inc.
Post by: TwoCitiesCapital on August 01, 2013, 06:28:54 AM
I don't think Amazon is a charity...I think they just realize that winning the retail business is a lot easier by undercutting everyone and weaning everyone off big-boxes by offering great shipping options.

Would I love to own Amazon? Absolutely. In a heartbeat. I think their moat is probably like the 5th layer of hell.

At this price? Not quite.

I disagree. Take Amazon's cash flow from operations and subtract out CapEx and acquisitions (both necessary for its continued growth and competitiveness) and you'll find that Amazon has "made" less than $10 billion in the last 10 years on a cumulative basis. A company that has only made $10 billion cumulatively over the last 10 years doesn't deserve to trade at $137 billion or anywhere near it. Amazon is a charity...one the has promised outsized profits for the last 10 years for long term shareholders. Funny thing is that people still buy this after 10 years and dont seem to realize that large profits will never materialize due to higher SG&A, COGS, and CapEx to expand into business lines that they operate at large losses or razor thin profits.

Lastly, one should question the strength of a moat that is predicated on undercutting competition. The moment someone else comes along with a lower price is the moment that moat is gone. I shop at Amazon because its cheap and convenient.  If someone else were more convenient or more cheap, I'd switch in a heartbeat.
Title: Re: AMZN - Amazon.com Inc.
Post by: DTEJD1997 on August 01, 2013, 12:08:27 PM
Hey all:

I am not that impressed with AMZN's business.

How many huge businesses were built selling dollar bills for $.96?  A ton of them were, until they lost the easy financing/equity.  AMZN's losses are being subsidized by an extremely generous valuation of their equity.

The other thing is a lot of the jobs they have created are of questionable quality.  There have been many expository articles about conditions in their distribution warehouses.  Extremely difficult conditions, extremely low pay.

If AMZN ever has to raise their prices, how much of their sales will they lose?

Is the street going to allow them to lose money/break even forever?

If they raise prices will someone else come in and be the next AMZN?

Title: Re: AMZN - Amazon.com Inc.
Post by: LC on August 01, 2013, 12:33:15 PM
I don't think Amazon is a charity...I think they just realize that winning the retail business is a lot easier by undercutting everyone and weaning everyone off big-boxes by offering great shipping options.

Would I love to own Amazon? Absolutely. In a heartbeat. I think their moat is probably like the 5th layer of hell.

At this price? Not quite.

I disagree. Take Amazon's cash flow from operations and subtract out CapEx and acquisitions (both necessary for its continued growth and competitiveness) and you'll find that Amazon has "made" less than $10 billion in the last 10 years on a cumulative basis. A company that has only made $10 billion cumulatively over the last 10 years doesn't deserve to trade at $137 billion or anywhere near it. Amazon is a charity...one the has promised outsized profits for the last 10 years for long term shareholders. Funny thing is that people still buy this after 10 years and dont seem to realize that large profits will never materialize due to higher SG&A, COGS, and CapEx to expand into business lines that they operate at large losses or razor thin profits.

Lastly, one should question the strength of a moat that is predicated on undercutting competition. The moment someone else comes along with a lower price is the moment that moat is gone. I shop at Amazon because its cheap and convenient.  If someone else were more convenient or more cheap, I'd switch in a heartbeat.
Hold on now, if ABC corp made $1b/year over 10 years would that company be a charity? In my eyes it wouldn't.

Valuation is a different beast. I don't buy into "promises" of anything. Do I think Amazon should trade at such a high multiple? No, I don't. That's why I don't own any. At a (much) lower price I would love to own this company.

Let's turn to the moat. We both agree they compete on cost and convenience. They offer the best value in that regards. But yes I agree most shoppers will go elsewhere if another company can best them in this value proposition.

But what are the chances of that happening? Can WalMart do it? Costo? Sears? How much money would it take to set up shop and put Amazon out of business?
Title: Re: AMZN - Amazon.com Inc.
Post by: NewbieD on August 01, 2013, 12:49:04 PM
Quote
I disagree. Take Amazon's cash flow from operations and subtract out CapEx and acquisitions (both necessary for its continued growth and competitiveness) and you'll find that Amazon has "made" less than $10 billion in the last 10 years on a cumulative basis. A company that has only made $10 billion cumulatively over the last 10 years doesn't deserve to trade at $137 billion or anywhere near it. ..

I don't quite follow this. Why not count the aquisitions and CapEx (i.e. Book Value) in the valuation? Of course investments could be made at high prices relative to intrinsic value, but they shouldn't be totally worthless. Maybe I'm missing something.

I agree AMZN is hard to value because of the uncertainty in their profit making ability. But on the other hand they are trying to occupy a huge niche (basically to be #1 choice for all retail). To do this they have to be the low cost provider, which is why they are sacrificing all profits now to build a supremely efficient retail machine across more and more of the globe. Nothing wrong with that strategy IMO. Once the machine is efficient enough their gap on competitors could be big enough that they can make decent margins from a huge customer base. The thing to argue IMO is if they are doing it well and quickly enough for their stock price to be reasonable. And how hard it is to recreate their infrastructure / customer relationships.

If the rules of the stockmarket were that you had to invest in one non-holding company and hold it for at least 50 years I'd probably buy AMZN or GOOG just because they seem to be on the path to becoming low-cost providers for huge niches.
Title: Re: AMZN - Amazon.com Inc.
Post by: ajc on August 01, 2013, 12:50:09 PM
Hey all:

I am not that impressed with AMZN's business.

How many huge businesses were built selling dollar bills for $.96?  A ton of them were, until they lost the easy financing/equity.  AMZN's losses are being subsidized by an extremely generous valuation of their equity.

The other thing is a lot of the jobs they have created are of questionable quality.  There have been many expository articles about conditions in their distribution warehouses.  Extremely difficult conditions, extremely low pay.

If AMZN ever has to raise their prices, how much of their sales will they lose?

Is the street going to allow them to lose money/break even forever?

If they raise prices will someone else come in and be the next AMZN?

You might end up being right, and just for the sake of disclosure I'd have to say that I'd only think about buying AMZN if it went down to its 8 times P/B ratio like it did in 2008 (and hopefully it goes even lower) and even then I'd want a clearer view than I have now.
So at these prices I'd have to agree that it's definitely a swing-and-hope stock, to my mind anyway.

However, having worked in their warehouses before, I think the 'modern day slavery' meme that certain journalists are pushing is genuinely being overplayed and that the place is just really, really tough but if you make it onto the permanent roster then the rewards are good.
As far as I'm aware, Amazon is totally upfront about all that and to me it's just a case of the Asian work ethic making its way across the ocean like it eventually had to.

Bottom line is, you can take it or leave it but there are a billion Chinese, Indians and so on who would do it in pretty much any industry and so in my opinion this is going to become more and more common and the fact that Amazon happen to be the hardest-driving Western corporation who're doing it, is not such a big deal I think as much as it is a sign that they're leading the field in terms of human productivity.

One thing your post made me wonder about was their moat and competition. My experience has been that their warehouses are the most efficient of any business out there, because that is their thing whereas say WalMart have huge distribution centers but the store sort of always has to be the top priority because that's where they interact with the customer. In that respect then, I'm unsure that anyone could beat them at the warehouse game - maybe come pretty close, but beating them would take some doing I figure.

Anyway, my thought was whether Amazon compares more to UPS and FedEx than a WalMart or whoever else and what that means in terms of the retail business model and industry dynamics going foward?
No ideas right now as to what the answer might be, but that's a bulb that kind of went off for me while I was reading your post.
Title: Re: AMZN - Amazon.com Inc.
Post by: NewbieD on August 01, 2013, 12:59:32 PM
Quote

Let's turn to the moat. We both agree they compete on cost and convenience. They offer the best value in that regards. But yes I agree most shoppers will go elsewhere if another company can best them in this value proposition.


I think in the book business they are doing well on the convenience part. Also there is little incentive from Authors for low prices, and AMZN's cut is only 30% for a huge distribution. The customers have a very convenient way to shop books, even if it's not supercheap. Here I think their scale is most valuable.

Books/media only seems to be about 30% of their revenue though, if I read their statements right.
Title: Re: AMZN - Amazon.com Inc.
Post by: DTEJD1997 on August 01, 2013, 03:47:38 PM


However, having worked in their warehouses before, I think the 'modern day slavery' meme that certain journalists are pushing is genuinely being overplayed and that the place is just really, really tough but if you make it onto the permanent roster then the rewards are good.
As far as I'm aware, Amazon is totally upfront about all that and to me it's just a case of the Asian work ethic making its way across the ocean like it eventually had to.

Bottom line is, you can take it or leave it but there are a billion Chinese, Indians and so on who would do it in pretty much any industry and so in my opinion this is going to become more and more common and the fact that Amazon happen to be the hardest-driving Western corporation who're doing it, is not such a big deal I think as much as it is a sign that they're leading the field in terms of human productivity.

One thing your post made me wonder about was their moat and competition. My experience has been that their warehouses are the most efficient of any business out there, because that is their thing whereas say WalMart have huge distribution centers but the store sort of always has to be the top priority because that's where they interact with the customer. In that respect then, I'm unsure that anyone could beat them at the warehouse game - maybe come pretty close, but beating them would take some doing I figure.
[/quote]

Well, I think most of the authors meant to suggest that the work practices, while not being illegal, were not what we would expect in a "Western" society.  I don't think anybody has a problem with workers working hard, that is what needs to be done.  However, how hard is hard?  Some of problems that were highlighted were switching up hours, so people didn't have regular hours.  Poor physical conditions, think excess heat, inadequate ventilation, insufficient bathroom breaks, etc.  Another problem was virtually impossible pull quotas.  Quotas would also go up over time.

I'm sure some of the complaints were "sour grapes", but there were numerous articles highlighting the same problems.  That indicates to me that the problems are pervasive.

Do you want to build a business that "squeezes it's workers HARDER than the competition?"  Amazon's competitive advantage is that they pay their workers the lowest and work them the hardest?  If that is the case, I think that is a VERY shallow moat.  Who is to say that company XYZ won't decide to challenge AMZN and relocate it's warehouses to economically depressed areas (Flint MI) where there are tons of desperate workers that they take advantage of and squeeze even harder?

Is the destiny of the USA to race to the bottom to join other less developed countries?  That the situation for workers gets progressively worse as time progresses?  If that is the case, I think we are headed in the wrong direction.

In my opinion, a strong competitive advantage would be based off of strong intellectual capital (GOOG, AAPL), a good brand & advertising (KO), superior manufacturing (Mercedes) or something that is not easily replicated.  Anybody can squeeze their employees, it is much harder to build a sustainable competitive edge.

I just don't see a lot of with AMZN, especially at these valuation levels.
Title: Re: AMZN - Amazon.com Inc.
Post by: ajc on August 01, 2013, 04:52:26 PM
@DTEJD1997

I hope you're right but my hardcore inner cynic says that labor-intensive jobs will become more and more like this until, perhaps the power of unions start to rise again and there's some kind of major levelling out.
In reality though, the world has never had close to this much economic competition in its entire history which creates amazing opportunities but also presents some huge challenges and might require some really big changes and sacrifices.

It's tough when the guy just on the other side of the ocean from you is working people 80 hours a week with very few benefits and only a living wage. Is it realistic to think that every working American can enjoy the same type of work environment they've had for the last 70 years after Europe had been completely demolished by WW2 and Asia hadn't risen yet?

My reaction to that is probably not.
I'd say that decades from now you'll find a greater percentage of unskilled American workers having to work their tails off just to survive because there's all sorts of countries that still need to raise their living standards off of very low bases and can therefore undercut most developed nations.
Either that or get ready for some sort of massive welfare state I think.

With any luck, I'll be dead wrong on this but I don't think that America progressing and making huge advances and still being a global market leader as well as having more and more really tough jobs like these at the lower-end are in any way mutually exclusive.
So all I'm saying, is that this isn't something I would completely rule out in the years ahead.

I agree with you that at these levels AMZN looks like its priced almost for perfection, but on the other hand regarding the moat issue I do think that maybe in retail - which obviously doesn't have great economics generally - it might be necessary to have the CEO, the brand, the advertising, the intellectual capital and the employees who work like the folks at Foxconn in order to stay at the head of the global pack (and I think I might be able to make a reasonably strong argument that this is basically what Jeff Bezos and the management and employees over at Amazon are doing).

Whether they can be disrupted or not and how easily is a somewhat different aspect of the moat question to be sure, but purely on the business efficiency side my take is that they are probably the best at what they do.

Just my opinion on the matter (and then again, maybe the robot company they bought works out and the whole working conditions question becomes moot).

 
Title: Re: AMZN - Amazon.com Inc.
Post by: LC on August 01, 2013, 05:19:15 PM
Quote

Let's turn to the moat. We both agree they compete on cost and convenience. They offer the best value in that regards. But yes I agree most shoppers will go elsewhere if another company can best them in this value proposition.


I think in the book business they are doing well on the convenience part. Also there is little incentive from Authors for low prices, and AMZN's cut is only 30% for a huge distribution. The customers have a very convenient way to shop books, even if it's not supercheap. Here I think their scale is most valuable.

Books/media only seems to be about 30% of their revenue though, if I read their statements right.
I don't see how anyone else will be able to undercut Amazon on a national level. The only way for another retailer to compete is to attack Amazon's shipping costs. If you consider the various costs which a big box neighborhood retailer incurs vs. a warehouse distribution + FedEx delivery system, I don't see how the big boxes can compete.

Remember too, shippers must love Amazon. With all the business that Amazon sends, they are able to maximize any operating leverage they have in their business model.

It reminds me of the mental model from Intel. intel's fabs have to operate at something like 95+% capacity in order for them to turn a profit. A 5billion dollar fab has a ton of operating leverage built into that cost.

I think the same goes for shippers. You have an entire global distribution system, there is tons of operating leverage. And you want to maximize that utilization. Think of why the US post office is failing. Because they don't have the utilization in some of the absurdly small towns to justify the capital spent on distribution, staffing (which is another issue, I admit), etc.

If I am FedEx, I'll charge Amazon at cost to ship and just make my profit on everything on top of their business!
Title: Re: AMZN - Amazon.com Inc.
Post by: DTEJD1997 on August 01, 2013, 05:39:57 PM
@DTEJD1997

I hope you're right but my hardcore inner cynic says that labor-intensive jobs will become more and more like this until, perhaps the power of unions start to rise again and there's some kind of major levelling out.
In reality though, the world has never had close to this much economic competition in its entire history which creates amazing opportunities but also presents some huge challenges and might require some really big changes and sacrifices.

AJC I most sincerely hope I am right too, but I am probably not.  It is not just AMZN that is having a tremendous disruptive influence.  Industry & profession has fallen.  I am originally from Detroit, and I've seen first hand the hollowing out of American industry.  As I am now middleaged, I can now understand why my grandparents and parents were so sad of what happened in Detroit.  The blame can be laid at the feet of MANY different actors, management, owners, workers, and government.  Some of the pain & disruption can simply NOT be avoided.  However, it seems to me, that a lot of could have been minimized or postponed for long periods of time.  Some of it never needed to happen...

Of course, this is a thread regarding AMZN.  They may have a viable business (most likely).  Do they have a good business?  remains to be seen...Do they have a great business model?  I am highly skeptical.

The problem is that the company has a market cap of $140BB, a stock price of $305/share and NO P/E.  The company also has sales of $67BB. 

Think of this...Is AMZN going to double or triple their sales in the next decade?  I think that their future sales are going to get tougher & tougher to grow.  All the easy customers have likely been acquired.  Even if AMZN does double or triple their sales, what good is it if they make no money on them?

I am going to STRONGLY suggest that if they can't money selling $67BB, they might never make money.

If they raise margins and sales growth stalls significantly OR EVEN GOES DOWN, what is that going to do to their valuation levels?  Is the Street going to accord AMZN a 45 EV/EBIDTA ratio?  Maybe, but I doubt it.  In fact, you could make an argument that if AMZN growth slows down, EV/EBIDTA might go down to 12 or even 10.

I never thought AMZN would ever attain these levels, so I've been wrong many times before.

When it comes time to investing serious money, why take the risk?  I'll find & invest in companies selling for low single digit EV/EBIDTA ratios...The closer to 1, the better! :)
Title: Re: AMZN - Amazon.com Inc.
Post by: ItsAValueTrap on August 01, 2013, 05:59:13 PM
Maybe you should try shopping online more.  There are a lot of individuals selling new stuff on eBay.  Their prices are often lower than those of bricks & mortar stores.

Quote
All the easy customers have likely been acquired.
I live in Canada and see that America is way ahead of Canada in terms of online shopping.  I consistently see lower prices in the US for many items.  For example, I got hooked on JLab earbuds because I won an Amazon US gift certificate.  When I bought my second pair from amazon.ca, the price was significantly higher than amazon.com.

Amazon has a lot of market share to gain.  There's a lot of categories that they haven't dominated yet like video/photo equipment (competing against bhphotovideo.com) and computer parts (newegg.com).

Quote
Industry & profession has fallen.
There are parts of American industry that work extremely well.  Online shopping is one of them.  I would buy things from bhphotovideo.com because they are superior to Canadian online retailers... even though the brokerage fees can be costly.

The American television industry is also very good.  Canada has many TV shows where two thirds of the cost is subsidized by the government.  (That is a massive, massive margin advantage.)  Yet Canadian TV shows rarely make the top 10 in Canada.  Canadian TV networks try to air as little Canadian content as possible (every one of them).

The US has some serious economic advantages over the rest of the world.
Title: Re: AMZN - Amazon.com Inc.
Post by: bargainman on August 01, 2013, 08:27:17 PM
Take a look at the virtuous cycle diagram:

http://blog.seattlepi.com/amazon/2008/12/10/amazon-talks-strategy-international-growth/

This is what it comes down to.  Amazon is going for scale in every market it goes after.  When it achieves it, it has a big long term advantage over others since it can keep driving costs down more than anyone else can.
Title: Re: AMZN - Amazon.com Inc.
Post by: ajc on August 02, 2013, 07:37:16 AM
@DTEJD1997

I hope you're right too. What you said about seeming like a step in the wrong direction is completely on point, to my mind anyway.
I do wonder though, what disruptive influences the never-before-seen economies of scale that China (and probably India) bring in the future will have on various US multinationals and other national economies globally.

Also, I agree that Amazon has no uncrossable moat. Their warehouses and distribution might be world-beating, but to me the entire online retail industry is based only on price and speed.
So, speed-wise AMZN leads now but what if UPS or FedEx went to some big electronic manufacturers (Sony, Samsung, etc, etc) and struck a deal?
 
Could they offer deals and speed that were competitive? I'm not saying it's guaranteed, but it's not impossible either and maybe they could discount the goods enough to take a day or two extra?
To me, I don't understand that probability well enough and so I can't say that AMZN has a strong enough moat there.

Another aspect I'm not knowledgeable enough about is online books. What's stopping a bunch of publishers or authors or eBay or whoever setting up booksandmedia.com and using their rights over the intellectual property to take market share?
I don't know enough to answer that, but I don't think the possibility is zero.
When you're dealing with nothing more than sending some data to a device in exchange for a fee - which any tech-savvy company can do - then again, I'd say I'm not convinced that AMZN has a strong moat for e-books, e-periodicals, etc.

What would just 2 disruptions like that do to Amazon? Not sure, but my guess is it wouldn't be pretty and to me those don't seem to be out-of-this-world can't-ever-happen ideas.

Anyway, what I'm saying basically is that I'm in real agreement with you that Amazon at this stage could still be killed and if it drops then that money could be dead for quite some time so Lancashire, Coca Cola, Wells Fargo and a bunch of others look like far better value buys at this time at least to my inexpert and inexperienced online retailing eye.

Thanks for the perspective, it's helped me think about the company in a much more conservative and realistic way.
Title: Re: AMZN - Amazon.com Inc.
Post by: DTEJD1997 on August 02, 2013, 08:23:36 AM
ajc:

Thanks for the good discussion!

AMZN could possibly be "killed" in the future...but it doesn't have to be...it just needs to have a strong competitor come up against it.  Their business could even continue to grow sales, but they might have their valuation collapse.

I don't think under any reasonable scenario that AMZN would be out of business in 5 years.  They probably will grow their sales.

HOWEVER, what is the risk that the have a valuation compression?  I would think that is almost certain. 

As a side issue, I do sometimes shop online.  I also sell online.  In fact, that is how I have made my living for the past 15 years or so.  I've been selling online since the mid 90's.  I got started on the "usenet" groups way, way, way back when.

Whatever happens with AMZN, it will certainly be interesting!

Title: Re: AMZN - Amazon.com Inc.
Post by: ItsAValueTrap on August 02, 2013, 11:18:57 AM
Quote
So, speed-wise AMZN leads now but what if UPS or FedEx went to some big electronic manufacturers (Sony, Samsung, etc, etc) and struck a deal?

I don't think that the manufacturers would be able to get a large speed advantage.  Amazon has a network of warehouses across the country.  To duplicate that speed, you'd have to build your own network of warehouses... and very few companies are going to have the money to do that.

Large electronics manufacturers could setup their own retail sales networks... but it's a lot of effort and not a lot of gain.  Sony has its own bricks and mortar retail stores, which seem to have mediocre success.
If you want to setup your own online store for physical goods, it's a huge amount of work.  If you're a small company, it makes no sense to do it.  You'd rather use another company's fulfillment services (e.g. Amazon's).

If you're a larger company, you'd have to setup your own distribution network, IT, shipping/logistics, customer service, billing department, website, etc. etc.  Or you could just focus on your core business.

2- There are many companies with their own B&M and online stores that are happy to sell through Amazon.  Crocs, Sony and Apple are examples.
Title: Re: AMZN - Amazon.com Inc.
Post by: ajc on August 02, 2013, 02:28:57 PM

I don't think that the manufacturers would be able to get a large speed advantage.  Amazon has a network of warehouses across the country.  To duplicate that speed, you'd have to build your own network of warehouses... and very few companies are going to have the money to do that.

Large electronics manufacturers could setup their own retail sales networks... but it's a lot of effort and not a lot of gain.  Sony has its own bricks and mortar retail stores, which seem to have mediocre success.
If you want to setup your own online store for physical goods, it's a huge amount of work.  If you're a small company, it makes no sense to do it.  You'd rather use another company's fulfillment services (e.g. Amazon's).

If you're a larger company, you'd have to setup your own distribution network, IT, shipping/logistics, customer service, billing department, website, etc. etc.  Or you could just focus on your core business.

2- There are many companies with their own B&M and online stores that are happy to sell through Amazon.  Crocs, Sony and Apple are examples.

Frankly, I don't know enough about how the entire industry operates to give a confident opinion.

What I was thinking though is that because Amazon changed the process from manufacturer-warehouse-store to manufacturer-warehouse-shipping, what's to stop the manufacturer and a shipping company from getting together and cutting out Amazon.

I was figuring that the manufacturing plant churns out headphones or whatever and puts them into glossy plastic containers, right?
So, add two steps to that process - first, your machine also puts the glossy container into a small brown non-descript box which is appropriate for posting.
Second, every order that comes through on your website gets printed an address sticker once the credit card details get confirmed and they get slapped onto the brown boxes automatically as they come off the conveyor.

After that, UPS or FedEx rolls their truck up to the manufacturing plant, takes all that mail, goes directly to their sorting center and all the orders from that evening get delivered the next day or two at the latest.
That way, the manufacturer does its core business and UPS/FedEx does its - no warehouse needed, just UPS/FedEx sorting centers of which there are probably already a few and if they built more then that could be to their advantage provided they signed up enough manufacturers.

On the issue of warehouses, I can tell you that from the UK, Amazon for the first decade only had two that I'm aware of - one in London and one in Glasgow.
From either of those warehouses it was possible to get same-day shipping (once they introduced it) if you ordered before 12 noon anywhere in either country provided you stumped up for it.

Now of course, they've grown much bigger so they're building more but all I'm wondering is that if Sony, Samsung or whoever could cut Amazon and certain stores out how much less could they charge consumers and still be profitable?
And also, how much of a discount would consumers want if they were going to wait another day or two for it to ship because UPS or FedEx only had 2 or 3 warehouses instead of 7 or 8 like Amazon?

I don't know unfortunately, but that's my line of thinking anyway and so to me I just have questions about their moat in some places I guess (even if there distribution efficiency is pretty incredible).   
Title: Re: AMZN - Amazon.com Inc.
Post by: ItsAValueTrap on August 02, 2013, 03:01:27 PM
Warehouses are getting insanely complicated nowadays.  There are trade journals dedicated to operating warehouses.  Unfortunately it's a field I don't understand that well.

The current situations is that Sony, Crocs, and Apple all have their own B&M stores and online stores.  Yet they still sell their products on Amazon.  I don't know how Amazon compares to their margins.  However, one advantage of Amazon is that customers actually search for stuff on Amazon.  Suppose you want to buy headphones.  You search on Amazon and look at review for headphones from Sony, Sennheiser, etc. etc.  If Sony didn't sell through Amazon, their products won't show up on Amazon and they might potentially lose sales.  Their website is valuable and is a reason why these manufacturers simultaneously sell through Amazon. 

On top of that, I believe that you can buy Crocs and Apple products cheaper on Amazon than the companies' other stores.  Crocs actually stopped doing discounting on its own website (to the benefit of wholesalers like Amazon), and it saw its web volumes fall.

*No position in Amazon.  Looks kinda overvalued.
Title: Re: AMZN - Amazon.com Inc.
Post by: ajc on August 02, 2013, 03:33:50 PM
Warehouses are getting insanely complicated nowadays.  There are trade journals dedicated to operating warehouses.  Unfortunately it's a field I don't understand that well.

The current situations is that Sony, Crocs, and Apple all have their own B&M stores and online stores.  Yet they still sell their products on Amazon.  I don't know how Amazon compares to their margins.  However, one advantage of Amazon is that customers actually search for stuff on Amazon.  Suppose you want to buy headphones.  You search on Amazon and look at review for headphones from Sony, Sennheiser, etc. etc.  If Sony didn't sell through Amazon, their products won't show up on Amazon and they might potentially lose sales.  Their website is valuable and is a reason why these manufacturers simultaneously sell through Amazon. 

On top of that, I believe that you can buy Crocs and Apple products cheaper on Amazon than the companies' other stores.  Crocs actually stopped doing discounting on its own website (to the benefit of wholesalers like Amazon), and it saw its web volumes fall.

*No position in Amazon.  Looks kinda overvalued.

All fair points and I think you're probably right about their brand position too.

Also agree that it's perhaps quite overvalued here, and as well as that I do wonder about the fact that they're not far more vertically integrated - say like Coca Cola.
Occupying that space between manufacturer and shipper for me doesn't look like it's entirely conducive to moat building, though I wouldn't mind at all if Amazon ended up proving otherwise.
Title: Re: AMZN - Amazon.com Inc.
Post by: siddharth18 on August 02, 2013, 09:41:50 PM
Warehouses are getting insanely complicated nowadays.  There are trade journals dedicated to operating warehouses.  Unfortunately it's a field I don't understand that well.

Regarding warehouses - have you looked at Kiva Systems Inc? Amazon acquired them a while back and they are currently the leading warehouse solution provider.

The bigger point here I think is that - if Amazon can't beat someone (think Soap.com/Diapers.com Kiva Systems), it will acquire them. Another reason why I think they are at the top of their game.
Title: Re: AMZN - Amazon.com Inc.
Post by: ItsAValueTrap on August 02, 2013, 11:10:58 PM
It's complicated right?

Apparently these robots can't handle every task (which is mentioned in the article that bashes Amazon in the UK).  So Amazon needs to develop (presumably custom) computer programs to handle a hybrid of the robots and human pickers.

There are other weird things about warehousing.  It's good to have a big warehouse where you have lots and lots of items in your catalogue under one roof.  This way you can handle an order in one shipment (amazon will sometimes break orders up into more than one shipment for various reasons).  But eventually the warehouse gets so big that it takes a long time to go from one end of it to the other.  So then you need to take steps to keep the traveling distances manageable.

The article posted earlier suggests a huge amount of sophistication on Amazon's part.  They are grinding out all these little tiny efficiencies that add up.

2- I really do think that Bezos knows what he is doing.  When it comes to online retailing, scale is an advantage.  Your software development and IT costs are close to fixed.  (*Making software scale for a larger number of users does take a little extra work.  But as your number of users go up, your software development cost per user goes down a lot.)  You get volume discounts for handling lots of sales.  Your brilliance doesn't get watered down with size (unlike investing); size isn't an anchor.  You can get bigger in a cookie cutter fashion- hire more "worker drones", buy more computers, warehousing space, etc.

Another advantage is shipping multiple items in one shipment.  I can buy a kettle and a book at the same time.  This is more efficient that buying a book from one online retailer and a kettle from another online retailer.  The shipping cost of one package is roughly half the cost of two packages (*technically slightly more than half).  Amazon has an "unfair" cost advantage.

I see amazon.com crushing other online retailers for these reasons.
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on August 03, 2013, 09:45:55 AM
It's complicated right?

Apparently these robots can't handle every task (which is mentioned in the article that bashes Amazon in the UK).  So Amazon needs to develop (presumably custom) computer programs to handle a hybrid of the robots and human pickers.

There are other weird things about warehousing.  It's good to have a big warehouse where you have lots and lots of items in your catalogue under one roof.  This way you can handle an order in one shipment (amazon will sometimes break orders up into more than one shipment for various reasons).  But eventually the warehouse gets so big that it takes a long time to go from one end of it to the other.  So then you need to take steps to keep the traveling distances manageable.

The article posted earlier suggests a huge amount of sophistication on Amazon's part.  They are grinding out all these little tiny efficiencies that add up.

2- I really do think that Bezos knows what he is doing.  When it comes to online retailing, scale is an advantage.  Your software development and IT costs are close to fixed.  (*Making software scale for a larger number of users does take a little extra work.  But as your number of users go up, your software development cost per user goes down a lot.)  You get volume discounts for handling lots of sales.  Your brilliance doesn't get watered down with size (unlike investing); size isn't an anchor.  You can get bigger in a cookie cutter fashion- hire more "worker drones", buy more computers, warehousing space, etc.

Another advantage is shipping multiple items in one shipment.  I can buy a kettle and a book at the same time.  This is more efficient that buying a book from one online retailer and a kettle from another online retailer.  The shipping cost of one package is roughly half the cost of two packages (*technically slightly more than half).  Amazon has an "unfair" cost advantage.

I see amazon.com crushing other online retailers for these reasons.

- Their digital good revenue including books, music, movies (30% of total, IIRC) are vulnerable to the likes of Google, Apple and Netflix.
- Their device revenues which include the Kindle devices are vulnerable to Google and Apple.
- They are probably going to be introducing a smartphone and a set top box which means those revenue streams will be added risk too
- Their cloud business is in the midst of a price war and is vulnerable to Google, Microsoft and others.
- Part of their retail business is vulnerable newer business models that are gain traction including Fab.com, One Kings Lane, Gilt Group, Ideeli and others.

The part that is protected by their scale moat is what is left.
Title: Re: AMZN - Amazon.com Inc.
Post by: Liberty on August 04, 2013, 11:56:26 AM
http://www.nytimes.com/2013/08/05/business/workers-of-amazon-divergent.html

European labor issues.
Title: Re: AMZN - Amazon.com Inc.
Post by: ajc on August 07, 2013, 09:08:51 AM
In defense of Amazon and Jeff Bezos

FORTUNE -- The news Monday that the Washington Post has been purchased by Jeff Bezos, the founder and CEO of Amazon (AMZN), has launched hundreds of stories and tweets -- including Andy Borowitz's Amazon Founder Says He Clicked on Washington Post by Mistake.

Nothing gets the chattering classes chattering like the sale of a storied newspaper -- especially when it follows so closely the sale of two other name brand journalistic outlets, Newsweek and the Boston Globe.

But of those hundreds of stories, the piece that is most relevant to Apple investors is the one by Michael Moritz, the former Time correspondent who wrote The Littlest Kingdom, the first inside story of Steve Jobs' Apple, and went on to become one of Silicon Valley's most successful venture capitalists (Google, Yahoo!, PayPal, YouTube, etc.).

As readers of this column know, Amazon is one of the companies most often compared by investors with Apple and found wanting.

Moritz uses Bezos' WashPo purchase as an opportunity to set those Apple investors straight...


http://tech.fortune.cnn.com/2013/08/06/apple-amazon-bezos-moritz/ (http://tech.fortune.cnn.com/2013/08/06/apple-amazon-bezos-moritz/) (the Fortune article)



and the aforementioned 1,700 word Michael Moritz (Sequoia Capital, Chairman) piece,

Stop The Presses: A New Media Baron Appears

http://www.linkedin.com/today/post/article/20130805231302-25760-stop-the-presses-a-new-press-lord-appears (http://www.linkedin.com/today/post/article/20130805231302-25760-stop-the-presses-a-new-press-lord-appears)
Title: Re: AMZN - Amazon.com Inc.
Post by: Grenville on August 07, 2013, 10:17:51 AM
In defense of Amazon and Jeff Bezos

FORTUNE -- The news Monday that the Washington Post has been purchased by Jeff Bezos, the founder and CEO of Amazon (AMZN), has launched hundreds of stories and tweets -- including Andy Borowitz's Amazon Founder Says He Clicked on Washington Post by Mistake.

Nothing gets the chattering classes chattering like the sale of a storied newspaper -- especially when it follows so closely the sale of two other name brand journalistic outlets, Newsweek and the Boston Globe.

But of those hundreds of stories, the piece that is most relevant to Apple investors is the one by Michael Moritz, the former Time correspondent who wrote The Littlest Kingdom, the first inside story of Steve Jobs' Apple, and went on to become one of Silicon Valley's most successful venture capitalists (Google, Yahoo!, PayPal, YouTube, etc.).

As readers of this column know, Amazon is one of the companies most often compared by investors with Apple and found wanting.

Moritz uses Bezos' WashPo purchase as an opportunity to set those Apple investors straight...


http://tech.fortune.cnn.com/2013/08/06/apple-amazon-bezos-moritz/ (http://tech.fortune.cnn.com/2013/08/06/apple-amazon-bezos-moritz/) (the Fortune article)



and the aforementioned 1,700 word Michael Moritz (Sequoia Capital, Chairman) piece,

Stop The Presses: A New Media Baron Appears

http://www.linkedin.com/today/post/article/20130805231302-25760-stop-the-presses-a-new-press-lord-appears (http://www.linkedin.com/today/post/article/20130805231302-25760-stop-the-presses-a-new-press-lord-appears)

Thanks for posting both.
Title: Re: AMZN - Amazon.com Inc.
Post by: Liberty on August 08, 2013, 05:16:59 PM
http://ben-evans.com/benedictevans/2013/8/8/amazons-profits
Title: Re: AMZN - Amazon.com Inc.
Post by: ajc on August 10, 2013, 11:11:22 AM
http://www.fastcompany.com/3014817/amazon-jeff-bezos (http://www.fastcompany.com/3014817/amazon-jeff-bezos)

A rose-tinted, but at the same time pretty interesting piece about Amazon Fresh and the potential future prospects for the company (and retail industry) as a whole.
 
The writer interviewed Jeff Bezos for it, so a fair amount of his perspective is represented here and some of it is frankly quite awesome.

Based on this, I'm starting to wonder if UPS/FedEx might perhaps be a smart way to bet on the disruptive changes taking place in retailing.
Title: Re: AMZN - Amazon.com Inc.
Post by: ItsAValueTrap on August 10, 2013, 12:10:53 PM
The trend towards more online shopping has been going on for several years, yet it doesn't seem to have helped UPS or Fedex become crazy profitable.  Look at the performance of UPS, Fedex, and Amazon over the past several years.

I think the wealth will mostly go to Amazon and Google (companies that sell goods and services online often advertise on google; some of these things can't be sold through amazon).  Ebay may do ok.  I think a lot of online retailers will be hurt badly by amazon... if they don't have a niche, amazon will steamroll them.
Title: Re: AMZN - Amazon.com Inc.
Post by: ajc on August 17, 2013, 03:22:25 PM
More about AmazonFresh, this time from NYC.


Amazon’s Secret Plan to Sell You Everything!

"Something strange is happening in the township of Woodbridge, New Jersey, just 20 miles outside of Manhattan. It started when a real estate development partner of Amazon.com purchased a nearly one-million square foot warehouse. The previous tenant was a grocery wholesaler and so the building is equipped with refrigeration. Now Amazon (AMZN) has quietly posted job listings for facility and operation managers in the area.

Last week a research analyst put the pieces together and came to the conclusion that Amazon.com is going to expand AmazonFresh into New York City. That means Amazon.com will be taking orders and providing same-day delivery to the nation's largest market. That may not mean much yet, but it suggests that the way eight million people buy groceries is about to change forever..."


http://finance.yahoo.com/blogs/breakout/amazon-secret-plan-sell-everything-113211742.html (http://finance.yahoo.com/blogs/breakout/amazon-secret-plan-sell-everything-113211742.html)
Title: Re: AMZN - Amazon.com Inc.
Post by: hellsten on August 17, 2013, 04:49:13 PM
More about AmazonFresh, this time from NYC.


Amazon’s Secret Plan to Sell You Everything!

"Something strange is happening in the township of Woodbridge, New Jersey, just 20 miles outside of Manhattan. It started when a real estate development partner of Amazon.com purchased a nearly one-million square foot warehouse. The previous tenant was a grocery wholesaler and so the building is equipped with refrigeration. Now Amazon (AMZN) has quietly posted job listings for facility and operation managers in the area.

Last week a research analyst put the pieces together and came to the conclusion that Amazon.com is going to expand AmazonFresh into New York City. That means Amazon.com will be taking orders and providing same-day delivery to the nation's largest market. That may not mean much yet, but it suggests that the way eight million people buy groceries is about to change forever..."


http://finance.yahoo.com/blogs/breakout/amazon-secret-plan-sell-everything-113211742.html (http://finance.yahoo.com/blogs/breakout/amazon-secret-plan-sell-everything-113211742.html)

Thanks. According to the author, Amazon seems to be doing everything right:
Quote
If Amazon can pull off same-day grocery delivery in NYC, it ostensibly means consumers can order anything online and receive it the same day. By logical extension, that means Jeff Bezos, the CEO of Amazon, is on the cusp of rendering every retailer on earth obsolete.

It marks the beginning of the end of shopping as the whole world knows it; malls will collapse, chains will disappear. "Running errands" will no longer mean jumping from the grocery store to the pharmacy and then to the mall.

Bezos has been called the best CEO by Warren, so I don't doubt that Amazon is doing things right:
http://indiatoday.intoday.in/story/amazons-bezos-best-ceo-in-us-says-warren-buffett/1/298248.html

Amazon and Bezos are very different from Sears and Lampert, but they both seem to have a "secret plan". Maybe Bezos can use the inflated share price to buy Lampert's Kmarts and turn them into warehouses…
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on August 17, 2013, 07:15:48 PM
There are perils to building castles in the air:

http://www.roughtype.com/?p=2296
Title: Re: AMZN - Amazon.com Inc.
Post by: ajc on August 20, 2013, 01:45:22 AM
Amazon Ramps Up $13.9 Billion Warehouse Building Spree

"Amazon.com Inc. (AMZN) is stepping up a warehouse building spree, signaling the urgency of getting products to customers more quickly amid rising competition from EBay Inc. (EBAY) and Wal-Mart (WMT) Stores Inc.

Consider Amazon’s center in Chattanooga, Tennessee, which opened in 2011 after about 10 months, compared with as much as two years for older warehouses. Boasting more space and technology that makes it easier to find items, the building is part of Amazon’s almost $13.9 billion spending binge on 50 new facilities since 2010. That’s more than the company spent on warehouses in its lifetime and brought the total to 89 at the end of 2012. Amazon has announced five more in the U.S. this year..."


http://www.bloomberg.com/news/2013-08-20/amazon-ramps-up-13-9-billion-warehouse-building-spree.html (http://www.bloomberg.com/news/2013-08-20/amazon-ramps-up-13-9-billion-warehouse-building-spree.html)
Title: Re: AMZN - Amazon.com Inc.
Post by: hellsten on August 20, 2013, 02:28:55 AM
$13.9 billion ($278 million on average per warehouse) and they only have 15% coverage of the U.S.

I wonder how much of $278 million is technology? I guess Wal-Mart and Sears don't have to spend $278 million per warehouse to compete, but they definitely have to upgrade the technology.

Quote
Buying a retailer without good management is like buying the Eiffel Tower without an elevator.

Retailing is a tough business.  During my investment career,
I have watched a large number of retailers enjoy terrific growth
and superb returns on equity for a period, and then suddenly
nosedive, often all the way into bankruptcy.  This shooting-star
phenomenon is far more common in retailing than it is in
manufacturing or service businesses.  In part, this is because a
retailer must stay smart, day after day.  Your competitor is
always copying and then topping whatever you do
Shoppers are
meanwhile beckoned in every conceivable way to try a stream of
new merchants
.  In retailing, to coast is to fail.

For example, if you were smart enough to buy a network TV station
very early in the game, you could put in a shiftless and backward
nephew to run things, and the business would still do well for
decades.  You'd do far better, of course, if you put in Tom
Murphy, but you could stay comfortably in the black without him.
For a retailer, hiring that nephew would be an express ticket to
bankruptcy.

     The two retailing businesses we purchased this year are
blessed with terrific managers who love to compete and have done
so successfully for decades.

http://www.berkshirehathaway.com/letters/1995.html
Title: Re: AMZN - Amazon.com Inc.
Post by: ItsAValueTrap on August 20, 2013, 07:54:40 AM
Online retailing may have different drivers than bricks and mortar retailing.  I do agree with Buffett that management is extremely important when it comes to bricks and mortar retailing.

Quote
Your competitor is always copying and then topping whatever you do.
With online, I think that scale is an advantage for Amazon and will eventually turn into a moat. 

Amazon's scale is something that can't be copied.  When the consumer can buy multiple items (items in different categories so not just books) and pay less for shipping, it's a huge advantage for Amazon.  Online retailing is mostly about price... and Amazon will likely have cost advantages that can't be duplicated.  This is an unusual advantage that no bricks and mortar retailer enjoys.  (You could make the argument that Walmart has an advantage due to its scale, but its Sam's Club loses to Costco and Walmart is getting beat by smaller retailers like Tractor Supply.  Amazon's moat is far stronger.)
Title: Re: AMZN - Amazon.com Inc.
Post by: fareastwarriors on August 20, 2013, 01:31:08 PM
http://www.bloomberg.com/news/2013-08-20/amazon-ramps-up-13-9-billion-warehouse-building-spree.html (http://www.bloomberg.com/news/2013-08-20/amazon-ramps-up-13-9-billion-warehouse-building-spree.html)


Amazon Ramps Up $13.9 Billion Warehouse Building Spree
Title: Re: AMZN - Amazon.com Inc.
Post by: JHelg on August 20, 2013, 04:23:02 PM
I don't think Amazon's moat is as impenetrable as many think.

I think there are a lot of retailers that will be willing (or forced) to take a hit on gross margin to stay relevant. See e.g. this article today from the Wall Street Journal http://blogs.wsj.com/corporate-intelligence/2013/08/19/a-problem-for-jeff-bezos-the-mall-is-becoming-cheaper-than-amazon/?mod=WSJ_hppMIDDLENexttoWhatsNewsSecond (http://blogs.wsj.com/corporate-intelligence/2013/08/19/a-problem-for-jeff-bezos-the-mall-is-becoming-cheaper-than-amazon/?mod=WSJ_hppMIDDLENexttoWhatsNewsSecond).
Title: Re: AMZN - Amazon.com Inc.
Post by: ajc on August 20, 2013, 04:25:45 PM
@hellsten

"I wonder how much of $278 million is technology? I guess Wal-Mart and Sears don't have to spend $278 million per warehouse to compete, but they definitely have to upgrade the technology."

Good point, on this and the management (which with retail, tech and a few others is more key than usual I think).
I'm spit-balling this, but from the warehouse and distribution chapters in Sam Walton's autobiography (which is admittedly dated) and from my own experience, having worked in one of Amazon's UK warehouses, I'd say there are big differences between most of the warehouses that WalMart and Sears own and Amazon's.

For example, as far as I'm aware your typical warehouse for distribution to stores is done on a pallet-by-pallet basis.
So the manufacturer, will drop a truckload full of pallets of the same product at one end of the warehouse into the recieving dock.
This gets scanned, logged, etc. A forklift then takes it to the 4 or 5 level high storage bay where they park it in a barcoded section and then go back for another load.

At the same time, stores are sending in their requirements and so another bunch of forklift drivers from the dispatch section will be sent by computer to individual pallets of x product from that same storage bay and deliver those to your distribution trucks that are sat waiting at the other end of the warehouse.
Essentially then, trucks full of the same pallets arrive on one end and trucks leave on the other end all with a variety of pallets for the stores they're going to.
That right there is a very basic inventory/distrbution system which even though it was revolutionary when computers were added to stores, warehouses and suppliers 30 years ago is very different to what Amazon are doing.

This is where I'm speculating but my guess is that the vast majority of WalMart's warehouses are still of this variety because that's by far the primary way they sell their products.

Amazon on the other hand is far more complex.
To answer your question about how much of that is technology, I'd guess between 80 and 90 percent (so $220m to $250m or so). If you ever go inside one, you'll know why.
The place is basically an empty aircraft hangar the size of 3 or 4 football fields. The first quarter is the loading and receiving section.
The trucks full of pallets come in (I'd say about half are all the same product and half are mixed products) and the forklift drivers drop them next to a line of receivers all with their own computer, scanner and totes.
All those folks then need to process about 200 items per hour which involves deboxing all the products, scanning the barcode so it's logged and placing about 10 or 20 into each tote.

Once, that's done you scan the tote which has its own unique barcode and then push it onto the conveyor. So then, the system knows that tote XYZ500001 has precisely 16 items in it and what those items are.
Now, the conveyor takes the totes along and up to your 5 level storage facility which is full of packers.
The packers all have trolleys which have space for 2 totes and they take them off the conveyor, scan their first tote, then the first product and their handheld tells them to go to row14A shelf Q4. They do that, scan the shelf, scan the product, place it there, press enter and then repeat the procedure.

This storage part takes up 2 football fields worth. In this same storage space you have pickers going round also with trolleys, scanners and empty totes. Every time you or I click 'place order' online that gets routed to the closest warehouse and goes in line and will appear shortly on the scanner of a picker who will then take their trolley to whichever shelf the system directs them to, scan the shelf and product and put it into their already scanned tote.
Once their 2 totes are full, they go to the conveyors on the opposite side of the storage space and put it on (packers and pickers have to hit about 120 or 150 per hour by the way, if I remember right - more ground to cover).

Anyway, that conveyor goes down to packing which takes up 75% of the final football field.
Here, the totes back up on the conveyor belt and the packers walk to the end of their line and have to drag a few each to their station so there's not too much of a jam and then they have a bunch of different size packaging boxes for books, dvds, etc.
On their screens an order appears with say 3 items (which the system will have ensured are all in the same tote that's come down from the storage levels) and then they'll decide which box fits best and pack them up, the machine next to them prints a barcoded sticker and they slap that on, then in front of them there's another conveyor and they put the box onto it and it rolls away.

That conveyor then takes the boxes overhead and across to the final 25% of the last football field and as the boxes travel on the conveyor they get their barcodes scanned by sensors along the way so the system knows where to post them. The conveyor at this point links up with a new conveyor which has flat panels that can tilt to one side.
All the parcels, etc go individually onto one of these panels on the new conveyor belt which travels overhead this small distribution section in a sort of scrunched-up circular pattern (not sure if you ever played a PC-game called snake where you sometimes had to double back again and again not to be killed but it's something like that).

So then, there are about 100 wheeled-cages for different towns, suburbs, etc and whenever a box gets to the correct spot on the matrix then the panel flips and the box slides down the steel chute and lands in the cage.
When the cage fills, it's replaced by someone and they take that cage off to the truck in dock H and when that truck is full of parcels for its area it goes off and gets replaced by an empty one.

Anyway, you get the idea!  :D
Automation is key in an Amazon warehouse during every step whereas my understanding of regular warehouses like the ones they had across the road from the Amazon one for Bath and Home or whatever are that they still used the old pallet-in pallet-out system and if I'm not mistaken (though I'm open to correction) that is essentially the standard worldwide.
You can see however that Amazon is a completely different animal and frankly, without the technology it'd not be anywhere near as widely used.

Don't get me wrong, the people there work a real shift everyday/night but without the inventory system, computers, conveyors and scanners which dominate the place it's my opinion that the process would require way, way more people or alternatively would be nowhere near as quick (same day or next day delivery would be out of the question on a wide-scale without that specific technology and machinery I think it's safe to say).

Finally, the reason I attach such a high probability to the major cost of the technology is that besides that the warehouse is pretty much empty except for 10 or so basic offices and conference rooms, 4 bathrooms and 2 breakrooms with a small food counter in each.
That's it, lights - yes but no aircon, just concrete floors, loads of metal, etc.
Very much like a warehouse, surprisingly enough!  ;D

Okay, long answer I know but hopefully it's been somewhat useful.
 
Short answer is yes, you're totally right there would be upgrade costs and they'd probably be substantial since there's the actual technology and machinery costs which Amazon pays and then there's the intellectual property aspect which they'd all have to earn the hard way.
(I could've just said that in the beginning, but this has been way more fun!)
Title: Re: AMZN - Amazon.com Inc.
Post by: Liberty on August 20, 2013, 04:35:49 PM
Thanks for the inside perspetive, ajc. Very interesting!
Title: Re: AMZN - Amazon.com Inc.
Post by: txlaw on August 20, 2013, 04:36:48 PM
ajc, great post. 

AMZN continues to push the limits on automating these warehouses and distribution centers, which I think means that they are probably building the lowest cost facilities out there.  Just one of the reasons why I think AMZN has a big moat.

Check out AMZN's wholly owned subsidiary, Kiva Systems:
http://www.kivasystems.com/
Title: Re: AMZN - Amazon.com Inc.
Post by: txlaw on August 20, 2013, 04:45:55 PM
ajc, great post. 

AMZN continues to push the limits on automating these warehouses and distribution centers, which I think means that they are probably building the lowest cost facilities out there.  Just one of the reasons why I think AMZN has a big moat.

Check out AMZN's wholly owned subsidiary, Kiva Systems:
http://www.kivasystems.com/

I should add lowest cost, for now, though.  AMZN moat is big, but wait till the big guys make their assault.

One wonders how much it will take for the likes of WMT, TGT, and others to start converting their own distribution centers to be more automated.  They can certainly use their prodigious cash flows to do so.  And then they could have an advantage because they will also have local points of distribution that AMZN can't replicate . . . unless AMZN partners with someone locally.

I believe GOOG is piloting some partnerships with the older school retailers to provide a competing solution.  That's something to watch.
Title: Re: AMZN - Amazon.com Inc.
Post by: Grenville on August 20, 2013, 05:17:37 PM
Interesting tidbit in this article about Kiva after the Amazon acquisition.

Quote
Shortly after the completion of Dansko’s system, Amazon.com acquired Kiva. “We lucked out in our timing,” says Curry explaining that Amazon would not permit Kiva to take on any new jobs until their own warehouses were equipped with Kiva systems.

"Robots in southern Chester County? Yes."
http://www.unionvilletimes.com/?p=17535 (http://www.unionvilletimes.com/?p=17535)


From what I understand, most of Amazon's warehouses don't use the Kiva robots, but follow AJC's post. On the other hand Quidsi companies like Diapers.com are all on the Kiva system. They may be the ones the article above refers to.
Title: Re: AMZN - Amazon.com Inc.
Post by: ItsAValueTrap on August 20, 2013, 05:17:54 PM
I think Walmart has been working on improving their warehouses for years.  They failed several years ago with using RFID instead of barcodes.

http://www.smartplanet.com/blog/pure-genius/did-wal-mart-love-rfid-to-death/7459

Every company is improving their technology and their business processes.  Retail (both online and B&M) seems like a treadmill.  You have to run just to stay in the same place.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on August 20, 2013, 05:25:08 PM
@hellsten

"I wonder how much of $278 million is technology? I guess Wal-Mart and Sears don't have to spend $278 million per warehouse to compete, but they definitely have to upgrade the technology."

Good point, on this and the management (which with retail, tech and a few others is more key than usual I think).
I'm spit-balling this, but from the warehouse and distribution chapters in Sam Walton's autobiography (which is admittedly dated) and from my own experience, having worked in one of Amazon's UK warehouses, I'd say there are big differences between most of the warehouses that WalMart and Sears own and Amazon's.

For example, as far as I'm aware your typical warehouse for distribution to stores is done on a pallet-by-pallet basis.
So the manufacturer, will drop a truckload full of pallets of the same product at one end of the warehouse into the recieving dock.
This gets scanned, logged, etc. A forklift then takes it to the 4 or 5 level high storage bay where they park it in a barcoded section and then go back for another load.

At the same time, stores are sending in their requirements and so another bunch of forklift drivers from the dispatch section will be sent by computer to individual pallets of x product from that same storage bay and deliver those to your distribution trucks that are sat waiting at the other end of the warehouse.
Essentially then, trucks full of the same pallets arrive on one end and trucks leave on the other end all with a variety of pallets for the stores they're going to.
That right there is a very basic inventory/distrbution system which even though it was revolutionary when computers were added to stores, warehouses and suppliers 30 years ago is very different to what Amazon are doing.

This is where I'm speculating but my guess is that the vast majority of WalMart's warehouses are still of this variety because that's by far the primary way they sell their products.

Amazon on the other hand is far more complex.
To answer your question about how much of that is technology, I'd guess between 80 and 90 percent (so $220m to $250m or so). If you ever go inside one, you'll know why.
The place is basically an empty aircraft hangar the size of 3 or 4 football fields. The first quarter is the loading and receiving section.
The trucks full of pallets come in (I'd say about half are all the same product and half are mixed products) and the forklift drivers drop them next to a line of receivers all with their own computer, scanner and totes.
All those folks then need to process about 200 items per hour which involves deboxing all the products, scanning the barcode so it's logged and placing about 10 or 20 into each tote.

Once, that's done you scan the tote which has its own unique barcode and then push it onto the conveyor. So then, the system knows that tote XYZ500001 has precisely 16 items in it and what those items are.
Now, the conveyor takes the totes along and up to your 5 level storage facility which is full of packers.
The packers all have trolleys which have space for 2 totes and they take them off the conveyor, scan their first tote, then the first product and their handheld tells them to go to row14A shelf Q4. They do that, scan the shelf, scan the product, place it there, press enter and then repeat the procedure.

This storage part takes up 2 football fields worth. In this same storage space you have pickers going round also with trolleys, scanners and empty totes. Every time you or I click 'place order' online that gets routed to the closest warehouse and goes in line and will appear shortly on the scanner of a picker who will then take their trolley to whichever shelf the system directs them to, scan the shelf and product and put it into their already scanned tote.
Once their 2 totes are full, they go to the conveyors on the opposite side of the storage space and put it on (packers and pickers have to hit about 120 or 150 per hour by the way, if I remember right - more ground to cover).

Anyway, that conveyor goes down to packing which takes up 75% of the final football field.
Here, the totes back up on the conveyor belt and the packers walk to the end of their line and have to drag a few each to their station so there's not too much of a jam and then they have a bunch of different size packaging boxes for books, dvds, etc.
On their screens an order appears with say 3 items (which the system will have ensured are all in the same tote that's come down from the storage levels) and then they'll decide which box fits best and pack them up, the machine next to them prints a barcoded sticker and they slap that on, then in front of them there's another conveyor and they put the box onto it and it rolls away.

That conveyor then takes the boxes overhead and across to the final 25% of the last football field and as the boxes travel on the conveyor they get their barcodes scanned by sensors along the way so the system knows where to post them. The conveyor at this point links up with a new conveyor which has flat panels that can tilt to one side.
All the parcels, etc go individually onto one of these panels on the new conveyor belt which travels overhead this small distribution section in a sort of scrunched-up circular pattern (not sure if you ever played a PC-game called snake where you sometimes had to double back again and again not to be killed but it's something like that).

So then, there are about 100 wheeled-cages for different towns, suburbs, etc and whenever a box gets to the correct spot on the matrix then the panel flips and the box slides down the steel chute and lands in the cage.
When the cage fills, it's replaced by someone and they take that cage off to the truck in dock H and when that truck is full of parcels for its area it goes off and gets replaced by an empty one.

Anyway, you get the idea!  :D
Automation is key in an Amazon warehouse during every step whereas my understanding of regular warehouses like the ones they had across the road from the Amazon one for Bath and Home or whatever are that they still used the old pallet-in pallet-out system and if I'm not mistaken (though I'm open to correction) that is essentially the standard worldwide.
You can see however that Amazon is a completely different animal and frankly, without the technology it'd not be anywhere near as widely used.

Don't get me wrong, the people there work a real shift everyday/night but without the inventory system, computers, conveyors and scanners which dominate the place it's my opinion that the process would require way, way more people or alternatively would be nowhere near as quick (same day or next day delivery would be out of the question on a wide-scale without that specific technology and machinery I think it's safe to say).

Finally, the reason I attach such a high probability to the major cost of the technology is that besides that the warehouse is pretty much empty except for 10 or so basic offices and conference rooms, 4 bathrooms and 2 breakrooms with a small food counter in each.
That's it, lights - yes but no aircon, just concrete floors, loads of metal, etc.
Very much like a warehouse, surprisingly enough!  ;D

Okay, long answer I know but hopefully it's been somewhat useful.
 
Short answer is yes, you're totally right there would be upgrade costs and they'd probably be substantial since there's the actual technology and machinery costs which Amazon pays and then there's the intellectual property aspect which they'd all have to earn the hard way.
(I could've just said that in the beginning, but this has been way more fun!)

Thanks so much for this post AJC! 

And by the way: Is anyone long AMZN?
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on August 20, 2013, 05:44:18 PM
I don't think Amazon's moat is as impenetrable as many think.

I think there are a lot of retailers that will be willing (or forced) to take a hit on gross margin to stay relevant. See e.g. this article today from the Wall Street Journal http://blogs.wsj.com/corporate-intelligence/2013/08/19/a-problem-for-jeff-bezos-the-mall-is-becoming-cheaper-than-amazon/?mod=WSJ_hppMIDDLENexttoWhatsNewsSecond (http://blogs.wsj.com/corporate-intelligence/2013/08/19/a-problem-for-jeff-bezos-the-mall-is-becoming-cheaper-than-amazon/?mod=WSJ_hppMIDDLENexttoWhatsNewsSecond).

Interesting, they're turning the screws on Amazon just as it levers up.
Title: Re: AMZN - Amazon.com Inc.
Post by: link01 on August 20, 2013, 06:12:29 PM
I don't think Amazon's moat is as impenetrable as many think.

I think there are a lot of retailers that will be willing (or forced) to take a hit on gross margin to stay relevant. See e.g. this article today from the Wall Street Journal http://blogs.wsj.com/corporate-intelligence/2013/08/19/a-problem-for-jeff-bezos-the-mall-is-becoming-cheaper-than-amazon/?mod=WSJ_hppMIDDLENexttoWhatsNewsSecond (http://blogs.wsj.com/corporate-intelligence/2013/08/19/a-problem-for-jeff-bezos-the-mall-is-becoming-cheaper-than-amazon/?mod=WSJ_hppMIDDLENexttoWhatsNewsSecond).

a follow up article provides more balance:

<<Market Track, a retail pricing intelligence firm, keeps tabs on pricing across the industry, and its data suggests that Amazon is still broadly cheaper than its competitors. A couple of examples the company dug up for us today: Over the last 30 days, in a sample of the top-selling items in Amazon’s Bakeware / Cookware section, the site was beaten on price on only 9% of the items.

Put another way, 91% of the time you wouldn’t find it cheaper anywhere else. In the treadmills and elliptical trainers section of the site, its top sellers were beaten on price 11% of the time.>>

http://blogs.wsj.com/corporate-intelligence/2013/08/20/live-from-the-front-lines-of-the-amazon-price-war/?mod=yahoo_hs
Title: Re: AMZN - Amazon.com Inc.
Post by: Grenville on August 20, 2013, 07:10:50 PM

And by the way: Is anyone long AMZN?

I'm long, but it's a very small position.
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on August 20, 2013, 11:14:44 PM
The herd moves:

http://venturebeat.com/2013/08/08/trust-him-hes-rich/
http://www.asymco.com/2013/08/07/the-anti-apple/
Title: Re: AMZN - Amazon.com Inc.
Post by: txlaw on August 21, 2013, 08:26:50 AM
And by the way: Is anyone long AMZN?

I'm not -- too expensive.  However, I think Bezos might be the best CEO we have in the US, so I like watching what the guy does. 

One thing that I believe critics have completely wrong about AMZN is their contention that it makes no profits.  AMZN almost certainly makes profits.  It's just that all those dollars are being reinvested as growth expenditures, which is obscuring AMZN's profitability in the P&L and CF statements.

Most of AMZN's capex is growth capex, and the SG&A and R&D lines are increasing at rapid rates because Bezos is investing for growth.  Depending on the return that Bezos is getting on those expenditures, it makes sense for him to do this.  If he is getting 30% long term returns on invested capital, then it makes sense for him to invest every dollar that comes in, so long as the financial profile of the business isn't harmed.
Title: Re: AMZN - Amazon.com Inc.
Post by: link01 on August 21, 2013, 09:19:16 AM
And by the way: Is anyone long AMZN?

I'm not -- too expensive.  However, I think Bezos might be the best CEO we have in the US, so I like watching what the guy does. 

One thing that I believe critics have completely wrong about AMZN is their contention that it makes no profits.  AMZN almost certainly makes profits.  It's just that all those dollars are being reinvested as growth expenditures, which is obscuring AMZN's profitability in the P&L and CF statements.

Most of AMZN's capex is growth capex, and the SG&A and R&D lines are increasing at rapid rates because Bezos is investing for growth.  Depending on the return that Bezos is getting on those expenditures, it makes sense for him to do this.  If he is getting 30% long term returns on invested capital, then it makes sense for him to invest every dollar that comes in, so long as the financial profile of the business isn't harmed.

I saw a youtube interview with Bezos where he said amazon avg new growth venture initiatives take between 5 to 7 years to scale & bear fruit. during that time they generally make losses. when I think about that it boggles the mind. a minimum of 5 years worth of loss making new growth initiatives is a whole lot of baggage heaped onto the mature businesses! and not only the capex part of it. think about the employee hires for those new ventures. that & some other stuff doesn't show up in capex, it probably shows up in their gross margins (cost of sales). all kinds of things are weighing on amazons bottom line, more than you would think at first blush. I believe amzn has some serious earnings power hidden under the hood
Title: Re: AMZN - Amazon.com Inc.
Post by: ajc on August 21, 2013, 11:38:56 AM
@Liberty and JAllen

Glad I could contribute.

Don't own any, but if the price dropped 20 to 30 percent I'm thinking seriously of making it a 5% position.
The fact that it's in retail means I want to limit it - no matter how great the idea might seem.

@Grenville

Spot on, there's no Kiva robots in most Amazon warehouses as far as I'm aware.
They sure are darn interesting though (at least if that clip on their site and the link you posted are anything to go by).

@ItsAValueTrap

Agreed.
Your point brings two things to mind.
One is that I don't want to make any retailer a large holding, and the other is that leadership matters more in retail (and technology) I think than in most other places because of what you're describing.
Eventually, whether it's Sam Walton's autobiography or Behind The Arches or Nebraska Furniture Mart I find the common theme is always that the people who hustle the hardest and the most (and in retail I'd say that means almost killing yourself) as well as focusing on a few big ideas end up winning while everyone else only gets to pick up the pieces.

For what it's worth, my own take on the 4 investing filters (ie. an industry you understand, able and honest management, durable competitive advantage and a fair price) is that "able and honest management" actually needs to read "able, honest, fanatical and visionary management" in those industries and then I give it a 30 to 40 percent weighting in the overall equation because it's just so key.
That's the way I look at it anyhow...

@JHelg

I think link01 and txlaw made a valid rebuttal to your link with their posts (txlaw's being the one 3 comments below link01's).
Title: Re: AMZN - Amazon.com Inc.
Post by: ajc on August 21, 2013, 11:40:31 AM
@valueInv

Again (as with JHelg), I'm not sure I buy the "turning the screws" argument.
 
My understanding is that Amazon charges what they do these days because they no longer need to be a discount seller.
When they were a start-up then sure that was necessary to build a base as well as trust, but now they're just another mainstream retailer and so they sell at just enough of a discount to still bring everyone in though they try and make as much profit as they can so they have the cash with which to increase their global warehouse and distribution capacity.

As far as those two articles go, I'm not sure what point they're trying to make but I think they both fail to say anything of substance.
Don't get me wrong, they're well-written and fancy and would do great in a university newspaper or some such thing but in the real world my guess is if those were in print then that'd be the first thing people reached for if and when the toilet paper ever ran out (neither of them would ever run in a serious science or technology publication).

So... we may have to agree to disagree on the similarities between the handset/software world and a logistical distribution network/retailer which just happens to use robots as do Amazon.

Appreciate the critical viewpoint though - cheerleading parties are to be avoided, on that we undoubtedly see eye to eye.
Title: Re: AMZN - Amazon.com Inc.
Post by: ajc on August 21, 2013, 11:55:03 AM
@txlaw

Very cool, thanks for that Kiva post and plus 1 on the best CEO, capex/profit margin situation and that it probably looks too expensive right now (I'm waiting for around 8 or 9 times BV myself).

Two things to add to the stuff you've already said.
First, from that Kiva site it's not much of a stretch to think that Amazon could automate the entire storage, picking, packing and shipping sections of their warehouses in the future and so instead of using 1000 people per shift they could use 250 or so and the work would also get done at a quicker speed.
The reasoning behind that thought is that the major obstacle they had when I was there was in the first stage where they got the stuff off the trucks and were logging the various products into the system.

One thing they'd started doing before I left was getting the exact dimensions of every product scanned in so they could recommend boxes, but presumably once the system has that info then new pallets that arrive could conceivably be picked apart by robotic arms with scanners on them which enter them into inventory, store them on those moving units, order comes through online, specific unit gets located by Kiva robot, takes storage unit to packing section, another robot arm scans and places it into a packing machine, packing machine puts wrapped article onto conveyor, conveyor spills package into correct bin, once full the bin gets replaced and moved onto waiting truck by another Kiva robot and you'd basically have a completely automated system except for the technicians who fix the belts, robots and maintain the system hardware and software.
Just an idea, but the necessary tools all seem to be there.

As far as a WalMart assault goes, it'll be interesting for sure. I'm skeptical that they'll win it, but clearly they'll give it a shot.
On the one hand, I wonder whether they'd choose to convert their distribution centers or build fresh and run alongside because I think they still need those in their current form and capacity for their B&M stores.
Then, as they become more of an online entity they'll need to shut stores and warehouses and lay people off. There might be alot of pain there and when do you close the B&M stores and how many, and how does the public and Wall Street react, etc, etc?

Something that valueInv (whose posts I may or may not have been slightly over-critical of) had in one of those articles was a comment about the ability of corporations to turn on a dime which effectively said that they couldn't and to some extent I agree though in the case of large-scale retail I think that goes to Amazon's advantage.
Can WalMart change its deeply-held approach to retail while Amazon uses a modern take on the age-old customer-first strategy? My tendency is to say it's pretty unlikely because it's a new format which Amazon has created and has a 15-year head start in intellectually and logistically.

And this is also why I disagree with what the "Trust Him He's Rich" article states because the writer unfortunately has some imagined artsy mental creation where the nuts and bolts nature of what Amazon does happen to not exist.
Bezos has quite obviously changed retailing just like Sam Walton did before when folks used to have to go to a bunch of different shops for all their items and to me anyway, that should necessarily be factored in.

I think now that Sam Walton's passed and his successors have left - for me the company (any company, but especially retail, tech, maybe a few others) loses that passion after the 2nd generation.
I'm not saying it starts to suck or anything but this goes back to the leadership issue, for me it's more important in these industries than in others because of the drive and near fanaticism as well as creativity and discipline that it requires to build it from scratch and this is something I think a number of people (yourself and other commenters included) apparently realize about Bezos.

Anyway, I could go on for some time and no doubt I eventually will but I'll leave it there for now.
Thanks for the insights and links and hopefully this thread will steer clear of some of the blustery and personal momentums that've unfortunately sometimes been present on some other threads.
I mean, it obviously just happens to look like a very interesting company, where if anyone puts their preconceptions aside and gives the thesis a chance (and of course if the price is right) then it wouldn't be at all surprising to me if this turned out to be a reasonably profitable investment idea over the next 2 to 3 decades.

Regards.   

 
Title: Re: AMZN - Amazon.com Inc.
Post by: ajc on August 21, 2013, 01:34:33 PM
One wonders how much it will take for the likes of WMT, TGT, and others to start converting their own distribution centers to be more automated.  They can certainly use their prodigious cash flows to do so.  And then they could have an advantage because they will also have local points of distribution that AMZN can't replicate . . . unless AMZN partners with someone locally.

I believe GOOG is piloting some partnerships with the older school retailers to provide a competing solution.  That's something to watch.

Just to add on the topic of Google. I see them assisting with online ordering, mapping and so on but in my view AMZN has this 15 to 20 year head start with all of the thinking and systems and on top of that, it's their main focus.
GOOG might be able to help others with some aspects, but those corporations will have to do some serious heavy lifting and institutional transformation to be as useful in online retail as Amazon are from my perspective.

Here's something that struck me. Is there anyone in the WalMart organization today who has the sway and gumption to say to the company that they need to stop building stores right now in new locations and go into online retailing with all their profits immediately so that they can see off Amazon at the pass before Bezos and Co even get through?

As far as I know (which admittedly isn't much), that's not happening. WalMart is doing things their way and the institution supports that. Amazon isn't. Clearly.

In my view, Bezos has clearly grasped the idea that retailing (and its history) is about the transfer of items from production plant to an individual's personal possession - or in the case of Fresh from farm to human belly.
So Walton revolutionizes it earlier right by seeing that some towns only had a butchers, hardware store, clothing store and liquor store say.
If you wanted a bike for your kids, you had to head to the city and get one at the sports shop or if you wanted a TV you had to do the same.
Effectively, he moved those products closer to everyone than they ever were before and he obviously did it with speed, cheaply and with standards.
Result? WalMart succeeds mightily.

To me, that's still the standard everywhere (Walmart, Costco, etc) and I don't see that model going away - which may make it much tougher for them to adapt because it's perhaps too uncomfortable - but Amazon have realized that the final step is to actually get that stuff quickly, cheaply and with quality onto their doorsteps.
Not 10 miles away at the next turn-off. Not 500 yards away which most people could easily walk. Right there, in their hands without them having to move off the sofa (#Murica all the way!).
And the world is ready for it because techology and material advancement means it's now deliverable from point A all the way to point B instead of from A almost to B.

So, Amazon is busy building that and that's their central and main priority. No B&M, just you click and that afternoon or the next day it's there without you going out.
My opinion is that WalMart and others are underestimating the laziness and love of convenience that the average American (and global) consumer has and the only people who're dead serious about satisfying that craving right now and probably for the past decade at least are Amazon.

Yeah, so when the housewife preparing for tomorrow's dinner party doesn't want to go out in rush hour traffic and instead gets to type in a product and delivery time with Amazon then they get her business.
She can spend the time she would've used getting her nails done.

Or, when the shift worker gets home at 3am and is tired and needs that new set of headphones for the weekend roadtrip he's going on the day after tomorrow, he types in the item and suitable pickup time on Amazon and he knows it'll be at the door at 11am exactly just before they set off - they get his business.

I may be wrong, but I don't think the traditional retailers understand how important that last few miles actually is and how painful it will be for them when someone (Amazon probably) cracks that space with enough speed, quality and affordability to make it worth being lazy over.

My 1 and a 1/4 pennies worth...

(All that said, I still think 5% is the maximum portfolio weighting I'd like to give to any retailer - even a game-changing one...)
Title: Re: AMZN - Amazon.com Inc.
Post by: txlaw on August 21, 2013, 03:44:37 PM
@txlaw

Very cool, thanks for that Kiva post and plus 1 on the best CEO, capex/profit margin situation and that it probably looks too expensive right now (I'm waiting for around 8 or 9 times BV myself).

Two things to add to the stuff you've already said.
First, from that Kiva site it's not much of a stretch to think that Amazon could automate the entire storage, picking, packing and shipping sections of their warehouses in the future and so instead of using 1000 people per shift they could use 250 or so and the work would also get done at a quicker speed.
The reasoning behind that thought is that the major obstacle they had when I was there was in the first stage where they got the stuff off the trucks and were logging the various products into the system.

One thing they'd started doing before I left was getting the exact dimensions of every product scanned in so they could recommend boxes, but presumably once the system has that info then new pallets that arrive could conceivably be picked apart by robotic arms with scanners on them which enter them into inventory, store them on those moving units, order comes through online, specific unit gets located by Kiva robot, takes storage unit to packing section, another robot arm scans and places it into a packing machine, packing machine puts wrapped article onto conveyor, conveyor spills package into correct bin, once full the bin gets replaced and moved onto waiting truck by another Kiva robot and you'd basically have a completely automated system except for the technicians who fix the belts, robots and maintain the system hardware and software.
Just an idea, but the necessary tools all seem to be there.

As far as a WalMart assault goes, it'll be interesting for sure. I'm skeptical that they'll win it, but clearly they'll give it a shot.
On the one hand, I wonder whether they'd choose to convert their distribution centers or build fresh and run alongside because I think they still need those in their current form and capacity for their B&M stores.
Then, as they become more of an online entity they'll need to shut stores and warehouses and lay people off. There might be alot of pain there and when do you close the B&M stores and how many, and how does the public and Wall Street react, etc, etc?

Something that valueInv (whose posts I may or may not have been slightly over-critical of) had in one of those articles was a comment about the ability of corporations to turn on a dime which effectively said that they couldn't and to some extent I agree though in the case of large-scale retail I think that goes to Amazon's advantage.
Can WalMart change its deeply-held approach to retail while Amazon uses a modern take on the age-old customer-first strategy? My tendency is to say it's pretty unlikely because it's a new format which Amazon has created and has a 15-year head start in intellectually and logistically.

And this is also why I disagree with what the "Trust Him He's Rich" article states because the writer unfortunately has some imagined artsy mental creation where the nuts and bolts nature of what Amazon does happen to not exist.
Bezos has quite obviously changed retailing just like Sam Walton did before when folks used to have to go to a bunch of different shops for all their items and to me anyway, that should necessarily be factored in.

I think now that Sam Walton's passed and his successors have left - for me the company (any company, but especially retail, tech, maybe a few others) loses that passion after the 2nd generation.
I'm not saying it starts to suck or anything but this goes back to the leadership issue, for me it's more important in these industries than in others because of the drive and near fanaticism as well as creativity and discipline that it requires to build it from scratch and this is something I realize about Bezos to the same extent that you do (by my reckoning at least).

Anyway, I could go on for some time and no doubt I eventually will but I'll leave it there for now.
Thanks for the insights and links and hopefully this thread will steer clear of some of the blustery and personal momentums that've unfortunately sometimes been present on some other threads.
I mean, it just happens to look like a very interesting company, where if anyone puts their preconceptions aside and gives the thesis a chance (and of course if the price is right) then it wouldn't be at all surprising to me if this turned out to be a reasonably profitable investment idea over the next 2 to 3 decades.

Regards.   
 

Can't disagree with much of what you said.

And I love your willingness to share your insights into AMZN ops.  Thanks, ajc.
Title: Re: AMZN - Amazon.com Inc.
Post by: txlaw on August 21, 2013, 03:50:07 PM
Over the weekend, I spoke to a friend of mine who works at a company that provides an OpenStack PaaS solution.   

He thinks that AMZN is probably making ridiculous margins on AWS.  The fact of the matter is that AWS is very expensive, and anyone who has scale is better off owning rather than renting computing resources from the likes of AMZN.

Food for thought wrt public clouds vs. private clouds.
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on August 21, 2013, 04:08:08 PM
@valueInv

Again (as with JHelg), I'm not sure I buy the "turning the screws" argument.
 
My understanding is that Amazon charges what they do these days because they no longer need to be a discount seller.
When they were a start-up then sure that was necessary to build a base as well as trust, but now they're just another mainstream retailer and so they sell at just enough of a discount to still bring everyone in though they try and make as much profit as they can so they have the cash with which to increase their global warehouse and distribution capacity.

As far as those two articles go, I'm not sure what point they're trying to make but I think they both fail to say anything of substance.
Don't get me wrong, they're well-written and fancy and would do great in a university newspaper or some such thing but in the real world my guess is if those were in print then that'd be the first thing people reached for if and when the toilet paper ever ran out (neither of them would ever run in a serious science or technology publication).

So... we may have to agree to disagree on the similarities between the handset/software world and a logistical distribution network/retailer which just happens to use robots as do Amazon.

Appreciate the critical viewpoint though - cheerleading parties are to be avoided, on that we undoubtedly see eye to eye.

If they are no longer the discount retailer, why are they losing money?
Title: Re: AMZN - Amazon.com Inc.
Post by: ItsAValueTrap on August 21, 2013, 04:58:13 PM
Quote
Sam Walton did before when folks used to have to go to a bunch of different shops for all their items and to me anyway

Other countries have hypermarts/hypermarkets.  Sam tried to bring that format to America and it failed, though it morphed into the larger wal-mart format (the wal-mart supercenter). 

Wal-Mart versus Amazon:
Maybe there are reasons why Wal-Mart may not win the online game.  Their distribution centers and warehouses may be setup in a way that is good for bricks and mortar retailing, but not so much for online.

They also charge sales tax.
Title: Re: AMZN - Amazon.com Inc.
Post by: Grenville on August 21, 2013, 10:24:00 PM
Good talk with Amy Villeneuve, COO of Kiva Systems. The talk is more about her and her background and not so much about the company.

http://youtu.be/bpcWh434ghI (http://youtu.be/bpcWh434ghI)

She joined Kiva in 2010. The company hit 100mln in sales in 2011 and is now at 399 employees in 2013, up 120 from a year ago.
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on August 21, 2013, 11:05:13 PM
Over the weekend, I spoke to a friend of mine who works at a company that provides an OpenStack PaaS solution.   

He thinks that AMZN is probably making ridiculous margins on AWS.  The fact of the matter is that AWS is very expensive, and anyone who has scale is better off owning rather than renting computing resources from the likes of AMZN.

Food for thought wrt public clouds vs. private clouds.

Firstly, Amazon has dropped prices is a big way in  price war with MSFT and Google the last few months.
Secondly, others seem to be gaining ground:

http://gigaom.com/2013/08/21/more-proof-that-amazon-still-leads-the-iaas-pack-but-watch-out-for-those-other-dogs/
Title: Re: AMZN - Amazon.com Inc.
Post by: ajc on August 22, 2013, 09:46:44 AM
If they are no longer the discount retailer, why are they losing money?

So, I'll just direct you to txlaw's post from a few comments earlier (Aug 21st, 08h26) which essentially answers your question.

Regards.
Title: Re: AMZN - Amazon.com Inc.
Post by: ajc on August 22, 2013, 09:54:37 AM
Other countries have hypermarts/hypermarkets.  Sam tried to bring that format to America and it failed, though it morphed into the larger wal-mart format (the wal-mart supercenter). 

Wal-Mart versus Amazon:
Maybe there are reasons why Wal-Mart may not win the online game.  Their distribution centers and warehouses may be setup in a way that is good for bricks and mortar retailing, but not so much for online.

They also charge sales tax.

From "Made In America"?
Great read, right.

I'm largely of the same opinion, I think Wal-Mart and others will eventually have to do something game-changing but if they leave it much longer I think it could only be good enough for 2nd or 3rd place.

I've also read recently that Amazon will start paying more and more sales tax in the coming years, so perhaps fortunately for their competitors that advantage is now slowly starting to erode.

Cheers.
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on August 22, 2013, 10:30:06 PM
@txlaw

Very cool, thanks for that Kiva post and plus 1 on the best CEO, capex/profit margin situation and that it probably looks too expensive right now (I'm waiting for around 8 or 9 times BV myself).

Two things to add to the stuff you've already said.
First, from that Kiva site it's not much of a stretch to think that Amazon could automate the entire storage, picking, packing and shipping sections of their warehouses in the future and so instead of using 1000 people per shift they could use 250 or so and the work would also get done at a quicker speed.
The reasoning behind that thought is that the major obstacle they had when I was there was in the first stage where they got the stuff off the trucks and were logging the various products into the system.

One thing they'd started doing before I left was getting the exact dimensions of every product scanned in so they could recommend boxes, but presumably once the system has that info then new pallets that arrive could conceivably be picked apart by robotic arms with scanners on them which enter them into inventory, store them on those moving units, order comes through online, specific unit gets located by Kiva robot, takes storage unit to packing section, another robot arm scans and places it into a packing machine, packing machine puts wrapped article onto conveyor, conveyor spills package into correct bin, once full the bin gets replaced and moved onto waiting truck by another Kiva robot and you'd basically have a completely automated system except for the technicians who fix the belts, robots and maintain the system hardware and software.
Just an idea, but the necessary tools all seem to be there.

As far as a WalMart assault goes, it'll be interesting for sure. I'm skeptical that they'll win it, but clearly they'll give it a shot.
On the one hand, I wonder whether they'd choose to convert their distribution centers or build fresh and run alongside because I think they still need those in their current form and capacity for their B&M stores.
Then, as they become more of an online entity they'll need to shut stores and warehouses and lay people off. There might be alot of pain there and when do you close the B&M stores and how many, and how does the public and Wall Street react, etc, etc?

Something that valueInv (whose posts I may or may not have been slightly over-critical of) had in one of those articles was a comment about the ability of corporations to turn on a dime which effectively said that they couldn't and to some extent I agree though in the case of large-scale retail I think that goes to Amazon's advantage.
Can WalMart change its deeply-held approach to retail while Amazon uses a modern take on the age-old customer-first strategy? My tendency is to say it's pretty unlikely because it's a new format which Amazon has created and has a 15-year head start in intellectually and logistically.

And this is also why I disagree with what the "Trust Him He's Rich" article states because the writer unfortunately has some imagined artsy mental creation where the nuts and bolts nature of what Amazon does happen to not exist.
Bezos has quite obviously changed retailing just like Sam Walton did before when folks used to have to go to a bunch of different shops for all their items and to me anyway, that should necessarily be factored in.

I think now that Sam Walton's passed and his successors have left - for me the company (any company, but especially retail, tech, maybe a few others) loses that passion after the 2nd generation.
I'm not saying it starts to suck or anything but this goes back to the leadership issue, for me it's more important in these industries than in others because of the drive and near fanaticism as well as creativity and discipline that it requires to build it from scratch and this is something I think a number of people (yourself and other commenters included) apparently realize about Bezos.

Anyway, I could go on for some time and no doubt I eventually will but I'll leave it there for now.
Thanks for the insights and links and hopefully this thread will steer clear of some of the blustery and personal momentums that've unfortunately sometimes been present on some other threads.
I mean, it obviously just happens to look like a very interesting company, where if anyone puts their preconceptions aside and gives the thesis a chance (and of course if the price is right) then it wouldn't be at all surprising to me if this turned out to be a reasonably profitable investment idea over the next 2 to 3 decades.

Regards.   

 

Impressive warehouses. I decided to rum some quick, simple numbers to compare Walmart and Amazon:

   Amazon   WMT
Revenues   61093   469162
COGS   45,971   352488
Gross Profit   15122   116674
Operating Expense   14446   88873
Operating Income   676   27801
D&A   2835   8501
Net Income   -39   16999
      
PP&E    9582   171724
      
Operating Margin   1%   6%
Net Margin   0%   4%
ROA   2.50%   8.40%
      
Cash   11448   7781
      
Normalized to sales      
Operating Expense   24%   19%
D&A    5%   2%
PP&E   16%   37%
      
Normalized to COGS      
Operating Expense   31%   25%

Couple of things I found interesting:
 - Gross margins are the same despite Walmart being infamous for squeezing suppliers, while Amazon being known to sell many items at or below cost
 - I would have thought Amazon to be more efficient than Walmart on its operations with is advanced warehouses and all. Yet when you normalize opex to COGS, it seems that Amazon spends 31 cents to sell a dollar of inventory while Walmart spends 25 cents.

What am I missing here?
Title: Re: AMZN - Amazon.com Inc.
Post by: ajc on August 23, 2013, 11:08:28 AM
Couple of things I found interesting:
 - Gross margins are the same despite Walmart being infamous for squeezing suppliers, while Amazon being known to sell many items at or below cost
 - I would have thought Amazon to be more efficient than Walmart on its operations with is advanced warehouses and all. Yet when you normalize opex to COGS, it seems that Amazon spends 31 cents to sell a dollar of inventory while Walmart spends 25 cents.

What am I missing here?

Frankly valueInv, I'm not sure.
I'm actually somewhat new to this business, so you probably know a fair amount more than I do.

However, I found a well-written and pretty interesting article on Seeking Alpha - http://seekingalpha.com/article/1385861-amazon-good-business-bad-stock-stay-away-for-now (http://seekingalpha.com/article/1385861-amazon-good-business-bad-stock-stay-away-for-now) - which compared Amazon's COGS with WalMart's from the first quarter and they were not far apart at all at that time.
I'm wondering (perhaps stupidly) how something like Prime - or their Fresh initiatives, etc - impacts on that?

Anyway, that article and some of the comments section are pretty useful I think, and it'd be good to hear your take on it (and anyone else's for that matter) as well as the point you made earlier once you've had an opportunity to weigh the relevant information.

Regards.

Title: Re: AMZN - Amazon.com Inc.
Post by: Liberty on August 26, 2013, 01:39:23 PM
I ordered the Manual of Ideas book yesterday (a sunday). I got it today. That's with free shipping, and I'm in Canada. I don't even know how they did it, there's no mail on weekends here.

That's why Amazon keeps getting my business. They have good selection, good prices, and they keep surpassing my expectations.
Title: Re: AMZN - Amazon.com Inc.
Post by: rpadebet on August 28, 2013, 02:06:30 PM
@txlaw

Very cool, thanks for that Kiva post and plus 1 on the best CEO, capex/profit margin situation and that it probably looks too expensive right now (I'm waiting for around 8 or 9 times BV myself).

Two things to add to the stuff you've already said.
First, from that Kiva site it's not much of a stretch to think that Amazon could automate the entire storage, picking, packing and shipping sections of their warehouses in the future and so instead of using 1000 people per shift they could use 250 or so and the work would also get done at a quicker speed.
The reasoning behind that thought is that the major obstacle they had when I was there was in the first stage where they got the stuff off the trucks and were logging the various products into the system.

One thing they'd started doing before I left was getting the exact dimensions of every product scanned in so they could recommend boxes, but presumably once the system has that info then new pallets that arrive could conceivably be picked apart by robotic arms with scanners on them which enter them into inventory, store them on those moving units, order comes through online, specific unit gets located by Kiva robot, takes storage unit to packing section, another robot arm scans and places it into a packing machine, packing machine puts wrapped article onto conveyor, conveyor spills package into correct bin, once full the bin gets replaced and moved onto waiting truck by another Kiva robot and you'd basically have a completely automated system except for the technicians who fix the belts, robots and maintain the system hardware and software.
Just an idea, but the necessary tools all seem to be there.

As far as a WalMart assault goes, it'll be interesting for sure. I'm skeptical that they'll win it, but clearly they'll give it a shot.
On the one hand, I wonder whether they'd choose to convert their distribution centers or build fresh and run alongside because I think they still need those in their current form and capacity for their B&M stores.
Then, as they become more of an online entity they'll need to shut stores and warehouses and lay people off. There might be alot of pain there and when do you close the B&M stores and how many, and how does the public and Wall Street react, etc, etc?

Something that valueInv (whose posts I may or may not have been slightly over-critical of) had in one of those articles was a comment about the ability of corporations to turn on a dime which effectively said that they couldn't and to some extent I agree though in the case of large-scale retail I think that goes to Amazon's advantage.
Can WalMart change its deeply-held approach to retail while Amazon uses a modern take on the age-old customer-first strategy? My tendency is to say it's pretty unlikely because it's a new format which Amazon has created and has a 15-year head start in intellectually and logistically.

And this is also why I disagree with what the "Trust Him He's Rich" article states because the writer unfortunately has some imagined artsy mental creation where the nuts and bolts nature of what Amazon does happen to not exist.
Bezos has quite obviously changed retailing just like Sam Walton did before when folks used to have to go to a bunch of different shops for all their items and to me anyway, that should necessarily be factored in.

I think now that Sam Walton's passed and his successors have left - for me the company (any company, but especially retail, tech, maybe a few others) loses that passion after the 2nd generation.
I'm not saying it starts to suck or anything but this goes back to the leadership issue, for me it's more important in these industries than in others because of the drive and near fanaticism as well as creativity and discipline that it requires to build it from scratch and this is something I think a number of people (yourself and other commenters included) apparently realize about Bezos.

Anyway, I could go on for some time and no doubt I eventually will but I'll leave it there for now.
Thanks for the insights and links and hopefully this thread will steer clear of some of the blustery and personal momentums that've unfortunately sometimes been present on some other threads.
I mean, it obviously just happens to look like a very interesting company, where if anyone puts their preconceptions aside and gives the thesis a chance (and of course if the price is right) then it wouldn't be at all surprising to me if this turned out to be a reasonably profitable investment idea over the next 2 to 3 decades.

Regards.   

 

Impressive warehouses. I decided to rum some quick, simple numbers to compare Walmart and Amazon:

   Amazon   WMT
Revenues   61093   469162
COGS   45,971   352488
Gross Profit   15122   116674
Operating Expense   14446   88873
Operating Income   676   27801
D&A   2835   8501
Net Income   -39   16999
      
PP&E    9582   171724
      
Operating Margin   1%   6%
Net Margin   0%   4%
ROA   2.50%   8.40%
      
Cash   11448   7781
      
Normalized to sales      
Operating Expense   24%   19%
D&A    5%   2%
PP&E   16%   37%
      
Normalized to COGS      
Operating Expense   31%   25%

Couple of things I found interesting:
 - Gross margins are the same despite Walmart being infamous for squeezing suppliers, while Amazon being known to sell many items at or below cost
 - I would have thought Amazon to be more efficient than Walmart on its operations with is advanced warehouses and all. Yet when you normalize opex to COGS, it seems that Amazon spends 31 cents to sell a dollar of inventory while Walmart spends 25 cents.

What am I missing here?

I have no dog in this fight and I must admit I know very less about this company from an accounting standpoint. But is it possible that Amazon is accounting for the discounts or "promotional pricing" as marketing/advertising expenditure? Because if they do that and include those expenses in SG&A, then like you said Gross margins will be comparable to Walmart's but the operating margins would be lower.

I maybe totally wrong though. This is just an hypothesis.
Title: Re: AMZN - Amazon.com Inc.
Post by: Liberty on August 29, 2013, 08:07:14 PM
http://www.businessweek.com/articles/2013-08-29/amazon-takes-the-tax-fight-to-the-supreme-court
Title: Re: AMZN - Amazon.com Inc.
Post by: Grenville on September 06, 2013, 02:21:52 PM
It would be cool if Amazon can pull off a free or near free smart phone.


"Amazon may offer upcoming smartphone for free. Who's next?"
http://www.cnbc.com/id/101015435 (http://www.cnbc.com/id/101015435)

Quote
Amazon may soon offer its long-awaited smartphone to customers for free, former Wall Street Journal reporters Jessica Lessin and Amir Efrati said in a blog post Friday.

Full story:
"Exclusive: Amazon Wants To Offer Its Smartphone for Free. Who Will Follow?"
http://jessicalessin.com/2013/09/06/exclusive-amazon-wants-to-offer-its-smartphone-for-free-who-will-follow/ (http://jessicalessin.com/2013/09/06/exclusive-amazon-wants-to-offer-its-smartphone-for-free-who-will-follow/)
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on September 06, 2013, 02:25:52 PM
It would be cool if Amazon can pull off a free or near free smart phone.


"Amazon may offer upcoming smartphone for free. Who's next?"
http://www.cnbc.com/id/101015435 (http://www.cnbc.com/id/101015435)

Quote
Amazon may soon offer its long-awaited smartphone to customers for free, former Wall Street Journal reporters Jessica Lessin and Amir Efrati said in a blog post Friday.

Full story:
"Exclusive: Amazon Wants To Offer Its Smartphone for Free. Who Will Follow?"
http://jessicalessin.com/2013/09/06/exclusive-amazon-wants-to-offer-its-smartphone-for-free-who-will-follow/ (http://jessicalessin.com/2013/09/06/exclusive-amazon-wants-to-offer-its-smartphone-for-free-who-will-follow/)

As predicted.
Title: Re: AMZN - Amazon.com Inc.
Post by: wellmont on September 06, 2013, 03:29:48 PM
possibly entry level phone is free to prime customers and amzn will get a commission for selling the service plans at time of purchase. they will also charge extra for chargers, cases, etc. there will also be advertising (offers). something to watch. I don't see how the numbers work though.
Title: Re: AMZN - Amazon.com Inc.
Post by: rkbabang on September 09, 2013, 05:52:32 AM
   
Amazon: No Phone Launch ‘This Year’ and ‘Would Not Be Free’ (http://jessicalessin.com/2013/09/08/amazon-no-phone-launch-this-year-and-would-not-be-free/)
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on October 01, 2013, 10:05:25 AM
The problem with building a long term business while losing money is that others come and steal the punchbowl away
while you're still building your business:

http://pandodaily.com/2013/10/01/here-comes-another-netflix-for-books-this-time-from-scribd/

This happened with Amazon's music business. We may just see it with the books business.
Title: Re: AMZN - Amazon.com Inc.
Post by: txlaw on October 01, 2013, 12:47:57 PM
Bezos book recommendations to his execs:
http://www.farnamstreetblog.com/2013/10/jeff-bezos-read-these-books/

Bezos recommends the Innovator's Solution, which says a lot about how Bezos thinks about business.  And it's why I think he's the best CEO in tech.
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on October 02, 2013, 06:28:42 PM
   
Amazon: No Phone Launch ‘This Year’ and ‘Would Not Be Free’ (http://jessicalessin.com/2013/09/08/amazon-no-phone-launch-this-year-and-would-not-be-free/)

Here we go again:

http://techcrunch.com/2013/10/02/amazons-smartphones-detailed-project-smith-3d-flagship-model-and-a-value-handset-with-fireos/
Title: Re: AMZN - Amazon.com Inc.
Post by: DTEJD1997 on October 02, 2013, 06:39:47 PM
Hey all:

I want to stir the pot a little!

Let me ask the folks who are bullish on AMZN a question...

At what price would AMZN be too expensive?

I don't think ANYBODY would say that AMZN is cheap at over $300/share...The question is HOW expensive is it.  At what point does it become too expensive?

$400/share, $500/share, $800/share  maybe even higher?

I appreciate your response.

Thanks
Title: Re: AMZN - Amazon.com Inc.
Post by: link01 on October 06, 2013, 08:31:18 AM
since every one & their cousin has a short thesis or neg view of amzn's valuation I thought it would be interesting to post a few bullish case links to articles here to balance the debate out a bit. in fact, they're really the only ones I could find online that had at least a smattering of rigor at all.

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

(eric50 posted this earlier in the thread, thx eric)

http://seekingalpha.com/article/1648832-is-amazon-worth-its-price

(this is not really a bullish article but it lays out a what-if matrix that could support a bullish case for amzn's valuation)

http://seekingalpha.com/article/884981-understanding-amazon-what-you-really-need-to-know

http://seekingalpha.com/article/942551-top-10-pick-amazon-financials-understate-growth

http://seekingalpha.com/article/1405211-arne-alsins-1-pick-amazon-com?source=yahoo

its also interesting to note that morningstar pegs amzn fair value at 300 per share, altho their analysis does little to show how they arrived at that #.



Title: Re: AMZN - Amazon.com Inc.
Post by: Grenville on October 08, 2013, 01:07:50 PM
Nice 30min interview with Marc Lore and Vinnie Bharara founders of Diapers.com (Quidsi)

http://www.npr.org/2013/09/18/223785364/marc-lore-and-vinnie-bharara-founders-of-diapers-com (http://www.npr.org/2013/09/18/223785364/marc-lore-and-vinnie-bharara-founders-of-diapers-com)

They talk about founding the business and the early years.
Title: Re: AMZN - Amazon.com Inc.
Post by: DCG on October 08, 2013, 01:14:43 PM

its also interesting to note that morningstar pegs amzn fair value at 300 per share, altho their analysis does little to show how they arrived at that #.


Sounds like most valuations on Morningstar.
Title: Re: AMZN - Amazon.com Inc.
Post by: plato1976 on October 08, 2013, 03:06:27 PM
Hey all:

I want to stir the pot a little!

Let me ask the folks who are bullish on AMZN a question...
I do think it's cheap; AMZN is cheap as long as its market value is below Walmart's

///////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////


At what price would AMZN be too expensive?

I don't think ANYBODY would say that AMZN is cheap at over $300/share...The question is HOW expensive is it.  At what point does it become too expensive?

$400/share, $500/share, $800/share  maybe even higher?

I appreciate your response.

Thanks
Title: Re: AMZN - Amazon.com Inc.
Post by: Grenville on October 08, 2013, 04:04:42 PM
U.S. court rules in favor of Amazon in CIA contract dispute
http://www.reuters.com/article/2013/10/08/net-us-amazon-ibm-ciacontract-idUSBRE9970NZ20131008 (http://www.reuters.com/article/2013/10/08/net-us-amazon-ibm-ciacontract-idUSBRE9970NZ20131008)

Quote
A U.S. court ruled in favor of Amazon.com Inc in the online retailer's dispute with IBM over a $600 million cloud computing contract awarded by the Central Intelligence Agency, a court notice showed.
Title: Re: AMZN - Amazon.com Inc.
Post by: txlaw on October 08, 2013, 05:01:28 PM
Nice 30min interview with Marc Lore and Vinnie Bharara founders of Diapers.com (Quidsi)

http://www.npr.org/2013/09/18/223785364/marc-lore-and-vinnie-bharara-founders-of-diapers-com (http://www.npr.org/2013/09/18/223785364/marc-lore-and-vinnie-bharara-founders-of-diapers-com)

They talk about founding the business and the early years.

Thanks!  There also appears to be an interview with the founder of Kiva Systems in that show as well.

In another AMZN news, they are releasing a "Pay with Amazon" feature for third party websites:
http://blogs.wsj.com/digits/2013/10/08/amazon-targets-rival-paypal-with-online-payment-option/
Title: Re: AMZN - Amazon.com Inc.
Post by: ItsAValueTrap on October 08, 2013, 09:48:09 PM
Online payments can be a brutal business.

Amazon.com pushes a Visa credit card on its main website instead of its ACH payment system.  This suggests to me that Amazon (like Paypal) is having a difficult time with fraud.  If you pay through ACH, you can't make unusually large purchases or buy digital downloads or buy gift cards.  That's the payment network side of things.

On the payment gateway side of things, both Paypal and Amazon help merchants accept credit card payments.  I think Paypal has an advantage in that area as its anti-fraud technology is pretty good.  (Unfortunately, it also has a very high false positive rate... which is frustrating for legitimate customers.  And you can't buy gift cards with Paypal in many cases.)
Title: Re: AMZN - Amazon.com Inc.
Post by: txlaw on October 10, 2013, 07:00:42 PM
http://www.businessweek.com/articles/2013-10-10/jeff-bezos-and-the-age-of-amazon-excerpt-from-the-everything-store-by-brad-stone
Title: Re: AMZN - Amazon.com Inc.
Post by: wescobrk on October 10, 2013, 07:10:02 PM
Just read it.
Can't wait to read the book when it's released on tues!
Title: Re: AMZN - Amazon.com Inc.
Post by: txlaw on October 10, 2013, 07:22:39 PM
Just read it.
Can't wait to read the book when it's released on tues!

Let us know what you think of the book when you're finished. :) 
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on October 10, 2013, 07:59:24 PM
http://www.businessweek.com/articles/2013-10-10/jeff-bezos-and-the-age-of-amazon-excerpt-from-the-everything-store-by-brad-stone (http://www.businessweek.com/articles/2013-10-10/jeff-bezos-and-the-age-of-amazon-excerpt-from-the-everything-store-by-brad-stone)


This article was fantastic!  The author, during the writing of the book, actually informed Jeff's father that his long-lost son, whom he hadn't seen since Jeff was three years old back in '67, was the founder of Amazon.com and a billionaire, at the end of 2012! 


That blew me away....


I'll read the book the day it comes out.
Title: Re: AMZN - Amazon.com Inc.
Post by: Liberty on October 10, 2013, 08:07:06 PM
http://www.businessweek.com/articles/2013-10-10/jeff-bezos-and-the-age-of-amazon-excerpt-from-the-everything-store-by-brad-stone

Thanks, didn't know about that one. Added the book to my list.
Title: Re: AMZN - Amazon.com Inc.
Post by: wescobrk on October 10, 2013, 08:30:55 PM


"Let us know what you think of the book when you're finished."

Sure!
I've had it on pre order on amazon for at least two months.
The date was delayed after bezos bought the post presumably so the author could cover it in the book.
Title: Re: AMZN - Amazon.com Inc.
Post by: Grenville on October 15, 2013, 08:45:46 AM
Soap Opera: Amazon Moves In With P&G
E-Commerce Giant Sets Up Shop Inside Warehouses of Suppliers
http://online.wsj.com/news/articles/SB10001424052702304330904579135840230674458 (http://online.wsj.com/news/articles/SB10001424052702304330904579135840230674458)

Article talks about how Amazon is working inside supplier warehouses and highlights a 3yr relationship working with P&G in their warehouses.
Title: Re: AMZN - Amazon.com Inc.
Post by: fareastwarriors on October 18, 2013, 10:50:43 AM
love the name...Jeff Bezos’s League of Shadows


 ;D

http://www.businessweek.com/articles/2013-10-17/jeff-bezos-s-league-of-shadows#r=nav-fs (http://www.businessweek.com/articles/2013-10-17/jeff-bezos-s-league-of-shadows#r=nav-fs)
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on October 21, 2013, 11:00:53 PM
http://techcrunch.com/2013/10/21/german-antitrust-watchdog-investigates-amazons-3rd-party-pricing-as-e-commerce-giant-touts-new-3rd-party-holiday-sales-channels/

They're also running into trouble in France.
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on October 24, 2013, 10:36:40 PM
This shows you that if you have a good narrative and say very little about reality, investors will assume the best:

http://venturebeat.com/2013/10/24/red-is-the-new-green-for-amazon-shareholders-despite-these-relevant-unanswered-questions/

Reminds me of mushrooms.
Title: Re: AMZN - Amazon.com Inc.
Post by: muscleman on October 24, 2013, 10:46:21 PM
This shows you that if you have a good narrative and say very little about reality, investors will assume the best:

http://venturebeat.com/2013/10/24/red-is-the-new-green-for-amazon-shareholders-despite-these-relevant-unanswered-questions/

Reminds me of mushrooms.

I would recommend you read George Soros' theory of reflexivity. The fact that AMZN is extremely over priced enables them to issue stocks to finance every thing. Their pay is really good compared to MSFT and Oracle, so they can always attract top talents. The more they grow, the more overpriced the stocks are, and the easier for them to issue stocks to finance everything in order to kill competitors and gain moat. That is exactly what I would do if I were the CEO.
I don't see this self reinforcing loop coming to an end anytime soon yet.
As a value investor, I agree that they are overpriced and I am not interested in buying at current levels, but I am currently considering to join their company and get a good chunk of stock awards. If my prediction is right, these overpriced stocks will become even more overpriced in 3 years. If they don't, I am still doing fine because the majority chunk of these stocks will be vested to me in the 3rd year, and I will get very good cash bonus for 1st and 2nd year. :)
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on October 24, 2013, 10:52:27 PM
This shows you that if you have a good narrative and say very little about reality, investors will assume the best:

http://venturebeat.com/2013/10/24/red-is-the-new-green-for-amazon-shareholders-despite-these-relevant-unanswered-questions/

Reminds me of mushrooms.

I would recommend you read George Soros' theory of reflexivity. The fact that AMZN is extremely over priced enables them to issue stocks to finance every thing. Their pay is really good compared to MSFT and Oracle, so they can always attract top talents. The more they grow, the more overpriced the stocks are, and the easier for them to issue stocks to finance everything in order to kill competitors and gain moat. That is exactly what I would do if I were the CEO.
I don't see this self reinforcing loop coming to an end anytime soon yet.
As a value investor, I agree that they are overpriced and I am not interested in buying at current levels, but I am currently considering to join their company and get a good chunk of stock awards. If my prediction is right, these overpriced stocks will become even more overpriced in 3 years. If they don't, I am still doing fine because the majority chunk of these stocks will be vested to me in the 3rd year, and I will get very good cash bonus for 1st and 2nd year. :)

Are they issuing more stock? I haven't seen secondary offerings.
Title: Re: AMZN - Amazon.com Inc.
Post by: ItsAValueTrap on October 25, 2013, 07:22:38 AM
Quote
The fact that AMZN is extremely over priced enables them to issue stocks to finance every thing.
Except they issued stock during the tech bubble.  I believe Buffett bought Amazon debt at one point in time.
Title: Re: AMZN - Amazon.com Inc.
Post by: compoundinglife on October 25, 2013, 07:38:18 AM
Quote
The fact that AMZN is extremely over priced enables them to issue stocks to finance every thing.
Except they issued stock during the tech bubble.  I believe Buffett bought Amazon debt at one point in time.

Yes he did when their debt was HY. This might have been already posted on the thread: http://articles.chicagotribune.com/2003-04-12/business/0304120174_1_junk-bonds-warren-buffett-berkshire-hathaway
Title: Re: AMZN - Amazon.com Inc.
Post by: muscleman on October 25, 2013, 08:26:03 AM
This shows you that if you have a good narrative and say very little about reality, investors will assume the best:

http://venturebeat.com/2013/10/24/red-is-the-new-green-for-amazon-shareholders-despite-these-relevant-unanswered-questions/

Reminds me of mushrooms.

I would recommend you read George Soros' theory of reflexivity. The fact that AMZN is extremely over priced enables them to issue stocks to finance every thing. Their pay is really good compared to MSFT and Oracle, so they can always attract top talents. The more they grow, the more overpriced the stocks are, and the easier for them to issue stocks to finance everything in order to kill competitors and gain moat. That is exactly what I would do if I were the CEO.
I don't see this self reinforcing loop coming to an end anytime soon yet.
As a value investor, I agree that they are overpriced and I am not interested in buying at current levels, but I am currently considering to join their company and get a good chunk of stock awards. If my prediction is right, these overpriced stocks will become even more overpriced in 3 years. If they don't, I am still doing fine because the majority chunk of these stocks will be vested to me in the 3rd year, and I will get very good cash bonus for 1st and 2nd year. :)

Are they issuing more stock? I haven't seen secondary offerings.

They give new hires stock awards, and also I heard that they give employee annual bonus only in stocks. I know that a lot of companies have employee stock purchase plan, so I think AMZN probably has one as well.
Title: Re: AMZN - Amazon.com Inc.
Post by: Grenville on October 25, 2013, 09:35:12 AM
In the Q3 2013 release, Bezos mentions the deployment of 1,382 Kiva robots to 3 fulfillment centers. They haven't referred to the Kiva robots before from what I can remember. They also raised the min on free shipping to $35.

Title: Re: AMZN - Amazon.com Inc.
Post by: bookie71 on October 25, 2013, 11:56:47 AM
FWIW:
My last order to Amazon wasn't filed and shipped until almost a week after I placed the order.
In the past "in stock" items were always shipped, at the latest, the next day.
It is a good thing I wasn't in a hurry, but it might make me think about ordering from somewhere else next time.
CB
P.S.  Maybe the robots were sick  ;D
Title: Re: AMZN - Amazon.com Inc.
Post by: link01 on October 25, 2013, 11:58:24 AM


Quote
I would recommend you read George Soros' theory of reflexivity. The fact that AMZN is extremely over priced enables them to issue stocks to finance every thing. Their pay is really good compared to MSFT and Oracle, so they can always attract top talents. The more they grow, the more overpriced the stocks are, and the easier for them to issue stocks to finance everything in order to kill competitors and gain moat. That is exactly what I would do if I were the CEO.
I don't see this self reinforcing loop coming to an end anytime soon yet.

sounds about right in theory. and many hi-fliers do issue stock to finance acquisitions. but amzn is not one of them. diluted shares were 419m in 2003 and were 453m at 2012 yr end.

Title: Re: AMZN - Amazon.com Inc.
Post by: globalfinancepartners on October 25, 2013, 12:22:33 PM
In the Q3 2013 release, Bezos mentions the deployment of 1,382 Kiva robots to 3 fulfillment centers. They haven't referred to the Kiva robots before from what I can remember. They also raised the min on free shipping to $35.

Amazon owns Kiva Systems, the robot company.  They bought them in 2012 for $775 million cash, so it's good that they are actually doing to deploy them.  They also bought Quidsi (Diapers.com, Soap.com, etc), which was a big early user of Kiva's order picking robots.
Title: Re: AMZN - Amazon.com Inc.
Post by: Grenville on October 25, 2013, 12:30:57 PM
In the Q3 2013 release, Bezos mentions the deployment of 1,382 Kiva robots to 3 fulfillment centers. They haven't referred to the Kiva robots before from what I can remember. They also raised the min on free shipping to $35.

Amazon owns Kiva Systems, the robot company.  They bought them in 2012 for $775 million cash, so it's good that they are actually doing to deploy them.  They also bought Quidsi (Diapers.com, Soap.com, etc), which was a big early user of Kiva's order picking robots.

I am aware. It is the first time they have mentioned deployment. Amazon is very stingy with specific numbers or details in both their releases and the conference calls. I find it interesting that they are providing such granular detail on robot deployment.
Title: Re: AMZN - Amazon.com Inc.
Post by: DTEJD1997 on October 25, 2013, 12:51:36 PM
Wow:

A multi billion mega cap stock is STILL losing money and the stock rockets forward 10%+.

So my question to all the bulls is:

"At what price is AMZN too much"?

When do they plan on actually making money?  I am beginning to suspect that they might not even know.

What happens if they keep growing sales for some time...then they decide it is time to actually make money...but then they lose customers/growth?
Title: Re: AMZN - Amazon.com Inc.
Post by: rkbabang on October 25, 2013, 01:22:41 PM
Wow:

A multi billion mega cap stock is STILL losing money and the stock rockets forward 10%+.

So my question to all the bulls is:

"At what price is AMZN too much"?

When do they plan on actually making money?  I am beginning to suspect that they might not even know.

What happens if they keep growing sales for some time...then they decide it is time to actually make money...but then they lose customers/growth?


They don't need to ever make money.  They have a new business model that has never been seen before.  You are using an antiquated theory to value them.  They will keep increasing revenue and their stock will continue to go up, whether or not they ever actually make a profit, it doesn't matter.


:)  That seems to be the theory anyway.  I'm not a shareholder, but I am a happy customer.

Title: Re: AMZN - Amazon.com Inc.
Post by: DTEJD1997 on October 25, 2013, 01:29:00 PM
They don't need to ever make money.  They have a new business model that has never been seen before.  You are using an antiquated theory to value them.  They will keep increasing revenue and their stock will continue to go up, whether or not they ever actually make a profit, it doesn't matter.


:)  That seems to be the theory anyway.  I'm not a shareholder, but I am a happy customer.

I will admit, I've purchased things from AMZN before, and they did a pretty good job.  So do plenty of other sellers though...

I've just got this nagging feeling that I've seen this before somewhere....

Oh I don't know....maybe the internet back in 1998, 1999?

I think those companies had a new business model back then!    ;)
Title: Re: AMZN - Amazon.com Inc.
Post by: Kraven on October 25, 2013, 01:39:15 PM
They don't need to ever make money.  They have a new business model that has never been seen before.  You are using an antiquated theory to value them.  They will keep increasing revenue and their stock will continue to go up, whether or not they ever actually make a profit, it doesn't matter.


:)  That seems to be the theory anyway.  I'm not a shareholder, but I am a happy customer.

I will admit, I've purchased things from AMZN before, and they did a pretty good job.  So do plenty of other sellers though...

I've just got this nagging feeling that I've seen this before somewhere....

Oh I don't know....maybe the internet back in 1998, 1999?

I think those companies had a new business model back then!    ;)

They lose money, but I'm pretty sure they make it up on volume.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on October 25, 2013, 02:03:34 PM
I'd like to ask a series of questions about the company, if I may.  These are meant to spur discussion and cause more people to thoroughly understand AMZN's financials and management intent instead of focusing solely on the fact that the company is currently generating slightly negative GAAP income.

Has anyone ever considered the possibility that they may in fact be making money but it doesn't show up on their income statement?  How would you evaluate this?  Why would a company choose to minimize its GAAP income?  How does the company measure profitability?  Is it possible that the company doesn't focus on GAAP profitability but in fact focuses on other profitability measures?  What did Jeff Bezos say in his 1997 letter to shareholders about what financial metrics he would focus on and how the company would make financial decisions?

Is the company doing anything that intentionally reduces both GAAP income and free cash flow? 

Has the company much more inefficient over the last three years (since 2009 when it generated a ~12% free cash flow margin)?  Are operating expenses permanently higher as a percentage of revenues?  How have gross margins changed since then as well.

Could there be any incentives to intentionally minimize income at the company?  Are there other examples of very successful CEOs intentionally minimizing income?  How did that work out for them and what were they focused on?


Probably the most important question I might ask myself is "what does the market see that I don't?"  How am I right and everyone else is wrong?


And to answer the question about  "what price would be too high right now?", that's an excellent question.  I think $500 or so would be too high for right now, but I don't know if I would sell.  I would probably sell some at that price.  If it reaches that price in the next year I will seriously consider selling then, perhaps.


Was there ever too high of a price for Berkshire Hathaway prior to the 2000s?  Or is the market just totally wrong about AMZN, has been for 3+ years but never was for Berkshire Hathaway?

Does anyone know how much in the way of net tangible assets AMZN shareholders have invested in the company?  What is operating cash flow divided by NTA?
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on October 25, 2013, 02:39:55 PM
They don't need to ever make money.  They have a new business model that has never been seen before.  You are using an antiquated theory to value them.  They will keep increasing revenue and their stock will continue to go up, whether or not they ever actually make a profit, it doesn't matter.


:)  That seems to be the theory anyway.  I'm not a shareholder, but I am a happy customer.

I will admit, I've purchased things from AMZN before, and they did a pretty good job.  So do plenty of other sellers though...

I've just got this nagging feeling that I've seen this before somewhere....

Oh I don't know....maybe the internet back in 1998, 1999?

I think those companies had a new business model back then!    ;)

They lose money, but I'm pretty sure they make it up on volume.

 ;D ;D
Title: Re: AMZN - Amazon.com Inc.
Post by: kevin4u2 on October 26, 2013, 08:21:35 AM
I'd like to ask a series of questions about the company, if I may.  These are meant to spur discussion and cause more people to thoroughly understand AMZN's financials and management intent instead of focusing solely on the fact that the company is currently generating slightly negative GAAP income.

Has anyone ever considered the possibility that they may in fact be making money but it doesn't show up on their income statement?  How would you evaluate this?  Why would a company choose to minimize its GAAP income?  How does the company measure profitability?  Is it possible that the company doesn't focus on GAAP profitability but in fact focuses on other profitability measures?  What did Jeff Bezos say in his 1997 letter to shareholders about what financial metrics he would focus on and how the company would make financial decisions?

Is the company doing anything that intentionally reduces both GAAP income and free cash flow? 

Has the company much more inefficient over the last three years (since 2009 when it generated a ~12% free cash flow margin)?  Are operating expenses permanently higher as a percentage of revenues?  How have gross margins changed since then as well.

Could there be any incentives to intentionally minimize income at the company?  Are there other examples of very successful CEOs intentionally minimizing income?  How did that work out for them and what were they focused on?


Probably the most important question I might ask myself is "what does the market see that I don't?"  How am I right and everyone else is wrong?


And to answer the question about  "what price would be too high right now?", that's an excellent question.  I think $500 or so would be too high for right now, but I don't know if I would sell.  I would probably sell some at that price.  If it reaches that price in the next year I will seriously consider selling then, perhaps.


Was there ever too high of a price for Berkshire Hathaway prior to the 2000s?  Or is the market just totally wrong about AMZN, has been for 3+ years but never was for Berkshire Hathaway?

Does anyone know how much in the way of net tangible assets AMZN shareholders have invested in the company?  What is operating cash flow divided by NTA?

Big surprise that you're the only guy asking the right questions on a board full of people who cling to Security Analysis like a religious fundamentalist clings to the bible.
Are they the right questions or are they absolutely absurd? There are legal ways to shield income and their are illegal ways. Unless the author is suggesting fraud, I am suggesting that the questions are non sense.

Let me add another question, why don't other companies hire the accountants from amazon and let them work their magic?  I'm sure the government would love that... but of course it is fantasy and not reality.

There are numerous ways to reduce income but the most common is to have revenue equal expenses.

I would ask the writer to substantiate any of his ideas/questions.

Here is the right question. Amazon is obviously growing at all costs so how far can they grow without income before their market share is tapped out. At that point they can focus on profitability, and even if their net margin is a few percentage points like Walmart or Costco they will be immensely profitable. That is what the bet is when it comes to amazon IMO. 

I'm sure I wasn't the only one thinking these thoughts.

Edited: typos.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on October 26, 2013, 08:35:37 AM
I'd like to ask a series of questions about the company, if I may.  These are meant to spur discussion and cause more people to thoroughly understand AMZN's financials and management intent instead of focusing solely on the fact that the company is currently generating slightly negative GAAP income.

Has anyone ever considered the possibility that they may in fact be making money but it doesn't show up on their income statement?  How would you evaluate this?  Why would a company choose to minimize its GAAP income?  How does the company measure profitability?  Is it possible that the company doesn't focus on GAAP profitability but in fact focuses on other profitability measures?  What did Jeff Bezos say in his 1997 letter to shareholders about what financial metrics he would focus on and how the company would make financial decisions?

Is the company doing anything that intentionally reduces both GAAP income and free cash flow? 

Has the company much more inefficient over the last three years (since 2009 when it generated a ~12% free cash flow margin)?  Are operating expenses permanently higher as a percentage of revenues?  How have gross margins changed since then as well.

Could there be any incentives to intentionally minimize income at the company?  Are there other examples of very successful CEOs intentionally minimizing income?  How did that work out for them and what were they focused on?


Probably the most important question I might ask myself is "what does the market see that I don't?"  How am I right and everyone else is wrong?


And to answer the question about  "what price would be too high right now?", that's an excellent question.  I think $500 or so would be too high for right now, but I don't know if I would sell.  I would probably sell some at that price.  If it reaches that price in the next year I will seriously consider selling then, perhaps.


Was there ever too high of a price for Berkshire Hathaway prior to the 2000s?  Or is the market just totally wrong about AMZN, has been for 3+ years but never was for Berkshire Hathaway?

Does anyone know how much in the way of net tangible assets AMZN shareholders have invested in the company?  What is operating cash flow divided by NTA?

Big surprise that you're the only guy asking the right questions on a board full of people who cling to Security Analysis like a religious fundamentalist clings to the bible.
Are they the right questions or are they absolutely absurd? There are legal ways to shield income and their are illegal ways. Unless the author is suggesting fraud, I am suggesting that the questions are non sense.

Let me add another question, why don't other companies high the accountants from amazon and let them work their magic?  I'm sure the government would love that... but of course it is fantasy and not reality.

There are numerous ways to reduce income but the most common is to have revenue equal expenses.

I would ask the writer to substantiate any of his ideas/questions.

Here is the right question. Amazon is obviously growing at all costs so how far can they grow without income before their market share is tapped out. At that point they can focus on profitability, and even if their net margin is a few percentage points like Walmart or Costco they will be immensely profitable. That is what the bet is when to amazon IMO. 

I'm sure I wasn't they only one thinking these thoughts.


Did you read an AMZN annual report thoughtfully before you responded?  There's one way they legally and intentionally choose to minimize GAAP income that is stated in plain English.  This 'way' resulted in reduced income by almost 1% of sales in 2012.  I don't know why I'm reluctant to point it out, but I am, so I won't.
Title: Re: AMZN - Amazon.com Inc.
Post by: link01 on October 26, 2013, 08:49:41 AM
I think classic security analysis probably has the tools to decipher amazon's value, it just lacks the a culture among most of its adherents to find a different set of keys within its framework.

if warren buffett says Bezos is the best ceo in America, I for one don't take that statement lightly: I highly doubt that WEB would bestow that title on someone who wasn't creating real (as opposed to illusory) economic value for his company & shareholders.

Bezos & amazon is a uniquely different sort of beast vs most other businesses, for sure. and I think it will be many more years before amzn 'earns' profits. but it will also many more yrs before it pays any significant income taxes too. and if your co has still substantial growth opportunities in front of it that's a good thing: there will be perpetually 35% more 'profitless' cash flow dollars available to plow back into its businesses until that changes.

not only that. but amzn has a much longer time horizon that most co's do for ROI expectations on their new business ventures, between 5 & 7 yrs. in an interview with Charlie rose a couple of years ago Bezos said they are typically between loss & breakeven during that time because in amazons world they are scale-dependent. I wish I had a way of confidently estimating what portion of amzn's capex was maintenance & what part growth capex. so they are constantly carrying around a moving avg of 6 yrs of growth investment earning nothing, along with the operating expenses that also entails.

if nothing else its fascinating to watch play out.

http://www.kernelmag.com/features/report/4406/amazon-is-taking-over-the-world/#

http://timkastelle.org/blog/2013/08/innovation-lessons-from-amazons-shareholder-letters/



   

Title: Re: AMZN - Amazon.com Inc.
Post by: hellsten on October 26, 2013, 09:23:23 AM
Please excuse my ignorance, I'm going to play devil's advocate. I believe Buffett if he says Bezos is the best CEO in the US, but how much higher can AMZN stock go? AMZN market cap is close to Wal-Mart's. Isn't there a risk of a lost decade even if they become the next Wal-Mart? Wal-Mart's 10-year performance isn't good, competitors both small and large are catching up.

10 years ago who thought anyone could compete with Wal-Mart:
Quote
…over the next decade we forecast EBIT margin declines because of the inevitable increased competition with Costco  and Amazon , both of which have lower fixed assets bases and run their businesses at much lower profit margins. This, along with the ongoing share losses to the dollar stores, is the reason for our current negative moat trend for Wal-Mart.

http://quotes.morningstar.com/stock/s?t=WMT

Muscleman's point about the theory of reflexivity works both ways; what happens when Amazon is no longer growing or competitors adapt, won't the self-reinforcing feedback loop work the other way then?

Quote
The main similarity lies in a self-reinforcing process whereby inflated stock prices can accelerate an underlying trend, which in turn enhances expectations and inflates stock prices until the outcomes fail to sustain expectations and there is a crash
~George Soros

Has Amazon used the inflated stock price for acquisitions?

Compare SHLD's stock price to AMZN's between 2000-2013 and think about what the market was expecting from the two companies.

Maybe WinCo will eat the world:
http://business.time.com/2013/08/07/meet-the-low-key-low-cost-grocery-chain-being-called-wal-marts-worst-nightmare/

Does Amazon have a moat or are they just best, and first, at adapting new technology?
Title: Re: AMZN - Amazon.com Inc.
Post by: DTEJD1997 on October 26, 2013, 10:39:40 AM
Quote
Here is the right question. Amazon is obviously growing at all costs so how far can they grow without income before their market share is tapped out. At that point they can focus on profitability, and even if their net margin is a few percentage points like Walmart or Costco they will be immensely profitable. That is what the bet is when to amazon IMO. 

I'm sure I wasn't they only one thinking these thoughts.

Ok, if we assume that AMZN is going to turn profitable EVENTUALLY, but they will settle for a margin a few points LOWER than WMT or COST...they will still be making a TON of money!!!!

OK, lets look at those margins...WMT's net margin is about 3.6%.   COST's net margin is about 2%.   So AMZN is going to have margin LOWER than that by a few points?  That could arguably be right where they are at now, NOTHING.

The other problem is this.  I don't think ANYBODY would say AMZN is a small, startup company.  They have sales in the BILLIONS of dollars!  They have sales of $67 BILLION.  That is too small to scale into profitability?  WTF?????

Am I the only one to think that sounds like a cop out.  That they can't and won't ever earn any money and that they are selling naive and gullible investors a "scaling" story?

Just you guys wait!  Once AMZN's sales go over $200 BILLION, they will start earning 1% on sales and RAKING in the cash!   

OK, so AMZN starts making $2 billion, that equates to about $4.25/share.  So the future P/E will be 85?

Of course, Mr. Bezos is a very capable manager!!!  We simpletons who are value investors just don't "grok" what is going on and can't comprehend this new business model!

WHERE HAVE I HEARD THIS BEFORE?
Title: Re: AMZN - Amazon.com Inc.
Post by: ScottHall on October 26, 2013, 10:44:36 AM
Quote
Here is the right question. Amazon is obviously growing at all costs so how far can they grow without income before their market share is tapped out. At that point they can focus on profitability, and even if their net margin is a few percentage points like Walmart or Costco they will be immensely profitable. That is what the bet is when to amazon IMO. 

I'm sure I wasn't they only one thinking these thoughts.

Ok, if we assume that AMZN is going to turn profitable EVENTUALLY, but they will settle for a margin a few points LOWER than WMT or COST...they will still be making a TON of money!!!!

OK, lets look at those margins...WMT's net margin is about 3.6%.   COST's net margin is about 2%.   So AMZN is going to have margin LOWER than that by a few points?  That could arguably be right where they are at now, NOTHING.

The other problem is this.  I don't think ANYBODY would say AMZN is a small, startup company.  They have sales in the BILLIONS of dollars!  They have sales of $67 BILLION.  That is too small to scale into profitability?  WTF?????

Am I the only one to think that sounds like a cop out.  That they can't and won't ever earn any money and that they are selling naive and gullible investors a "scaling" story?

Just you guys wait!  Once AMZN's sales go over $200 BILLION, they will start earning 1% on sales and RAKING in the cash!   

OK, so AMZN starts making $2 billion, that equates to about $4.25/share.  So the future P/E will be 85?

Of course, Mr. Bezos is a very capable manager!!!  We simpletons who are value investors just don't "grok" what is going on and can't comprehend this new business model!

WHERE HAVE I HEARD THIS BEFORE?

Your post reads like that of a crazed hyena. Why not calm down? This isn't a life or death situation, you know.

Personally, I think Amazon fits well in to the TCI model.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on October 26, 2013, 10:45:49 AM
Has anyone here read an AMZN 10-K?
Title: Re: AMZN - Amazon.com Inc.
Post by: ScottHall on October 26, 2013, 11:33:24 AM
Has anyone here read an AMZN 10-K?

I can't speak for anyone else, but I have.
Title: Re: AMZN - Amazon.com Inc.
Post by: enoch01 on October 26, 2013, 11:57:46 AM
Personally, I think Amazon fits well in to the TCI model.

Interesting - how so?  TCI had: built-in barriers to entry (the existing physical assets), the benefits of accelerated depreciation, scale of operations to increase bargaining power, and a virtuoso capital allocator.  Amazon has benefits of scale, and maybe Bezos has good capital allocation skills (hard for me to tell, although I don't know the company really well).  But what else?

What I underestimated for a long time was just how focused Amazon is on customer satisfaction.  That has carried them very far.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on October 26, 2013, 12:43:53 PM
Personally, I think Amazon fits well in to the TCI model.

Interesting - how so?  TCI had: built-in barriers to entry (the existing physical assets), the benefits of accelerated depreciation, scale of operations to increase bargaining power, and a virtuoso capital allocator.  Amazon has benefits of scale, and maybe Bezos has good capital allocation skills (hard for me to tell, although I don't know the company really well).  But what else?

What I underestimated for a long time was just how focused Amazon is on customer satisfaction.  That has carried them very far.


Scott is probably referring to the fact that TCI and Amazon both have CEOs that intentionally maximize expenses to maximize future cash flows, to put it succinctly.   
Title: Re: AMZN - Amazon.com Inc.
Post by: wellmont on October 26, 2013, 03:47:06 PM
Please excuse my ignorance, I'm going to play devil's advocate. I believe Buffett if he says Bezos is the best CEO in the US, but how much higher can AMZN stock go? AMZN market cap is close to Wal-Mart's. Isn't there a risk of a lost decade even if they become the next Wal-Mart? Wal-Mart's 10-year performance isn't good, competitors both small and large are catching up.

it can go a lot higher. insane valuations can get more insane. see 1999. and yes, it runs the risk of a lost decade or more.
Title: Re: AMZN - Amazon.com Inc.
Post by: LC on October 26, 2013, 04:55:59 PM
Scott is probably referring to the fact that TCI and Amazon both have CEOs that intentionally maximize expenses to maximize future cash flows, to put it succinctly.

But that raises the question which is what started this debate in the first place: when will those future cash flows come, and how certain are you that they will be there?  Then, how do you analyze and price the answer to that question?
Title: Re: AMZN - Amazon.com Inc.
Post by: Liberty on October 26, 2013, 09:53:21 PM
Good piece on Amazon. Love the apex predator analogy for Bezos.

http://www.eugenewei.com/blog/2013/10/25/amazon-and-the-profitless-business-model-narrative

I just wish I could value the business, and figure out if it's Walmart in the 70s or 90s.
Title: Re: AMZN - Amazon.com Inc.
Post by: hellsten on October 27, 2013, 01:20:09 AM
Good piece on Amazon. Love the apex predator analogy for Bezos.

http://www.eugenewei.com/blog/2013/10/25/amazon-and-the-profitless-business-model-narrative

I just wish I could value the business, and figure out if it's Walmart in the 70s or 90s.

Thanks. To me it looks like the market is valuing Amazon like the Walmart of today. That in combination with the competition from Walmart, Alibaba, Overstock, Sears, and the rest of the world, makes me want to stay away. Yes, I can't value growth stocks like Buffett or Fisher.
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on October 27, 2013, 09:43:33 AM
There is another company following the Amazon model, CRM:

http://feedproxy.google.com/~r/AVc/~3/LN1dskO-5Zc/they-dont-make-any-money.html
Title: Re: AMZN - Amazon.com Inc.
Post by: Palantir on October 27, 2013, 09:57:23 AM

Thanks. To me it looks like the market is valuing Amazon like the Walmart of today. That in combination with the competition from Walmart, Alibaba, Overstock, Sears, and the rest of the world, makes me want to stay away. Yes, I can't value growth stocks like Buffett or Fisher.

It is questionable whether Buffett himself is all that great at identifying and valuing growth businesses. He's made a small number of famous investments, but nothing compared to what Peter lynch did consistently.

I think Amzn has the potential of bring far more powerful than Walmart and eventually I think it will be, but no doubt valuation is a challenge.
Title: Re: AMZN - Amazon.com Inc.
Post by: jschembs on October 27, 2013, 10:20:29 AM
"Investing for the future at the expense of today's margins" in my opinion is valuable only if the expenses are expected to generate outsized benefits in future years. This is the whole point behind capitalizing expenditures as assets on the balance sheet and slowly amortizing those expenses over future years. I suppose the argument could be made for certain operating expenses, such as R&D, but sales and marketing expenses provide little future benefit. Marketing expenses certainly help build the brand, but you can't simply turn those off and hope to retain the brand awareness.
Title: Re: AMZN - Amazon.com Inc.
Post by: ItsAValueTrap on October 27, 2013, 04:43:04 PM
There are parts of Amazon that are in their infancy and bleeding money.

Payment processing companies usually bleed money when they first start.  You can read Paypal's SEC filings before eBay took them over.  They were down over $200M or something like that.  Virtually all of Paypal's competitors failed (and they also spent huge amounts of money chasing the dream)... they too lost hundreds of millions of dollars.  The losses are huge.  Even Google exited payments.

I don't think that this accounts for all of Amazon's losses though.  I read Amazon's 10-K and couldn't figure out how much money they are losing on Kindle, how (un)profitable Amazon Payments is, etc.
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on October 28, 2013, 08:50:45 AM
There are parts of Amazon that are in their infancy and bleeding money.

Payment processing companies usually bleed money when they first start.  You can read Paypal's SEC filings before eBay took them over.  They were down over $200M or something like that.  Virtually all of Paypal's competitors failed (and they also spent huge amounts of money chasing the dream)... they too lost hundreds of millions of dollars.  The losses are huge.  Even Google exited payments.

I don't think that this accounts for all of Amazon's losses though.  I read Amazon's 10-K and couldn't figure out how much money they are losing on Kindle, how (un)profitable Amazon Payments is, etc.

There is an underlying assumption that the business they enter are going to succeed. Not true:

http://gigaom.com/2013/10/25/amazon-publishing-cant-cut-it-in-nyc-kirshbaum-leaves-as-company-plans-to-scale-back-report/

There is also an assumption that their existing businesses will continue to do well. Again not true. Amazon has a big CD & DVD business. That got disrupted by mp3 and iTunes. They then built up a music download business. Not that too is getting disrupted by Spotify, Pandora and iTunes Radio. All the money invested in those businesses is not down the drain. They have to go back to square one and start again. In the process, they now are selling Kindles at cost to support their content businesses while at the same time selling content below cost. Even with heaving discounting, it was revealed that iBooks was gaining marketshare during the antitrust trial.
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on November 05, 2013, 08:08:31 AM
Another price drop:

http://feedproxy.google.com/~r/Techcrunch/~3/LqchqaRwX3c/
Title: Re: AMZN - Amazon.com Inc.
Post by: Liberty on November 05, 2013, 06:03:59 PM
HBR interview with Bezos (audio and transcript) from earlier this year:

http://blogs.hbr.org/2013/01/jeff-bezos-on-leading-for-the/

Interesting, he quotes both Buffett and Ben Graham within the first 3 mins.
Title: Re: AMZN - Amazon.com Inc.
Post by: ajc on November 07, 2013, 02:03:56 PM
Profits? Amazon Prefers Technology | MIT Technology Review

Amazon’s massive investments in technology shape the future for retailers everywhere.

"Why do some stores succeed while others fail? Retailers constantly struggle with this question, battling one another in ways that change with each generation.
In the late 1800s, architects ruled. Successful merchants like Marshall Field created palaces of commerce that were so gorgeous shoppers rushed to come inside.
In the early 1900s, mail order became the “killer app,” with Sears Roebuck leading the way. Toward the end of the 20th century, ultra-efficient suburban discounters like Target and Walmart conquered all..."


http://www.technologyreview.com/news/520801/no-stores-no-salesmen-no-profit-no-problem-for-amazon/#comments (http://www.technologyreview.com/news/520801/no-stores-no-salesmen-no-profit-no-problem-for-amazon/#comments)

Title: Re: AMZN - Amazon.com Inc.
Post by: fareastwarriors on November 11, 2013, 08:00:13 AM
Amazon, Postal Service to Start Sunday Package Deliveries

http://www.bloomberg.com/news/2013-11-11/amazon-postal-service-to-start-sunday-package-deliveries.html (http://www.bloomberg.com/news/2013-11-11/amazon-postal-service-to-start-sunday-package-deliveries.html)
Title: Re: AMZN - Amazon.com Inc.
Post by: fareastwarriors on November 13, 2013, 02:46:11 PM
http://online.wsj.com/news/articles/SB10001424052702303559504579196043034413108?mod=WSJ_business_whatsNews (http://online.wsj.com/news/articles/SB10001424052702303559504579196043034413108?mod=WSJ_business_whatsNews)

Amazon's Greatest Weapon: Jeff Bezos' Paranoia
Title: Re: AMZN - Amazon.com Inc.
Post by: Palantir on November 13, 2013, 03:05:20 PM
Given the growth rates that they have been moving at, their revenue should be x10 in ten years, if not greater. That will put them at a larger size than Walmart. With a 5.5% FCF margin on that... we get like 32B in FCF, and with a 15x multiplier, should put the firm at 480B. So if you discount that to today....should give you a roughly 11% return.

E commerce is growing portion of total retail, and this is growing its ecommerce marketshare, according to a VIC post on this....I don't see why growth should stall suddenly.
Title: Re: AMZN - Amazon.com Inc.
Post by: Grenville on November 14, 2013, 06:23:55 PM
Article below is an WSJ interview with Andy Jazzy, head of AWS.

"Meet the Man Who Really Runs the Internet"
http://online.wsj.com/news/articles/SB10001424052702304868404579194353031011652 (http://online.wsj.com/news/articles/SB10001424052702304868404579194353031011652)

Quote
WSJ: What is the annual revenue of AWS? Is it profitable?

Mr. Jassy: You know I can't disclose that. We don't disclose our financial results. It will be a very significant free cash flow generating business for Amazon.
Title: Re: AMZN - Amazon.com Inc.
Post by: rkbabang on November 14, 2013, 06:31:16 PM
Maybe Amazon will someday spin off its non-core retail sales operations.

Jeff Bezos Believes AWS Could Be Amazon’s Biggest Business (http://techcrunch.com/2013/11/13/jeff-bezos-believes-aws-could-be-amazons-biggest-business/)
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on November 14, 2013, 08:01:33 PM
Article below is an WSJ interview with Andy Jazzy, head of AWS.

"Meet the Man Who Really Runs the Internet"
http://online.wsj.com/news/articles/SB10001424052702304868404579194353031011652 (http://online.wsj.com/news/articles/SB10001424052702304868404579194353031011652)

Quote
WSJ: What is the annual revenue of AWS? Is it profitable?

Mr. Jassy: You know I can't disclose that. We don't disclose our financial results. It will be a very significant free cash flow generating business for Amazon.

In other words, it is not currently.
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on November 15, 2013, 07:12:30 AM
If you wonder why the server market is tanking:

http://feedproxy.google.com/~r/OmMalik/~3/4qc8UjgeUTQ/
Title: Re: AMZN - Amazon.com Inc.
Post by: txlaw on November 15, 2013, 08:09:57 AM
Article below is an WSJ interview with Andy Jazzy, head of AWS.

"Meet the Man Who Really Runs the Internet"
http://online.wsj.com/news/articles/SB10001424052702304868404579194353031011652 (http://online.wsj.com/news/articles/SB10001424052702304868404579194353031011652)

Quote
WSJ: What is the annual revenue of AWS? Is it profitable?

Mr. Jassy: You know I can't disclose that. We don't disclose our financial results. It will be a very significant free cash flow generating business for Amazon.

And you better believe that every single dollar of profit coming in from AWS is going right back into rapidly building out more capacity.  I saw one analyst saying that he thinks AWS has multiples of the capacity of the other large players when it comes to public cloud infrastructure.

However, the competition clearly is heating up.  I think that IaaS/PaaS providers who support both public, private, and hybrid cloud are going to be gaining market share.  People like Redhat are doing some pretty cool stuff -- OpenShift seems to be quite good.

But the pie is expanding at a rapid rate, so there's room for many players to win.
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on November 15, 2013, 08:26:37 AM
Article below is an WSJ interview with Andy Jazzy, head of AWS.

"Meet the Man Who Really Runs the Internet"
http://online.wsj.com/news/articles/SB10001424052702304868404579194353031011652 (http://online.wsj.com/news/articles/SB10001424052702304868404579194353031011652)

Quote
WSJ: What is the annual revenue of AWS? Is it profitable?

Mr. Jassy: You know I can't disclose that. We don't disclose our financial results. It will be a very significant free cash flow generating business for Amazon.

And you better believe that every single dollar of profit coming in from AWS is going right back into rapidly building out more capacity.  I saw one analyst saying that he thinks AWS has multiples of the capacity of the other large players when it comes to public cloud infrastructure.

However, the competition clearly is heating up.  I think that IaaS/PaaS providers who support both public, private, and hybrid cloud are going to be gaining market share.  People like Redhat are doing some pretty cool stuff -- OpenShift seems to be quite good.

But the pie is expanding at a rapid rate, so there's room for many players to win.

Which means the pie is shrinking for the server market. Note that he said that they pay 30% less
for servers. "Long runway" indeed.
Title: Re: AMZN - Amazon.com Inc.
Post by: txlaw on November 15, 2013, 08:30:19 AM
Article below is an WSJ interview with Andy Jazzy, head of AWS.

"Meet the Man Who Really Runs the Internet"
http://online.wsj.com/news/articles/SB10001424052702304868404579194353031011652 (http://online.wsj.com/news/articles/SB10001424052702304868404579194353031011652)

Quote
WSJ: What is the annual revenue of AWS? Is it profitable?

Mr. Jassy: You know I can't disclose that. We don't disclose our financial results. It will be a very significant free cash flow generating business for Amazon.

And you better believe that every single dollar of profit coming in from AWS is going right back into rapidly building out more capacity.  I saw one analyst saying that he thinks AWS has multiples of the capacity of the other large players when it comes to public cloud infrastructure.

However, the competition clearly is heating up.  I think that IaaS/PaaS providers who support both public, private, and hybrid cloud are going to be gaining market share.  People like Redhat are doing some pretty cool stuff -- OpenShift seems to be quite good.

But the pie is expanding at a rapid rate, so there's room for many players to win.

Which means the pie is shrinking for the server market. Note that he said that they pay 30% less
for servers. "Long runway" indeed.

No, there's really no way to definitively say that the pie is shrinking.  ASPs and margins are decreasing for sure.  But the units are expanding exponentially (just take a look at the non public cloud datacenter market growth). 

There's definitely a long runway.
Title: Re: AMZN - Amazon.com Inc.
Post by: Grenville on November 15, 2013, 08:34:30 AM
If you wonder why the server market is tanking:

http://feedproxy.google.com/~r/OmMalik/~3/4qc8UjgeUTQ/

Thanks for posting the article. Interesting info from the conference and an insider at Amazon.
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on November 15, 2013, 10:03:04 AM
Article below is an WSJ interview with Andy Jazzy, head of AWS.

"Meet the Man Who Really Runs the Internet"
http://online.wsj.com/news/articles/SB10001424052702304868404579194353031011652 (http://online.wsj.com/news/articles/SB10001424052702304868404579194353031011652)

Quote
WSJ: What is the annual revenue of AWS? Is it profitable?

Mr. Jassy: You know I can't disclose that. We don't disclose our financial results. It will be a very significant free cash flow generating business for Amazon.

And you better believe that every single dollar of profit coming in from AWS is going right back into rapidly building out more capacity.  I saw one analyst saying that he thinks AWS has multiples of the capacity of the other large players when it comes to public cloud infrastructure.

However, the competition clearly is heating up.  I think that IaaS/PaaS providers who support both public, private, and hybrid cloud are going to be gaining market share.  People like Redhat are doing some pretty cool stuff -- OpenShift seems to be quite good.

But the pie is expanding at a rapid rate, so there's room for many players to win.

Which means the pie is shrinking for the server market. Note that he said that they pay 30% less
for servers. "Long runway" indeed.

No, there's really no way to definitively say that the pie is shrinking.  ASPs and margins are decreasing for sure.  But the units are expanding exponentially (just take a look at the non public cloud datacenter market growth). 

There's definitely a long runway.
The market is shrinking for the likes of Dell that don't make custom servers for the likes of Amazon. If Dell wants to enter this market, they will have to drop prices by more than 30% and reorganize their manufacturing to just start being competitive.

Look at the article I posted. The fact that Amazon is adding that much capacity in one day tells you how much of the market they are eating in a single day. That much computing has shifted from what would have been private computing to the public cloud.

This is not even counting Google, MSFT and others.
Title: Re: AMZN - Amazon.com Inc.
Post by: Palantir on November 15, 2013, 10:12:54 AM
Units may be expanding, but knowledgeable buyers like AmazFaceGoo can easily build their own servers. You know, the infamous "commoditization". So just tons of cheapo servers built by buying off the shelf equipment with no profit margin built in, so the pie may be increasing, but the profit pie is shrinking IMO.

The value here has to be the software that runs on the server, and thats where companies like AMZN, MS and RHT need to make their play.
Title: Re: AMZN - Amazon.com Inc.
Post by: txlaw on November 15, 2013, 11:30:04 AM
Units may be expanding, but knowledgeable buyers like AmazFaceGoo can easily build their own servers. You know, the infamous "commoditization". So just tons of cheapo servers built by buying off the shelf equipment with no profit margin built in, so the pie may be increasing, but the profit pie is shrinking IMO.

The value here has to be the software that runs on the server, and thats where companies like AMZN, MS and RHT need to make their play.

Yup, the direct from ODMs phenomenon continues to grow because of the big Internet cos.  It simply doesn't make sense for massive public cloud infrastructure/service providers like GOOG and AMZN to buy servers from the likes of DELL, HPQ, or IBM.  So commoditization is definitely occurring (and has been for a while) -- that's why you see ASPs and margins decreasing.  And revenues shrinking as well for what is considered the traditional server market.

However, it's important to realize that units are growing at a rapid clip with direct sales from ODMs not really encompassed within the unit count for most studies/reports (most server market share figures I've seen only concentrate on traditional server vendors).  The fact of the matter is that units are growing rapidly because of the amazing growth of remote computing.

What we cannot say is what happens to profits as the traditional hardware vendors -- the top three of which are IBM, HP, and DELL -- start providing their servers for a "converged cloud" world.  I happen to agree with IBM, HP, and DELL that we will be living in a hybrid world -- one where you have the option to go with public cloud, hybrid cloud, or private cloud.  And you can either have a managed or unmanaged cloud.  What type of solution you go with will depend on your business and organizational capabilities.

So think about this:  all of these guys are buying from ODMs.  DELL and HPQ are ODM buyers as well -- it's just that they make a retail profit on servers at this time.  They're actually in a better position than FB, AMZN, and GOOG in terms of buying power.  That means they can be low cost providers for non-public cloud solutions (think about verticals like healthcare or energy), and they can also provide their own public clouds.  Because of projects like OpenStack and OpenCompute.   

In order for these guys to totally lose out, you must assume that none of them will provide public cloud solutions on par with the current public cloud big dogs and that everyone will outsource to the public cloud -- or at a higher level, to SaaS providers.  I contend that because of projects like Open Compute and OpenStack, the public cloud playing field will be leveled over time, with resources, scale, and enterprise relationships starting to matter more and more in terms of competitiveness in the market.  I also think that there will always be enterprises who will go with managed or unmanaged private/hybrid cloud solutions.  Because these guys want control over their data, they want to outsource cloud infrastructure management to vendors with expertise, and because it actually costs less to buy than to rent in most cases.

In other words, "retail" server sales to third parties may shrink, but that doesn't mean that the big guys don't profit from their position in the long run, particularly when you see value shifting to the software and services bundled with the cloud hardware (again, I agree with the notion of commoditization).  That's exactly the approach that the big three are taking.

RHAT is ridiculously overvalued, btw.
Title: Re: AMZN - Amazon.com Inc.
Post by: Palantir on November 15, 2013, 11:49:36 AM
I'm a little unclear about the above. When you say IBM/HP/D will be building for the public cloud, do you mean to say their software platforms for the public cloud or becoming commodity suppliers for the hardware? If the latter, I don't see an advantage, but If the former, I suppose OpenStack is one way to do it, but its not obvious to me yet how it is going to be monetized. But I have to read more before I can have an opinion on this.

Focusing on the last part. Why do you think RHT is way overvalued? I think it's a steal.
Title: Re: AMZN - Amazon.com Inc.
Post by: txlaw on November 15, 2013, 11:58:44 AM
Focusing on the last part. Why do you think RHT is way overvalued? I think it's a steal.

To boil it down, it seems like the market is valuing it like a software company when it's really a services company.  And that's not good when there is so much competition coming online.

I would actually be interested to hear why you think it's a steal, as I haven't done a ton of work on the company. 
Title: Re: AMZN - Amazon.com Inc.
Post by: Palantir on November 15, 2013, 12:11:41 PM
My take - Their revenue has an annuity-like structure, their clients have high switching costs, they have a low margin business model that tends to be disruptive and hard for proprietary software to attack, and finally, their earnings are far less than FCF. Combining the solid business model with its high rates of growth, even if growth slows I still think it looks attractive (back out the cash and use FCF vs NI).

The issue though is what are they going to do after RHEL? There is only so much they can convert to RHEL, so they will need new lines of growth, and they seem to think they've found it with middleware. My opinion is that their business model tends to be pretty flexible and should be able to attack other spaces apart from just operating systems. But I'm not really a tech guy...


Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on November 16, 2013, 08:40:37 AM

So think about this:  all of these guys are buying from ODMs.  DELL and HPQ are ODM buyers as well -- it's just that they make a retail profit on servers at this time.  They're actually in a better position than FB, AMZN, and GOOG in terms of buying power.  That means they can be low cost providers for non-public cloud solutions (think about verticals like healthcare or energy), and they can also provide their own public clouds.  Because of projects like OpenStack and OpenCompute.   

In order for these guys to totally lose out, you must assume that none of them will provide public cloud solutions on par with the current public cloud big dogs and that everyone will outsource to the public cloud -- or at a higher level, to SaaS providers.  I contend that because of projects like Open Compute and OpenStack, the public cloud playing field will be leveled over time, with resources, scale, and enterprise relationships starting to matter more and more in terms of competitiveness in the market.  I also think that there will always be enterprises who will go with managed or unmanaged private/hybrid cloud solutions.  Because these guys want control over their data, they want to outsource cloud infrastructure management to vendors with expertise, and because it actually costs less to buy than to rent in most cases.

In other words, "retail" server sales to third parties may shrink, but that doesn't mean that the big guys don't profit from their position in the long run, particularly when you see value shifting to the software and services bundled with the cloud hardware (again, I agree with the notion of commoditization).  That's exactly the approach that the big three are taking.

Let me see, AWS has cut prices 38 times in the last 7 years. Players like Dell and others will catch up and  join the game with Openstack, etc. That means that cloud services will get commoditized even more quickly. So let's see:
Hardware is getting commoditized
The OS is getting commoditized
Software is being replaced by services
Services is getting commoditized

I am beginning to sense a pattern here  ::).
Where is a poor boy to invest?

Title: Re: AMZN - Amazon.com Inc.
Post by: txlaw on November 16, 2013, 11:05:40 AM
I'm a little unclear about the above. When you say IBM/HP/D will be building for the public cloud, do you mean to say their software platforms for the public cloud or becoming commodity suppliers for the hardware? If the latter, I don't see an advantage, but If the former, I suppose OpenStack is one way to do it, but its not obvious to me yet how it is going to be monetized. But I have to read more before I can have an opinion on this.

I see you updated your last post.

What I'm saying is that, to the extent we're talking about "public cloud" service providers posing a competitive threat to traditional server vendors -- because many people who bought servers (e.g., Fortune 500 enterprise or SaaS providers) will now rent compute power (and other services) from AMZN, GOOG, or other public cloud providers who use direct from ODM hardware -- this market share loss is mitigated by: (1) exponential growth in cloud computing units needed by everybody (whether via private, public, or hybrid cloud); and (2) a shift in biz model where these big cloud hardware vendors start renting out the hardware they purchase and assemble from ODMs (for example, IBM and HP providing their own public cloud services) in addition to their traditional biz of selling hardware and providing turnkey solutions where hardware sales are part of a package.  Software and services provided to manage/utilize cloud computing infrastructure are part and parcel of both public and private cloud provisioning. 

Here's the way that NIST separates out the deployment models we're talking about:

(1) Private cloud -- The cloud infrastructure is provisioned for exclusive use by a single organization comprising multiple consumers (e.g., business units). It may be owned, managed, and operated by the organization, a third party, or some combination of them, and it may exist on or off premises.

(2) Community cloud -- The cloud infrastructure is provisioned for exclusive use by a specific community of consumers from organizations that have shared concerns (e.g., mission, security requirements, policy, and compliance considerations).  It may be owned, managed, and operated by one or more of the organizations in the community, a third party, or some combination of them, and it may exist on or off presmises.

(3) Public cloud -- The cloud infrastructure is provisioned for open use by the general public.  It may be owned, managed, and operated by a business, academic, or government organization, or some combination of them.  It exists on the premises of the cloud provider.

(4) Hybrid cloud -- The cloud infrastructure is a composition of two or more distinct cloud infrastructures (private, community, or public) that remain unique entities, but are bound together by standardized or proprietary technology that enables data and application portability (e.g., cloud bursting for load balancing between clouds).

Note that SaaS vendors can provide their software off of public cloud infrastructre (e.g., Netflix on AWS), private cloud infrastructure (e.g., Facebook), or hybrid cloud (e.g., Box.net).  The very big SaaS vendors like GOOG and FB tend to buy their own infrastructure straight from ODMs.

When it comes to private and community cloud (and hybrid cloud, as well), the software vendors that we're talking about are still making cloud hardware sales to organizations who need (or want) to own, rather than rent, the infrastructure.  But as I said before, they're also getting into the deployment models that focus more on renting compute hardware.  Further, it's not a zero sum game when it comes to the growth in public cloud computing, or the increasing use of commodity hardware by big SaaS vendors in their own private clouds.  The need for compute power is growing, and you are gonna see a lot of demand for compute power from all sorts of organizations that never considered this to be a necessity in the past.  The demand for compute power is on a hockey stick growth curve.

So the way I see it, there will be multiple winners.  AMZN will be one of them, of course.  And the big cloud hardware vendors will hopefully also be winners if they play their cards right.
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on November 16, 2013, 04:32:40 PM
I'm a little unclear about the above. When you say IBM/HP/D will be building for the public cloud, do you mean to say their software platforms for the public cloud or becoming commodity suppliers for the hardware? If the latter, I don't see an advantage, but If the former, I suppose OpenStack is one way to do it, but its not obvious to me yet how it is going to be monetized. But I have to read more before I can have an opinion on this.

I see you updated your last post.

What I'm saying is that, to the extent we're talking about "public cloud" service providers posing a competitive threat to traditional server vendors -- because many people who bought servers (e.g., Fortune 500 enterprise or SaaS providers) will now rent compute power (and other services) from AMZN, GOOG, or other public cloud providers who use direct from ODM hardware -- this market share loss is mitigated by: (1) exponential growth in cloud computing units needed by everybody (whether via private, public, or hybrid cloud); and (2) a shift in biz model where these big cloud hardware vendors start renting out the hardware they purchase and assemble from ODMs (for example, IBM and HP providing their own public cloud services) in addition to their traditional biz of selling hardware and providing turnkey solutions where hardware sales are part of a package.  Software and services provided to manage/utilize cloud computing infrastructure are part and parcel of both public and private cloud provisioning. 

Here's the way that NIST separates out the deployment models we're talking about:

(1) Private cloud -- The cloud infrastructure is provisioned for exclusive use by a single organization comprising multiple consumers (e.g., business units). It may be owned, managed, and operated by the organization, a third party, or some combination of them, and it may exist on or off premises.

(2) Community cloud -- The cloud infrastructure is provisioned for exclusive use by a specific community of consumers from organizations that have shared concerns (e.g., mission, security requirements, policy, and compliance considerations).  It may be owned, managed, and operated by one or more of the organizations in the community, a third party, or some combination of them, and it may exist on or off presmises.

(3) Public cloud -- The cloud infrastructure is provisioned for open use by the general public.  It may be owned, managed, and operated by a business, academic, or government organization, or some combination of them.  It exists on the premises of the cloud provider.

(4) Hybrid cloud -- The cloud infrastructure is a composition of two or more distinct cloud infrastructures (private, community, or public) that remain unique entities, but are bound together by standardized or proprietary technology that enables data and application portability (e.g., cloud bursting for load balancing between clouds).

Note that SaaS vendors can provide their software off of public cloud infrastructre (e.g., Netflix on AWS), private cloud infrastructure (e.g., Facebook), or hybrid cloud (e.g., Box.net).  The very big SaaS vendors like GOOG and FB tend to buy their own infrastructure straight from ODMs.

When it comes to private and community cloud (and hybrid cloud, as well), the software vendors that we're talking about are still making cloud hardware sales to organizations who need (or want) to own, rather than rent, the infrastructure.  But as I said before, they're also getting into the deployment models that focus more on renting compute hardware.  Further, it's not a zero sum game when it comes to the growth in public cloud computing, or the increasing use of commodity hardware by big SaaS vendors in their own private clouds.  The need for compute power is growing, and you are gonna see a lot of demand for compute power from all sorts of organizations that never considered this to be a necessity in the past.  The demand for compute power is on a hockey stick growth curve.

So the way I see it, there will be multiple winners.  AMZN will be one of them, of course.  And the big cloud hardware vendors will hopefully also be winners if they play their cards right.

Here ya go  ;):

http://gigaom.com/2013/11/16/new-startup-economics-why-amazon-web-services-and-dropbox-need-each-other/

Some interesting tidbits:
AWS has over five times the compute capacity in use than the aggregate total of the other 14 providers.
AWS replaces an average of 400 servers per customer.
Amazon has lowered AWS prices 38 times since launching in 2006.

In other words, thats 400 serves they don't buy from Dell, HP and IBM.
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on November 20, 2013, 02:53:30 PM
[

So think about this:  all of these guys are buying from ODMs.  DELL and HPQ are ODM buyers as well -- it's just that they make a retail profit on servers at this time.  They're actually in a better position than FB, AMZN, and GOOG in terms of buying power.  That means they can be low cost providers for non-public cloud solutions (think about verticals like healthcare or energy), and they can also provide their own public clouds.  Because of projects like OpenStack and OpenCompute.   

In order for these guys to totally lose out, you must assume that none of them will provide public cloud solutions on par with the current public cloud big dogs and that everyone will outsource to the public cloud -- or at a higher level, to SaaS providers.  I contend that because of projects like Open Compute and OpenStack, the public cloud playing field will be leveled over time, with resources, scale, and enterprise relationships starting to matter more and more in terms of competitiveness in the market.  I also think that there will always be enterprises who will go with managed or unmanaged private/hybrid cloud solutions.  Because these guys want control over their data, they want to outsource cloud infrastructure management to vendors with expertise, and because it actually costs less to buy than to rent in most cases.

In other words, "retail" server sales to third parties may shrink, but that doesn't mean that the big guys don't profit from their position in the long run, particularly when you see value shifting to the software and services bundled with the cloud hardware (again, I agree with the notion of commoditization).  That's exactly the approach that the big three are taking.

And here is Openstack in the real world:
http://blogs.gartner.com/alessandro-perilli/why-vendors-cant-sell-openstack-to-enterprises/

Re:Invent was a message to the ecosystem:
http://gigaom.com/2013/11/20/aws-gets-respect-but-also-fear-and-loathing-in-las-vegas/
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on November 26, 2013, 02:00:23 PM
[

So think about this:  all of these guys are buying from ODMs.  DELL and HPQ are ODM buyers as well -- it's just that they make a retail profit on servers at this time.  They're actually in a better position than FB, AMZN, and GOOG in terms of buying power.  That means they can be low cost providers for non-public cloud solutions (think about verticals like healthcare or energy), and they can also provide their own public clouds.  Because of projects like OpenStack and OpenCompute.   

In order for these guys to totally lose out, you must assume that none of them will provide public cloud solutions on par with the current public cloud big dogs and that everyone will outsource to the public cloud -- or at a higher level, to SaaS providers.  I contend that because of projects like Open Compute and OpenStack, the public cloud playing field will be leveled over time, with resources, scale, and enterprise relationships starting to matter more and more in terms of competitiveness in the market.  I also think that there will always be enterprises who will go with managed or unmanaged private/hybrid cloud solutions.  Because these guys want control over their data, they want to outsource cloud infrastructure management to vendors with expertise, and because it actually costs less to buy than to rent in most cases.

In other words, "retail" server sales to third parties may shrink, but that doesn't mean that the big guys don't profit from their position in the long run, particularly when you see value shifting to the software and services bundled with the cloud hardware (again, I agree with the notion of commoditization).  That's exactly the approach that the big three are taking.

And here is Openstack in the real world:
http://blogs.gartner.com/alessandro-perilli/why-vendors-cant-sell-openstack-to-enterprises/

Re:Invent was a message to the ecosystem:
http://gigaom.com/2013/11/20/aws-gets-respect-but-also-fear-and-loathing-in-las-vegas/

And here's more:

http://gigaom.com/2013/11/26/doh-amazon-builds-its-cloud-lead-over-it-rivals-in-q3/
Title: Re: AMZN - Amazon.com Inc.
Post by: CONeal on December 01, 2013, 05:34:36 PM
In a recent interview on 60 minutes Amazon revealed they were working on drone delivery for packages up to 5 pounds.  Thought it would be possible to implement in about 5 years.  Earliest that it could be done is 3 years due to Needing FAA approval. 

Edited to change FFA to FAA
Title: Re: AMZN - Amazon.com Inc.
Post by: LC on December 01, 2013, 09:00:14 PM
http://www.amazon.com/b?ref_=tsm_1_tw_s_amzn_mx3eqp&node=8037720011

If they can work it all out, it seems like a good way to deliver to rural customers. Although I suspect some money will be made insuring all the various liabilities associated with it...
Title: Re: AMZN - Amazon.com Inc.
Post by: turar on December 02, 2013, 08:26:16 AM
In Globe & Mail weekend edition there was an article about Chinese e-commerce. Couple of things mentioned were that one of Chinese e-tailers already tested drone delivery to rural areas (albeit with much less fanfare), and that by some estimates, China's online retailing is already larger than that of the US.
http://www.theglobeandmail.com/report-on-business/international-business/in-china-online-retail-is-about-to-get-a-whole-lot-bigger/article15688956/
Title: Re: AMZN - Amazon.com Inc.
Post by: DCG on December 02, 2013, 08:55:02 AM
China's population is 3x the U.S., so not a big surprise.
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on December 03, 2013, 08:44:52 AM
And the race to see who can lose the most money:

http://venturebeat.com/2013/12/03/google-cloud-compute-engine-launch/
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on December 03, 2013, 08:45:39 AM
In Globe & Mail weekend edition there was an article about Chinese e-commerce. Couple of things mentioned were that one of Chinese e-tailers already tested drone delivery to rural areas (albeit with much less fanfare), and that by some estimates, China's online retailing is already larger than that of the US.
http://www.theglobeandmail.com/report-on-business/international-business/in-china-online-retail-is-about-to-get-a-whole-lot-bigger/article15688956/
Alibaba is bigger than Amazon and Ebay put together.
Title: Re: AMZN - Amazon.com Inc.
Post by: fareastwarriors on December 03, 2013, 08:49:16 AM
I never understood why people need their stuff so quickly. The stuff I buy there is never urgent. If it comes in couple of days that's cool but if it comes next week that's okay too... Maybe I'm just weird...

I guess I am not their target for Prime (or Prime Air)...
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on December 03, 2013, 08:57:40 AM
I never understood why people need their stuff so quickly. The stuff I buy there is never urgent. If it comes in couple of days that's cool but if it comes next week that's okay too... Maybe I'm just weird...

I guess I am not their target for Prime (or Prime Air)...

They way they are doing it is problematic - using GPS co-ordinates. What are the coordinates of your front porch? How do you deliver to an apartment building? How valuable and stealable are the drones? How good are people at skeet shooting?


Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on December 03, 2013, 09:32:48 AM
Something to think about:

http://www.businessweek.com/articles/2013-12-02/amazons-drone-fleet-delivers-what-bezos-wants-an-image-of-ingenuity
Title: Re: AMZN - Amazon.com Inc.
Post by: rmitz on December 03, 2013, 09:52:28 AM
I never understood why people need their stuff so quickly. The stuff I buy there is never urgent. If it comes in couple of days that's cool but if it comes next week that's okay too... Maybe I'm just weird...

I guess I am not their target for Prime (or Prime Air)...

It's moving into different segments of the market.  You need some weird part for your plumbing project?  If it could be delivered in 30 minutes, why bother going to the store (if you can even get it there at all), just continue working on other bits while it's on the way to you.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on December 03, 2013, 09:55:39 AM
I never understood why people need their stuff so quickly. The stuff I buy there is never urgent. If it comes in couple of days that's cool but if it comes next week that's okay too... Maybe I'm just weird...

I guess I am not their target for Prime (or Prime Air)...

It's moving into different segments of the market.  You need some weird part for your plumbing project?  If it could be delivered in 30 minutes, why bother going to the store (if you can even get it there at all), just continue working on other bits while it's on the way to you.


Also sales they lose to Walgreen's & CVS - urgent items: candy, cards, various urgent health items.  AMZN will be able to offer comparable delivery/acquisition times in thirty minutes.  Walgreen's is one of the few retailers I ever shop at aside from AMZN now, and it's only health and other time sensitive products.
Title: Re: AMZN - Amazon.com Inc.
Post by: CONeal on December 03, 2013, 10:10:43 AM
I never understood why people need their stuff so quickly. The stuff I buy there is never urgent. If it comes in couple of days that's cool but if it comes next week that's okay too... Maybe I'm just weird...

I guess I am not their target for Prime (or Prime Air)...

You and me both.  Had a discussion with a friend the other day and he was literally about to flip out b/c his package wasn't going to be delivered Friday (UPS was closed) over a shirt.  People are losing the whole concept of patience these days or maybe its their expectations are way to high.  Wish I could figure out a way to accomodate these types of people b/c even though they are high maintence, I would charge them an arm and a leg to accomodate those demands (cause lets face it if your a pain in the ass I'm going to charge extra putting up with all the bs).
Title: Re: AMZN - Amazon.com Inc.
Post by: Kraven on December 03, 2013, 10:17:10 AM
I never understood why people need their stuff so quickly. The stuff I buy there is never urgent. If it comes in couple of days that's cool but if it comes next week that's okay too... Maybe I'm just weird...

I guess I am not their target for Prime (or Prime Air)...

You and me both.  Had a discussion with a friend the other day and he was literally about to flip out b/c his package wasn't going to be delivered Friday (UPS was closed) over a shirt.  People are losing the whole concept of patience these days or maybe its their expectations are way to high.  Wish I could figure out a way to accomodate these types of people b/c even though they are high maintence, I would charge them an arm and a leg to accomodate those demands (cause lets face it if your a pain in the ass I'm going to charge extra putting up with all the bs).

Could be a function of age and what you grew up with. Take smartphones for example or even just the internet. I can remember growing up and to find out the sports scores we would sit around and wait until the sports came on the 11 pm news. If for some reason you missed that or it was a late game you had to wait until you got the newspaper the next day. Sometimes when we really wanted to know we would call up the sports desk at the local paper and ask them but if we did it too often they got irritated. Now, if you want to know a score and for whatever reason the app on your phone doesn't connect immediately everyone freaks out.
Title: Re: AMZN - Amazon.com Inc.
Post by: shoeless on December 03, 2013, 12:02:55 PM
In a recent interview on 60 minutes Amazon revealed they were working on drone delivery for packages up to 5 pounds.  Thought it would be possible to implement in about 5 years.  Earliest that it could be done is 3 years due to Needing FAA approval. 

I believe this is the interview (see the drones around minute 11)
http://www.youtube.com/watch?v=6in-MZeeeGk
Title: Re: AMZN - Amazon.com Inc.
Post by: bargainman on December 04, 2013, 08:09:33 PM
I never understood why people need their stuff so quickly. The stuff I buy there is never urgent. If it comes in couple of days that's cool but if it comes next week that's okay too... Maybe I'm just weird...

I guess I am not their target for Prime (or Prime Air)...

You and me both.  Had a discussion with a friend the other day and he was literally about to flip out b/c his package wasn't going to be delivered Friday (UPS was closed) over a shirt.  People are losing the whole concept of patience these days or maybe its their expectations are way to high.  Wish I could figure out a way to accomodate these types of people b/c even though they are high maintence, I would charge them an arm and a leg to accomodate those demands (cause lets face it if your a pain in the ass I'm going to charge extra putting up with all the bs).

Could be a function of age and what you grew up with. Take smartphones for example or even just the internet. I can remember growing up and to find out the sports scores we would sit around and wait until the sports came on the 11 pm news. If for some reason you missed that or it was a late game you had to wait until you got the newspaper the next day. Sometimes when we really wanted to know we would call up the sports desk at the local paper and ask them but if we did it too often they got irritated. Now, if you want to know a score and for whatever reason the app on your phone doesn't connect immediately everyone freaks out.

Everything is amazing and nobody is happy!!! :-)

http://www.liveleak.com/view?i=aba_1332656862

"wasted on the crappiest generation of spoiled idiots..."  really funny ..

Love his description of flying :-)
Title: Re: AMZN - Amazon.com Inc.
Post by: LC on December 13, 2013, 09:32:01 PM
Amazon to launch 'Pantry': http://www.usatoday.com/story/tech/2013/12/12/amazon-pantry/4001707/

The service will be targeted at existing members of Amazon's Prime shipping program. It will launch with about 2,000 products typically found in the center of grocery stores, such as cleaning supplies, kitchen paper rolls, canned goods like pet food, dry grocery items like cereal and some beverages.

Amazon will let Prime shoppers put as many of these items into a set sized box, up to a specific weight limit. If the products fit and they don't exceed the maximum weight, Amazon will ship the box for a small fee.


Wonder if it will actually generate profits or just keep Fedex/UPS busy? :)
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on December 13, 2013, 11:44:40 PM
Amazon to launch 'Pantry': http://www.usatoday.com/story/tech/2013/12/12/amazon-pantry/4001707/

The service will be targeted at existing members of Amazon's Prime shipping program. It will launch with about 2,000 products typically found in the center of grocery stores, such as cleaning supplies, kitchen paper rolls, canned goods like pet food, dry grocery items like cereal and some beverages.

Amazon will let Prime shoppers put as many of these items into a set sized box, up to a specific weight limit. If the products fit and they don't exceed the maximum weight, Amazon will ship the box for a small fee.


Wonder if it will actually generate profits or just keep Fedex/UPS busy? :)

When you're Amazon, you don't need profits. ;)
Title: Re: AMZN - Amazon.com Inc.
Post by: Grenville on December 15, 2013, 03:34:07 PM
Just finished the Everything Store by Brad Stone. I highly recommend the book to anyone invested in Amazon or other's wanting to get a more inside look at the company. Really interesting stories both about internal operation along with their acquisitions. I know Mackenzie Bezos had a less than sparkling review, but I agree with others that its a valuable story/view on the workings of growing/sprawling business.

I think there is a thread in the book category, but I wanted to leave my review in the investment thread because it adds value understanding the company.
Title: Re: AMZN - Amazon.com Inc.
Post by: fareastwarriors on December 17, 2013, 11:11:38 PM
http://www.businessweek.com/articles/2013-12-17/amazon-may-get-its-first-labor-union-in-the-u-dot-s (http://www.businessweek.com/articles/2013-12-17/amazon-may-get-its-first-labor-union-in-the-u-dot-s)

Amazon May Get Its First Labor Union in the U.S.
Title: Re: AMZN - Amazon.com Inc.
Post by: ajc on December 20, 2013, 06:51:08 AM
When you're Amazon, you don't need profits. ;)

I don't think that's a very useful way of looking at Amazon's approach to business, in fact their 'unprofitability' is probably one of their most important strengths.

Still, it's always a joke I appreciate reading because you're right that for most companies it would be just as bad as it sounds.
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on December 20, 2013, 07:20:20 AM
When you're Amazon, you don't need profits. ;)

I don't think that's a very useful way of looking at Amazon's approach to business, in fact their 'unprofitability' is probably one of their most important strengths.

Still, it's always a joke I appreciate reading because you're right that for most companies it would be just as bad as it sounds.

Amazons greatest strength is the lack of people willing to do a financial analysis.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on December 20, 2013, 07:39:49 AM
When you're Amazon, you don't need profits. ;)

I don't think that's a very useful way of looking at Amazon's approach to business, in fact their 'unprofitability' is probably one of their most important strengths.

Still, it's always a joke I appreciate reading because you're right that for most companies it would be just as bad as it sounds.

Amazons greatest strength is the lack of people willing to do a financial analysis.


What are your conclusions performing your financial analysis? 


Some of mine are:

Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on December 20, 2013, 09:58:33 AM
[

So think about this:  all of these guys are buying from ODMs.  DELL and HPQ are ODM buyers as well -- it's just that they make a retail profit on servers at this time.  They're actually in a better position than FB, AMZN, and GOOG in terms of buying power.  That means they can be low cost providers for non-public cloud solutions (think about verticals like healthcare or energy), and they can also provide their own public clouds.  Because of projects like OpenStack and OpenCompute.   

In order for these guys to totally lose out, you must assume that none of them will provide public cloud solutions on par with the current public cloud big dogs and that everyone will outsource to the public cloud -- or at a higher level, to SaaS providers.  I contend that because of projects like Open Compute and OpenStack, the public cloud playing field will be leveled over time, with resources, scale, and enterprise relationships starting to matter more and more in terms of competitiveness in the market.  I also think that there will always be enterprises who will go with managed or unmanaged private/hybrid cloud solutions.  Because these guys want control over their data, they want to outsource cloud infrastructure management to vendors with expertise, and because it actually costs less to buy than to rent in most cases.

In other words, "retail" server sales to third parties may shrink, but that doesn't mean that the big guys don't profit from their position in the long run, particularly when you see value shifting to the software and services bundled with the cloud hardware (again, I agree with the notion of commoditization).  That's exactly the approach that the big three are taking.

And here is Openstack in the real world:
http://blogs.gartner.com/alessandro-perilli/why-vendors-cant-sell-openstack-to-enterprises/

Re:Invent was a message to the ecosystem:
http://gigaom.com/2013/11/20/aws-gets-respect-but-also-fear-and-loathing-in-las-vegas/

More on Openstack:

http://gigaom.com/2013/12/20/backbreaking-openstack-migrations-hinder-enterprise-upgrades/
Title: Re: AMZN - Amazon.com Inc.
Post by: ajc on December 20, 2013, 10:03:51 AM
Amazons greatest strength is the lack of people willing to do a financial analysis.

Unfortunately valueInv, I think you're confusing the stock price with the roughly definable intrinsic value of the underlying business.

How many people do or don't do a financial analysis of the business really has very little to do with its various internal strengths as a company (of which its emphasis on tax-efficiency is one).
I'm not sure if that's a fact which you're at all aware of.

Anyway, I just thought it might be helpful for me to point it out since you seem to be mixing up the extrinsic with the intrinsic in terms of business value there.
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on December 20, 2013, 10:16:42 AM
Amazons greatest strength is the lack of people willing to do a financial analysis.

Unfortunately valueInv, I think you're confusing the stock price with the roughly definable intrinsic value of the underlying business.

How many people do or don't do a financial analysis of the business really has very little to do with its various internal strengths as a company (of which its emphasis on tax-efficiency is one).
I'm not sure if that's a fact which you're at all aware of.

Anyway, I just thought it might be helpful for me to point it out since you seem to be mixing up the extrinsic with the intrinsic in terms of business value there.

Oh, I'm aware of it all right. If people started asking the right questions, Bezos wouldn't be able to do all the things he is doing right now. That would impact what happens internally and the intrinsic value.
Title: Re: AMZN - Amazon.com Inc.
Post by: Palantir on December 20, 2013, 10:23:59 AM
JAllen, do you believe AMZN is undervalued or misunderstood? Given their stock performance, I have a hard time believing that the mainstream investment community (note: not value investors) is skeptical of their business model rather rate it very highly.
Title: Re: AMZN - Amazon.com Inc.
Post by: jschembs on December 20, 2013, 11:34:40 AM
I am a big fan of AMZN the company, and my wife works in recruiting right there in South Lake Union, but I shudder when I hear people gush about how this company needs to be valued differently because of its investment decisions focused on growth and the future, which somehow render EBIT and other P&L based measures meaningless.

I have no position in the stock (save for minor long exposure via my wife's stock option plan), so I have no axe to grind. Further, I always begin my review of a business at the cash flow statement, so I appreciate the value of a company's ability to generate sustainable cash flow for shareholders. However, stating that "operating cash flow is superior to net income" without focusing on the components of that cash flow, their persistence, and ancillary impacts on shareholders is important.

From CapIQ, AMZN generated $4.98 billion of OCF for LTM ending 9/30. Of this, $132 MM was good old "net income." $2.5 BN (or more than 50% of OCF) represent addbacks for non-cash depreciation and amortization. I think there's a misconception that AMZN, RAX, GOOG, and other folks heavily involved in the cloud are somehow asset light, but the equipment to provide those services is very expensive and wears out rapidly. Thus, I would be shocked to begin seeing AMZN's capex requirements moderate significantly. Given the company had capex of $4.6 BN during the same period, it is very hard to argue D&A won't need ongoing replacement, and thus those non-cash adjustments to net income may not really accrue to shareholders over the long term as free cash.

Another $1 BN of AMZN's OCF relates to more non-cash addbacks for stock compensation. I presume no one on this board is naive enough to think that expense doesn't have a far less visible but deleterious effect on shareholder value via dilution.

Lastly, AMZN's ability to run its operations with negative working capital generated an incremental $1 BN (approx) in OCF. This, however, is a transitory source of cash that can easily become a use of cash if/when growth slows.

So we have a business generating nearly $5 BN in operating cash flow. $4.6 BN of that is consumed via capex. The lion's share of their OCF comes from three sources (D&A, stock comp expenses, and working capital) that do not provide a shareholder with reasonable assurance they can capture their proportionate share of those cash flows over the long term.
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on December 20, 2013, 01:32:41 PM
I am a big fan of AMZN the company, and my wife works in recruiting right there in South Lake Union, but I shudder when I hear people gush about how this company needs to be valued differently because of its investment decisions focused on growth and the future, which somehow render EBIT and other P&L based measures meaningless.

I have no position in the stock (save for minor long exposure via my wife's stock option plan), so I have no axe to grind. Further, I always begin my review of a business at the cash flow statement, so I appreciate the value of a company's ability to generate sustainable cash flow for shareholders. However, stating that "operating cash flow is superior to net income" without focusing on the components of that cash flow, their persistence, and ancillary impacts on shareholders is important.

From CapIQ, AMZN generated $4.98 billion of OCF for LTM ending 9/30. Of this, $132 MM was good old "net income." $2.5 BN (or more than 50% of OCF) represent addbacks for non-cash depreciation and amortization. I think there's a misconception that AMZN, RAX, GOOG, and other folks heavily involved in the cloud are somehow asset light, but the equipment to provide those services is very expensive and wears out rapidly. Thus, I would be shocked to begin seeing AMZN's capex requirements moderate significantly. Given the company had capex of $4.6 BN during the same period, it is very hard to argue D&A won't need ongoing replacement, and thus those non-cash adjustments to net income may not really accrue to shareholders over the long term as free cash.

Another $1 BN of AMZN's OCF relates to more non-cash addbacks for stock compensation. I presume no one on this board is naive enough to think that expense doesn't have a far less visible but deleterious effect on shareholder value via dilution.

Lastly, AMZN's ability to run its operations with negative working capital generated an incremental $1 BN (approx) in OCF. This, however, is a transitory source of cash that can easily become a use of cash if/when growth slows.

So we have a business generating nearly $5 BN in operating cash flow. $4.6 BN of that is consumed via capex. The lion's share of their OCF comes from three sources (D&A, stock comp expenses, and working capital) that do not provide a shareholder with reasonable assurance they can capture their proportionate share of those cash flows over the long term.
Thank you, good post.
Title: Re: AMZN - Amazon.com Inc.
Post by: ajc on December 20, 2013, 05:17:14 PM
Amazons greatest strength is the lack of people willing to do a financial analysis.

Unfortunately valueInv, I think you're confusing the stock price with the roughly definable intrinsic value of the underlying business.

How many people do or don't do a financial analysis of the business really has very little to do with its various internal strengths as a company (of which its emphasis on tax-efficiency is one).
I'm not sure if that's a fact which you're at all aware of.

Anyway, I just thought it might be helpful for me to point it out since you seem to be mixing up the extrinsic with the intrinsic in terms of business value there.

Oh, I'm aware of it all right. If people started asking the right questions, Bezos wouldn't be able to do all the things he is doing right now. That would impact what happens internally and the intrinsic value.

Okay sure, but I'm still confused about how intrinsic value being lumpy over time explains your line that Amazon's greatest strength is an external factor.

That still makes as little sense to me now as when I first read it. It just doesn't sound believable.
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on December 20, 2013, 07:46:51 PM
Amazons greatest strength is the lack of people willing to do a financial analysis.

Unfortunately valueInv, I think you're confusing the stock price with the roughly definable intrinsic value of the underlying business.

How many people do or don't do a financial analysis of the business really has very little to do with its various internal strengths as a company (of which its emphasis on tax-efficiency is one).
I'm not sure if that's a fact which you're at all aware of.

Anyway, I just thought it might be helpful for me to point it out since you seem to be mixing up the extrinsic with the intrinsic in terms of business value there.

Oh, I'm aware of it all right. If people started asking the right questions, Bezos wouldn't be able to do all the things he is doing right now. That would impact what happens internally and the intrinsic value.

Okay sure, but I'm still confused about how intrinsic value being lumpy over time explains your line that Amazon's greatest strength is an external factor.

That still makes as little sense to me now as when I first read it. It just doesn't sound believable.

What is Amazon's intrinsic value and how did you arrive at it?
Title: Re: AMZN - Amazon.com Inc.
Post by: Palantir on December 20, 2013, 08:26:45 PM
^What is GOOG's intrinsic value and how did you arrive at it? While we're at it, tell us AAPL's intrinsic value too.
Title: Re: AMZN - Amazon.com Inc.
Post by: ajc on December 21, 2013, 06:56:45 AM
What is Amazon's intrinsic value and how did you arrive at it?

Hey valueInv, I think I've got a better idea.
There's already an existing discussion going on about Amazon's intrinsic value and how it relates to what you said.

Instead of trying to skip ahead of the conversation, why not just just lay out the reasons why you said what you did?
We're all here to learn, I'm not sure why it has to be more complicated than that...
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on December 21, 2013, 08:32:46 AM
^What is GOOG's intrinsic value and how did you arrive at it? While we're at it, tell us AAPL's intrinsic value too.

Google - Around $500. What they are doing is unsustainable. However, they should be able to eke out average growth in most scenarios, so I would be willing to buy if they fell significantly below average price. Below $500, you have a margin of safety against management blunders.

Apple - Around $700. I am willing to pay an above average multiple due to combination of factors - growth in existing device product lines, introduction of
services above device product lines, new device product lines and capital return to shareholders under favorable terms.
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on December 21, 2013, 08:34:39 AM
What is Amazon's intrinsic value and how did you arrive at it?

Hey valueInv, I think I've got a better idea.
There's already an existing discussion going on about Amazon's intrinsic value and how it relates to what you said.

Instead of trying to skip ahead of the conversation, why not just just lay out the reasons why you said what you did?
We're all here to learn, I'm not sure why it has to be more complicated than that...

Tell me what it is and how you arrived at it, and I will demonstrate what I meant.
Title: Re: AMZN - Amazon.com Inc.
Post by: Palantir on December 21, 2013, 08:47:45 AM
How did you derive your numbers?
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on December 21, 2013, 09:15:44 AM
How did you derive your numbers?

By understanding the business inside out, assigning  probabilities and tracking every aspect of the companies and industry closely. What I know about Apple can easily fill a book.
Title: Re: AMZN - Amazon.com Inc.
Post by: Palantir on December 21, 2013, 09:31:58 AM
So in other words, no rationale. Great, may as well close these threads.
Title: Re: AMZN - Amazon.com Inc.
Post by: link01 on December 21, 2013, 10:12:04 AM
.. Thus, I would be shocked to begin seeing AMZN's capex requirements moderate significantly. Given the company had capex of $4.6 BN during the same period, it is very hard to argue D&A won't need ongoing replacement, and thus those non-cash adjustments to net income may not really accrue to shareholders over the long term as free cash.with a fast growing co like amzn there should really be a distinction made between maintenance capex & growth capex. as well, a significant part of azmn's COGS today are for new businesses that wont achieve scale, profitability, or even cash flow break-even till 2016 or beyond

Another $1 BN of AMZN's OCF relates to more non-cash addbacks for stock compensation. I presume no one on this board is naive enough to think that expense doesn't have a far less visible but deleterious effect on shareholder value via dilution.amzn has been expensing their stock options since 2002, so that's a hit to their income statement. as far as dilution goes I think you'll find amzn is quite cognizant of the tradeoffs (just read thru his annual letters) & manages it in a thoughtful way. their share count growth has been quite tame in comparison with other hi growth or hi tech co's. Bezos has said he tries to cap it at no more than 3%

Lastly, AMZN's ability to run its operations with negative working capital generated an incremental $1 BN (approx) in OCF. This, however, is a transitory source of cash that can easily become a use of cash if/when growth slows. I don't see how slowing growth would affect its negative working capital, or how slowing would become a use of cash. if amzn suddenly suffered the reverse of growth, that's another story. and I don't think amzn's neg working capital is transitory at all. its shown persistence. that wont change until they lose their moat

Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on December 21, 2013, 10:18:11 AM
.. Thus, I would be shocked to begin seeing AMZN's capex requirements moderate significantly. Given the company had capex of $4.6 BN during the same period, it is very hard to argue D&A won't need ongoing replacement, and thus those non-cash adjustments to net income may not really accrue to shareholders over the long term as free cash.with a fast growing co like amzn there should really be a distinction made between maintenance capex & growth capex. as well, a significant part of azmn's COGS today are for new businesses that wont achieve scale, profitability, or even cash flow break-even till 2016 or beyond

There is aaa bit assumption that these businesses will hit break even eventually. There is also th assumption that existing businesses are not declining.
Title: Re: AMZN - Amazon.com Inc.
Post by: jschembs on December 21, 2013, 12:23:48 PM
.. Thus, I would be shocked to begin seeing AMZN's capex requirements moderate significantly. Given the company had capex of $4.6 BN during the same period, it is very hard to argue D&A won't need ongoing replacement, and thus those non-cash adjustments to net income may not really accrue to shareholders over the long term as free cash.with a fast growing co like amzn there should really be a distinction made between maintenance capex & growth capex. as well, a significant part of azmn's COGS today are for new businesses that wont achieve scale, profitability, or even cash flow break-even till 2016 or beyond . Agreed that a distinction b/w growth and maintenance capex is valuable; my point was moreso that AMZN is hardly an asset-light technology or services business. Computer equipment is notoriously short in its economic lifespan, and while there's certainly some operating leverage to be expected in their warehouse build out, my bet is that AMZN's competitive edge in logistics and efficiency requires more ongoing investment (whether via traditional capex or R&D) to remain competitive than many believe. Also, can you speak to the component of AMZN COGS that is related to future benefits for the company? COGS by definition are the expenses associated with current revenue. I haven't spent a whole lot of time analyzing the 10Ks, so it's not a loaded question :)

Another $1 BN of AMZN's OCF relates to more non-cash addbacks for stock compensation. I presume no one on this board is naive enough to think that expense doesn't have a far less visible but deleterious effect on shareholder value via dilution.amzn has been expensing their stock options since 2002, so that's a hit to their income statement. as far as dilution goes I think you'll find amzn is quite cognizant of the tradeoffs (just read thru his annual letters) & manages it in a thoughtful way. their share count growth has been quite tame in comparison with other hi growth or hi tech co's. Bezos has said he tries to cap it at no more than 3%. That's fine; my point was that while adding back stock comp one needs to recognize the dilution. In other words, this isn't an add-back with no side effects to shareholders.

Lastly, AMZN's ability to run its operations with negative working capital generated an incremental $1 BN (approx) in OCF. This, however, is a transitory source of cash that can easily become a use of cash if/when growth slows. I don't see how slowing growth would affect its negative working capital, or how slowing would become a use of cash. if amzn suddenly suffered the reverse of growth, that's another story. and I don't think amzn's neg working capital is transitory at all. its shown persistence. that wont change until they lose their moat. I just wanted to point out that a large portion of AMZN's OCF comes from working capital changes, which one could argue is more of a financing than operating benefit. As a shareholder, I wouldn't want to rely long term on the company's ability to stretch the hell out of their vendors.


AMZN is a really interesting company, no doubt. A wonderful investment, however, I'm not so sure. Low margins themselves aren't necessarily a bad thing. I've seen cardboard packaging distributors with 15% gross margins that can achieve ROIC >30% because of phenomenal operating cost discipline and working capital management. AMZN generates gross and EBITDA margins of roughly 20-25% and 5%, respectively. Those are bad margins. Even with negative working capital, however, they're generating an ROIC of ~5% the last three years. That's also bad.   

The intent of my original post was to illustrate that all cash flows are not equal. If you don't buy off on those points, it's worth asking how a dominant, leading business with apparently significant moats cannot generate an ROIC that exceeds the cost of that capital.
Title: Re: AMZN - Amazon.com Inc.
Post by: ajc on December 27, 2013, 12:14:36 PM
In a recent interview on 60 minutes Amazon revealed they were working on drone delivery for packages up to 5 pounds.  Thought it would be possible to implement in about 5 years.  Earliest that it could be done is 3 years due to Needing FAA approval. 

Edited to change FFA to FAA

Not sure if that 60 Minutes interview was posted elsewhere, but here it is in any case:

http://www.youtube.com/watch?v=6in-MZeeeGk (http://www.youtube.com/watch?v=6in-MZeeeGk)
Title: Re: AMZN - Amazon.com Inc.
Post by: fareastwarriors on December 28, 2013, 10:11:34 AM
http://www.businessweek.com/articles/2013-12-26/amazon-reveals-holiday-sales-facts-cyber-monday-orders-rose-39-percent-and-other-fun-facts#r=hpt-ls (http://www.businessweek.com/articles/2013-12-26/amazon-reveals-holiday-sales-facts-cyber-monday-orders-rose-39-percent-and-other-fun-facts#r=hpt-ls)


Amazon Reveals Holiday Sales: Cyber Monday Orders Rose 39%
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on January 30, 2014, 01:29:09 PM
Another one:

http://techcrunch.com/2014/01/30/amazon-falls-short-of-expectations-with-q4-revenue-of-25-59b-eps-of-0-51/

Trading down 10% after-hours.
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on January 30, 2014, 03:51:17 PM
Haven't fuel costs been dropping?

http://venturebeat.com/2014/01/30/amazon-said-prime-membership-price-may-increase-20-40/
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on January 30, 2014, 11:29:56 PM
Haven't fuel costs been dropping?

http://venturebeat.com/2014/01/30/amazon-said-prime-membership-price-may-increase-20-40/ (http://venturebeat.com/2014/01/30/amazon-said-prime-membership-price-may-increase-20-40/)


Not since they launched Prime in 2005.  WTI traded at ~$45 in 2005.


Also, they can say one thing and mean another, which is perfectly fine.  They're allowed to raise prices for whatever reason they want.  I think it's a great sign they're raising prices personally, though I probably wouldn't raise it $40 at once.   Maybe $20 now, another $20 in a couple of years.  But of course the company has incomparable amounts of information about the inputs involved in making a decision about this than any of us do. 
Title: Re: AMZN - Amazon.com Inc.
Post by: valueInv on February 02, 2014, 04:20:08 PM
Good growth at AWS:

http://gigaom.com/2014/01/30/wow-amazon-web-services-had-another-bang-up-quarter/
Title: Re: AMZN - Amazon.com Inc.
Post by: saltybit on February 02, 2014, 10:06:32 PM
The Prophet of No Profit: How Jeff Bezos won the faith of Wall Street.
http://www.slate.com/articles/business/moneybox/2014/01/amazon_earnings_how_jeff_bezos_gets_investors_to_believe_in_him.single.html
Title: Re: AMZN - Amazon.com Inc.
Post by: rkbabang on March 13, 2014, 08:20:25 AM
Haven't fuel costs been dropping?

http://venturebeat.com/2014/01/30/amazon-said-prime-membership-price-may-increase-20-40/ (http://venturebeat.com/2014/01/30/amazon-said-prime-membership-price-may-increase-20-40/)


Not since they launched Prime in 2005.  WTI traded at ~$45 in 2005.

Also, they can say one thing and mean another, which is perfectly fine.  They're allowed to raise prices for whatever reason they want.  I think it's a great sign they're raising prices personally, though I probably wouldn't raise it $40 at once.   Maybe $20 now, another $20 in a couple of years.  But of course the company has incomparable amounts of information about the inputs involved in making a decision about this than any of us do. 

I just received the email today (see attached).  A $20 increase next year.
Title: Re: AMZN - Amazon.com Inc.
Post by: txlaw on March 25, 2014, 03:00:13 PM
Google making a big push to take biz away from Amazon AWS:
http://www.wired.com/wiredenterprise/2014/03/urs-google-story/

And Microsoft is expected to rebrand Azure from Windows Azure to Microsoft Azure to drive sales:
http://www.zdnet.com/microsoft-to-rebrand-windows-azure-as-microsoft-azure-7000027590/

I think I've mentioned this before, but Amazon has likely been making huge profits on its AWS biz (everyone I know who uses it -- or competes with it -- says it's really expensive) and investing it all back into growth initiatives.  But we might finally be seeing some real competition in the "public cloud" space from the likes of Google, Microsoft, OpenStack providers like Redhat, and even companies like Digital Ocean.  Prices to continue to drop, I suppose.
Title: Re: AMZN - Amazon.com Inc.
Post by: Palantir on March 25, 2014, 04:39:04 PM
I just don't see the upside for Google to move into this, or any potential edge against AWS. MS Azure has potential, as they have a different model, and an institutional sales channel where they can build both private and public clouds....but I don't really see what Google could bring.
Title: Re: AMZN - Amazon.com Inc.
Post by: Liberty on April 01, 2014, 10:46:31 AM
Amazon adds more than a million products to Canadian store:

http://www.cbc.ca/news/business/amazon-beefs-up-online-offerings-in-canada-1.2593861

I'm not a shareholder, but its nice as a Canadian shopper :)
Title: Re: AMZN - Amazon.com Inc.
Post by: tombgrt on April 04, 2014, 01:45:29 AM
So no more FREE super saver delivery for me (Belgium) when I order from Amazon UK. I have spend at least 500-750€ on books (all small items) these last few years, mainly because there were no shipping costs. Now it would costs me GBP 4.70 for books. No more <50€ orders for me.
Title: Re: AMZN - Amazon.com Inc.
Post by: jouni1 on April 04, 2014, 01:54:57 AM
they stopped free super saver to finland also.

although there are rumors they're setting up in sweden, to serve northern europe. might be to drive customers to the local version.
Title: Re: AMZN - Amazon.com Inc.
Post by: Phaceliacapital on April 04, 2014, 02:38:50 AM
So no more FREE super saver delivery for me (Belgium) when I order from Amazon UK. I have spend at least 500-750€ on books (all small items) these last few years, mainly because there were no shipping costs. Now it would costs me GBP 4.70 for books. No more <50€ orders for me.

"At another point in the interview, Bezos describes the “Amazon cocktail” of customer-centricity, long-term thinking, and a focus on invention."

Let's hope that his long term thinking is a fullfilment center in Belgium, although we both know that this is a pipedream with our current labor system.
Title: Re: AMZN - Amazon.com Inc.
Post by: tombgrt on April 04, 2014, 02:43:17 AM
So no more FREE super saver delivery for me (Belgium) when I order from Amazon UK. I have spend at least 500-750€ on books (all small items) these last few years, mainly because there were no shipping costs. Now it would costs me GBP 4.70 for books. No more <50€ orders for me.

"At another point in the interview, Bezos describes the “Amazon cocktail” of customer-centricity, long-term thinking, and a focus on invention."

Let's hope that his long term thinking is a fullfilment center in Belgium, although we both know that this is a pipedream with our current labor system.

Jup. ;( There have been rumors for Belgium as well but I'm afraid it there is little truth to it.
Title: Re: AMZN - Amazon.com Inc.
Post by: Phaceliacapital on April 04, 2014, 05:32:36 AM
Bezos is crazy, but not crazy enough to setup a labor heavy enterprise in Belgium :D

Btw I asked, this was his reaction:

https://www.youtube.com/watch?v=7uxfRDL-JzM
Title: Re: AMZN - Amazon.com Inc.
Post by: moody202 on April 04, 2014, 05:42:35 AM
And Microsoft is expected to rebrand Azure from Windows Azure to Microsoft Azure to drive sales:
http://www.zdnet.com/microsoft-to-rebrand-windows-azure-as-microsoft-azure-7000027590/

Another great example of how Microsoft time and again fails to take the leadership position while playing in the market. We have seen this story before with mobile phones, tablets......I won't bet just yet that MS's new CEO is going to change the culture enough.
Title: Re: AMZN - Amazon.com Inc.
Post by: dcollon on April 24, 2014, 11:58:03 AM
Amazon Prime Pantry is pretty interesting.  Anyone tried it yet?

http://www.engadget.com/2014/04/23/amazon-prime-pantry/?ncid=rss_truncated

Title: Re: AMZN - Amazon.com Inc.
Post by: Liberty on April 24, 2014, 12:28:39 PM
Amazon Prime Pantry is pretty interesting.  Anyone tried it yet?

http://www.engadget.com/2014/04/23/amazon-prime-pantry/?ncid=rss_truncated

Maybe I'll give it a try in 10 years when it comes to Canada...

In other amazon news:

http://online.wsj.com/news/article_email/SB10001424052702304788404579521522792859890-lMyQjAxMTA0MDIwNDEyNDQyWj

Amazon, in Threat to UPS, Tries Its Own Deliveries

Quote
The future of Amazon.com Inc.  is hiding in plain sight in a San Francisco parking lot.

There, adjacent to recently closed Candlestick Park, Amazon is testing its own delivery network for "the last mile," the final leg of a package's journey to consumers' doorsteps. Trucks loaded with Amazon packages and driven by Amazon-supervised contractors leave this parking lot for homes and offices around San Francisco. Similar efforts are under way in Los Angeles and New York.

Delivering its own packages will give Amazon, stung by shipping delays last Christmas, more control over the shopping experience. The retailer will gain flexibility regarding when packages are delivered and help in containing shipping expenses, which grew 29% last year. As a percentage of sales, Amazon's shipping costs have grown each year since 2009, according to securities filings.

Just as important, the new delivery efforts will get Amazon closer to a holy grail of e-commerce: Delivering goods the same day they are purchased, offering shoppers one less reason to go to physical stores. With its own trucks, Amazon could offer deliveries late at night, or at more specific times.
Title: Re: AMZN - Amazon.com Inc.
Post by: txlaw on May 05, 2014, 06:47:06 AM
WEB and Munger on Amazon (and Bezos):
http://video.cnbc.com/gallery/?video=3000272547
Title: Re: AMZN - Amazon.com Inc.
Post by: Laxputs on May 05, 2014, 07:02:53 PM
Help me with a hypothetical:

Suppose Amazon had owners' earnings (that is, cash flow from operations - maintenance capex) of 4 billion. That works out to 8.55/share. So suppose they trade at 36x OE.

If my hurdle rate is 10%, what kind of growth rate to they need to achieve for me to make the investment?

Title: Re: AMZN - Amazon.com Inc.
Post by: PatientCheetah on May 05, 2014, 07:18:02 PM
Help me with a hypothetical:

Suppose Amazon had owners' earnings (that is, cash flow from operations - maintenance capex) of 4 billion. That works out to 8.55/share. So suppose they trade at 36x OE.

If my hurdle rate is 10%, what kind of growth rate to they need to achieve for me to make the investment?

Multiple is a function of both growth rates and the duration of economic profits. Both Google and Amazon get high multiples because their moats are so deep that I can't see anyone becoming a competitive threat to them in the foreseeable future.
Title: Re: AMZN - Amazon.com Inc.
Post by: Laxputs on May 05, 2014, 07:50:45 PM
Suppose the multiple comes down to 15x fcf in 10 years. How much growth do they need between now and then to earn 10% a year?
Title: Re: AMZN - Amazon.com Inc.
Post by: PatientCheetah on May 05, 2014, 08:36:49 PM
15.5% if terminal multiple is 15x
12.6% if it is 20x
10.3% if it is 25x

solver is pretty nifty
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on May 05, 2014, 10:37:19 PM
One thing to keep in mind about AMZN in addition to the sales growth rate is the gross profit growth rate, which is consistently greater than 30% (33% last q/q).  Would you rather have your sales or gross profit growing faster?  This is because gross margins have increased 600 basis points over the last four years and continue to do so with AMZN's increasing digital sales.


Something else that is instructive for us is looking at historical capex margins (say 2002-2009), and how amazingly low they were, prior to 2010.  You can then also look at the immense ramp in capex since then and ask yourself how much of the current capex AND expenses that are purely designed to give cash/benefits to AMZN's customers instead of paying 39.6% to the federal government are actually required to maintain the business. 


Another instructive thing is to look at AMZN's North American operating margins that are pressured since they expense more than half of their technology expenses in the North America. It makes perfect sense to stuff your expenses in the top corporate tax jurisdiction.


Also look for additional discretionary accounting and customer expense items, such as 'accelerated stock compensation' - much faster than the actual vesting schedule.


Would love to engage more about AMZN's financials with those who've taken time to understand their financials.  Last time I asked only one person responded that they had read their annuals.
Title: Re: AMZN - Amazon.com Inc.
Post by: Laxputs on May 06, 2014, 12:12:56 AM
Basically I think Amazon is a ground breaking company and I would like to own them but I suck at math and am wondering what kind of growth rate and multiple contraction result in at least 10% return on my investment.

If the above math is correct that they need 16% growth for 10 years, I am interested.

I really like this write up by Tarasoff:

http://www.scribd.com/doc/98208572/ValueXVail-2012-Josh-Tarasoff
Title: Re: AMZN - Amazon.com Inc.
Post by: Laxputs on May 09, 2014, 03:08:59 PM
Read through the 10-K and 10-Q. Trying to understand Amazon better. Some thoughts and questions.

1. Operating expenses were ~18% before 2010 and now around 25%, and WMT is below 18% If AMZN should have lower costs in these areas, can we deduce that much of the Advertising/Marketing, and Techonology/Content is in fact spent on growth? And does the massive spend on fulfillment centers as compared to prior to 2010 support that?

2. I don't understand their capitalization costs associated with internal use software/website development. They capitalized 581m for 2013 and amortized 451m for 2013 that was there from previous years. Does it make sense to amortize the capitalized asset if it is still productive? This is another non cash expense that takes away from a more accurate approximation of owner earnings.

3. If we apply similar cap ex spending of .5% of revenue that WMT spends on marketing, we get drastically lower marketing cap ex needs, and can deduce the rest is for growth.

4. Is investments in PPE including internal use software and website development (3.4M) on the cash flow, completely separate from Marketing and Technology and Content Expenses (9.7m) on the earnings statement?

5.What is a reasonable way to deduce how much of the Technology and Content spend is for maintaining their earning power and what percent is for growing it?

6. Is AMZN revenue comparable to WMT? AMZN records 40% on a net basis and 60% on a gross basis. WMT records 100% on gross basis. Therefore approximating net profit using WMT margins may not be accurate.

7. It can be said AMZN earnings are likely very far from accurate if we use comparable WMT maintenance cap ex spending, and make other add-back adjustments for amortization. A range from 3.8b to 4.8b on 2013 seems reasonable depending on how much cap ex we associate to maintenance versus growth.

8. Amazon showed consistent FCF margins of 6-10% prior to the massive fulfillment center build, 2010. Their high scalability should mean that those margins increase.

9. There are 20 outstanding lawsuits. Any concerns there?

10. Gross margins are increasing because of service sales increasing (AWS, advertising,  3P sales--less shipping costs and and general expenses, higher margins). Is that sustainable?

A couple of statements I like that I've read:
-Amazon has 8x the ROIC of the average company. 6x the earnings growth. And trades at 2.5x (normalized earnings) of the average company's multiple.
-If amazon charged 63 cents per shipment they would double their profits. Untapped pricing power. Who would care about paying 63 cents for shipping?
-There were 46 fulfillment centers in 2013, 23 were built in the last 3 years. That is enormous growth cap ex spending.

What's a fair multiple for a company with greater than 25% growth rate for the foreseeable future. Massive international expansion. That has very little competition. Has some of the most talented management. Has exceptional scalability. Has a virtuous cycle of lower prices, attracting more customers, offering more SKUs, attracting more customers, lowering prices, etc.; a strong moat. Has more deflationary costs than traditional competitors. Is growing a loyal customer base/unparallelled focus on customer satisfaction. Will have untapped pricing power when a focus on accelerated expansion slows. What multiple of approximate normalized current earnings provides a margin of safety if that multiple drops to 15x in 10 years?

Thanks.
Title: Re: AMZN - Amazon.com Inc.
Post by: Palantir on May 09, 2014, 07:30:13 PM
^Good post!
Title: Re: AMZN - Amazon.com Inc.
Post by: Grenville on May 13, 2014, 08:31:30 PM
I didn't realize the Diapers.com/Quidsi founders had left Amazon. The other founders of acquired companies are still there.

Diapers.com co-founder quietly working on new startup called Jet
http://tech.fortune.cnn.com/2014/05/13/diapers-com-founder-startup/ (http://tech.fortune.cnn.com/2014/05/13/diapers-com-founder-startup/)

Amazon’s Quidsi Sees Founders Depart to Work on New Projects
http://www.bloomberg.com/news/2013-07-08/amazon-s-quidsi-sees-founders-depart-to-work-on-new-projects.html (http://www.bloomberg.com/news/2013-07-08/amazon-s-quidsi-sees-founders-depart-to-work-on-new-projects.html)
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on May 21, 2014, 11:45:49 AM


Here are some thoughts I wrote in an email a while back.  I hope it spurs more AMZN discussion.


" Generally the market seems to believe AMZN has no pricing power and is making zero profit.  But we haven't seen anyone analyze the company's historical margins thoroughly and considered where they might go.  Even using AMZN's current gross margin - 28% - and WMT's opex margin of  ~18% gets us to 10% operating margins for AMZN (Walmart's operating profit margin are very reliably 6% (https://docs.google.com/spreadsheet/oimg?key=0AlDQc5JaItpadFpBQTNONEdib0FNSzZ6S0NVemtoTlE&oid=8&zx=ywd4343awmac) so I think of 6% as a base for AMZN long-term).  I personally believe that AMZN's North American operations are running at least 8% underlying operating margin now, excluding massive non-revenue generating expenses like digital video licensing (~$1B/year); crazy things like Amazon Fresh and hardware development with non-trivial expenses (e.g. hundreds of Silicon Valley employees and dozens of Fresh trucks and employees).  The 8% North American operating margin is also supported by the fact that the N.A. operating margin is already 4% despite the fact that AMZN books all stock-comp in N.A., does so using an accelerated method which results in >1% of N.A. revenue being expensed prematurely (in 10-K), and almost surely has most R&D type expenses booked here (which makes perfect sense to do in your highest corporate tax jurisdiction, doesn't it?). 


Another thing that AMZN does well is to invest using expenses, not always capex, which as you know are immediately tax-deductible and help maximize long-term cash flows by minimizing taxes (remarkably similar to John Malone's modus operandi actually), the only thing Bezos cares about.  So the market thinks AMZN's underlying operations aren't profitable at all when in reality the profit is being obscured by the company's massive growth expenses, much of which are growth expenses.  A great example is the significant sum (http://recode.net/2014/04/23/hbos-amazon-haul-is-big-but-not-as-big-as-you-might-think/) AMZN is now spending on HBO shows.

Regarding size of Walmart now compared with AMZN's eventual size.  I've generally thought of AMZN's current addressable U.S. retail sales at ~$4T, which is less than $5T, primarily because it excludes fuel sales but includes groceries now (pretty sure retail + groceries is ~$4T).  But  yes, I believe AMZN will eventually be larger than WMT as a percentage of the U.S. economy (WMT is now ~10-11% of U.S. retail sales) because AMZN is now in four large businesses and sells 100X+ (WMT Supercenters are ~150,000 SKUs compared with Prime at 15M+) the number of products WMT sells and is not limited in the sectors it can participate in because it doesn't rely on the physical retail infrastructure Walmart relies upon (think AMZN art + cars with no physical capital required).


Regarding raising prices: aside from the proposed Prime price increase, I've seen a couple of potential price increases anecdotally.  I ordered something a few weeks ago on a Thursday evening.  They offered me one-day shipping for Saturday  - for $8.99, instead of the usual $3.99 - but for almost 48 hours later, not one day shipping really.  The free shipping date was the following Tuesday - a full 3+ shipping days after my order.  So not sure what that's about but it could be a shortage of that particular product (computer cord), a large shipping price increase, or some combination thereof.


Bezos has mentioned the need to "check in and make sure we can still make a profit" (this is not verbatim and I can't remember where he said this) a few times.  They may be doing this now, but I'm not sure.  But the Prime price increase suggests they believe they have pricing power with Prime, which I imagine they do.


Anyways, I'm happy to discuss AMZN more.  It's our second largest position at the moment and I hope to hold it for a decade or two.  I believe it will be the largest U.S. company by revenues and market cap in 10+ years or so.


One last thing I just remembered: the market focuses on sales growth.  This is wrong for AMZN because their gross profit is growing much faster - 34% in 2013 - than sales - 24%. This is because of the third-party retail commission growth (that should have much higher than normal retail gross margins of ~24%) and the shift to digital sales.  It's a little hard to explain, but the gist is that if AMZN were selling all of the third-party products themselves and not selling more digital products, sales growth would be closer to gross profit growth instead of sales growing at about two-thirds the rate of gross profit growth.  So AMZN in effect is generating the gross profit from sales growth equal to gross profit growth because it's capturing the profit with lower revenue, higher margin commissions, if that makes sense.  So I think of AMZN being a 30+% grower instead of 23%, which is a totally different story from a long-term shareholder return perspective.


I agree about your ROIC type calculations, although I've been using FCF for AMZN ( OCF - CAPEX and normalizing that for historic times when they were expanding less) instead of EBITDA.    This is primarily because OCF fully deducts taxes and interest (there aren't much of either though) and you've got a conservative pre-capex FCF number there.  Also, Bezos focuses on the cash flow statement - the operating cash flows (it's listed first in the reports; can either of you recall another company doing that?).  You can pick your FCF or whatever margin.  I think of it as high single digits now for OCF, which is less than what they were doing before they ramped spending in 2010 as I noted above and is only 2% of revenues more than what the income statement shows - 7.4% OCF margin for 2013.  I use 2% for the capex margin, because their capex as a percent of revenues was a very steady 1-2% until 2010 when they massively ramped spending (see above chart again).  So I get mid to high single-digit FCF margin. As far as invested capital for the ROIC denominator, AMZN's tangible invested capital is about $10B (leaving nearly all of the cash as invested which is probably conservative).  If you look at OCF/tangible capital it's quite attractive at ~55%. I realize this doesn't include any capex, I'm just using numbers that we know for certain to ballpark FCF ROIC numbers: OCF and balance sheet numbers."


Maintenance capex is of course the wild card here, and I don't know what % of revenues it will average.  I would love to read others' arguments why it will be substantially greater than the ~2-3% it averaged for seven years prior to the massive spending ramp in 2010.  If we use 3% as maintenance capex margin and operating margin of ~10% we get to 7% FCF margin which is entirely possible and would result in an approximate 50% FCF/ROIC
Title: Re: AMZN - Amazon.com Inc.
Post by: Liberty on May 21, 2014, 11:57:11 AM
Excellent post, JAllen. Thanks! The Malone comparison when it comes to avoiding taxes is very apt, IMO. Better to spend that money to invest in growth than to pay it in taxes, even if it makes GAAP earnings look horrible.
Title: Re: AMZN - Amazon.com Inc.
Post by: Palantir on May 21, 2014, 12:03:32 PM
JAllen - what adjustments are you making to OCF to get the true "economic" OCF? I assume your argument is that economic FCF is far higher than what the statement shows, so just wondering where to look to find adjustments.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on May 21, 2014, 12:38:04 PM
JAllen - what adjustments are you making to OCF to get the true "economic" OCF? I assume your argument is that economic FCF is far higher than what the statement shows, so just wondering where to look to find adjustments.


For now, I'm using actual OCF as a floor that no one can argue with on its own (except for what I discuss below).  AMZN does have growth expenses as I mentioned, and these do reduce OCF as well as income, so your intimation that OCF is probably understated is correct, IMO.  OCF is just a number that is better than GAAP operating income to work with because op. income is being intentionally minimized.


There are some major expenses OCF excludes in addition to not deducting anything for maintenance capex (which I do deduct for FCF in my discussion above as perhaps 3% of revenues), the biggest one being stock-comp. expense (which is itself overstated - see below), so I think OCF is a very rough proxy for current operating margins after subtracting growth expenses.  We would need to adjust OCF downward for stock-comp, by something like .4-.5% of revenues (actual stock-comp. expense is ~2% of revenues but AMZN's vesting schedule is not 50% the first year of grants which is how they expense stock-comp[1]; it is 5%-15%-40%-40% (http://www.quora.com/What-is-Amazons-stock-compensation-practice)) but adjust it upwards for all of the cash growth expenses and benefits that are thrown at customers but aren't charged for like the Prime benefits, Amazon Fresh, digital video (this is a huge tax-deductible expense, probably something like 1-1.5% of revenues now), other general expansion and whatever else they are spending money on that we have no clue about


So the moral of the story is that much of AMZN's growth spending is not capex but are tax-deductible expenses.  It makes perfect sense to target growth expenses if you are truly concerned about long-term FCF like Bezos is. 


Would you rather give 39% of your income to the Federal Govt. and get zero benefit or throw your OCF at customers to make them happier, more loyal, build trust, gain a larger percentage of their annual retail spending and drive your taxable income to essentially zero?  If you're not concerned about current years EPS, which Bezos is so clearly not, this is exactly what you would do.  And then Buffett would say you're essentially the best American CEO (http://www.washingtonpost.com/business/technology/amazons-jeff-bezos-will-bring-a-demanding-management-style-to-the-post/2013/08/07/b5ce5ee8-ff96-11e2-9711-3708310f6f4d_story.html).


[1] We utilize the accelerated method, rather than the straight-line method, for recognizing compensation expense. For example, over 50% of the compensation cost related to an award vesting ratably over four years is expensed in the first year. If forfeited early in the life of an award, the compensation expense adjustment is much greater under an accelerated method than under a straight-line method. (pg. 19 in 10-K (http://www.sec.gov/Archives/edgar/data/1018724/000101872414000006/amzn-20131231x10k.htm))
Title: Re: AMZN - Amazon.com Inc.
Post by: PatientCheetah on May 21, 2014, 03:58:26 PM
Excellent analysis, it took me a few years to finally understand the AMZN story and I blame myself for reading too many bearish thesis. The steady increase in price and my own personal dependency on AMZN should've tipped me off a long time ago.
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on May 21, 2014, 09:16:31 PM
Great analysis JAllen.  Good summary and it's tough to argue with any of the math.

At the end of the day though I just struggle with the concept that Amazon has always been an investment I justify by starting with "when they finally start to...." or "when they stop doing.....".  The sales growth has unquestionably been fantastic but I always come back to the fact that free cash flow over the past 5 years has been steadily declining: 
    2009  - $2920
    2010  - $2516
    2011  - $2092
    2012  - $ 395
    2013  - $2031
All while sales have grown from $24bn to $74bn (and other than 2012 the share count has continued to increase).

There are a ton of adjustments you can make that suggest the FCF potential is enormous but it always seems to be just that, potential.  The higher capex to build out fulfillment centers has hurt the past few years but I can't see that stopping any time soon if they want to keep growing the top line and taking delivery down to same or next day.  It will also increase the ongoing fulfillment opex as they operate all these new and larger facilities.  If you assume growth slows they lose the cash flow benefit of the operating cycle (working capital) as well as the direct cash generated by unearned revenue growth ($400M of FCF in 2013).

Would love to get your view on a couple of items:
 - what's your thoughts on the impact of them having to start charging state sales tax in the next year or two?  I haven't done the homework but it would seem that for the states this has been implemented they took a pretty sharp hit to revenues (probably one time and then resumed growing);
- the price declines in AWS services have been significant over the past year.  Microsoft, Google and IBM have all dropped prices hugely (over 40% I think) in just the past year and have stated they will match any price.  This is high margin, sticky business for AMZN.
- they don't really buy back shares but they certainly expense them (your point on timing is a good one but over a longer term this will even out).  The share count hasn't gotten out of hand over the past few years but it certainly isn't helping from a FCF/share perspective.

In buying this stock I worry very much about the reaction you saw after the 1Q earnings and outlook.  People seem to be pricing it off of the potential FCF it can earn in the future.  But at the FCF multiples it trades at today there's a big risk of the Microsoft situation - i.e. the stock is dead money for 10 years while the cash flow and earnings grow into the stock price as the multiple comes down.




Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on May 21, 2014, 09:39:12 PM
sorry for droning on but I forgot to add a couple of other points:

- The gross margins are strong and growing but I really think it makes sense to adjust those for the technology and content spend which is also growing rapidly, given they are including AWS in the sales number but there aren't many COGS expenses for this as it is largely a fixed cost business and we don't know what support costs for AWS are in COGS vs tech & content.

- on a similar vein, again, they don't break it out but a good portion of the capex growth over the past 2 years has to be related to AWS.  And that's a business that will require a lot of additional capex (both facilities and hardware) to support growth.  The hardware would likely need to be replaced every 3-5 years.

- Google shopping now offers same day delivery here (San Fran) on items purchased from major stores.  It's free for the first 6 months.  Who knows how they'll price it long term or if it takes off (I think it will die a quiet death at the next downturn much like all those delivery businesses in the internet bubble) but it's a deep pocketed competitor aiming directly at the Amazon core.
Title: Re: AMZN - Amazon.com Inc.
Post by: Laxputs on May 21, 2014, 09:56:36 PM
I'm curious on the investment argument: how do you price in the future growth given your hurdle rate?. I never do DCF analysis, I usually buy companies priced at very attractive earnings yield, with growth not necessary for the investment. So supposing this is 25x normalized earnings, what kind of minimum return are you expecting when accounting for growth? I'm hoping a few examples and the math involved can be offered.

It's interesting that multiple contraction is not really an issue with this stock, if the math of your assumptions is roughly correct. It means the company is currently trading at the multiple some anitcipate it will contract to.

Also, JAllen, what is your largest holding?

Thanks.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on May 22, 2014, 12:03:11 AM
Great analysis JAllen.  Good summary and it's tough to argue with any of the math.

At the end of the day though I just struggle with the concept that Amazon has always been an investment I justify by starting with "when they finally start to...." or "when they stop doing.....".  The sales growth has unquestionably been fantastic but I always come back to the fact that free cash flow over the past 5 years has been steadily declining: 
    2009  - $2920
    2010  - $2516
    2011  - $2092
    2012  - $ 395
    2013  - $2031
All while sales have grown from $24bn to $74bn (and other than 2012 the share count has continued to increase).

AMZN is for me and Bezos a very long-term stockholding, so I'm really not overly concerned about what the company is earning now.  If you don't view AMZN as a long-term hold and focus on what it will earn in five to ten years, it just doesn't work, because it's not cheap on a current FCF basis.  That point is inarguable. Since the vast majority of us will be alive in 10-20 years, why not have a holding period perspective that long?  There's the great hockey quote that applies in droves here: skate where the puck is going, not where it is.  So I believe that when the massive spending ramp (again from 20% growth to 57% growth - this is huge!) cools back down to sales or gross margin growth, we will see growth in operating income and free cash flow, but I have no idea when that will happen.  If one has a VERY long-term perspective, you hope this doesn't happen for a very long time, as that would mean AMZN has run out of places to invest its capital.  This won't even begin to be a problem for AMZN for a number of years though, at least ten I'm guessing.


There are a ton of adjustments you can make that suggest the FCF potential is enormous but it always seems to be just that, potential.  The higher capex to build out fulfillment centers has hurt the past few years but I can't see that stopping any time soon if they want to keep growing the top line and taking delivery down to same or next day.  It will also increase the ongoing fulfillment opex as they operate all these new and larger facilities.  If you assume growth slows they lose the cash flow benefit of the operating cycle (working capital) as well as the direct cash generated by unearned revenue growth ($400M of FCF in 2013).

Again, this comes down to a difference in time-horizon.  I'm viewing AMZN as a semi-permanent shareholder, not as 1-2 year shareholders.

Regarding the operating cycle, I expect that to continue due to Prime + Prime Fresh and AWS 1 and 3 year reserved instances (that are quite attractively priced) revenues.  I don't expect growth to slow anytime soon because of the virtuous cycle caused by having the best selection, prices, and service/convenience.  AMZN has by far the most momentum in very important industries that are the future of how humans do business and consume.  This should not be overlooked.  It can be easy to miss the forest for a tree.  AMZN having great momentum, first mover advantage, scale and the best management in very large businesses while still being tiny in the grand scheme of things is the forest (AMZN's North American revenue is still just 1% of addressable sales).  Being concerned with how much FCF the company is currently generating is a tree.

Would love to get your view on a couple of items:
 - what's your thoughts on the impact of them having to start charging state sales tax in the next year or two?  I haven't done the homework but it would seem that for the states this has been implemented they took a pretty sharp hit to revenues (probably one time and then resumed growing);

The sales tax cost advantage was just one attraction from a consumer's perspective.  AMZN started charging sales tax in CA, which is almost surely its highest revenue state at least a couple of years ago.  When they do start charging in a new state, they can lower shipping expenses building warehouses closer to population centers.  For SF, packages used to come from Reno and Las Vegas, 4.5 and many hours away respectively.  Reno was over the Sierra Mountains, which I'm sure was risky and sometimes treacherous due to snow for four months of the year.  Now there are two warehouses 1.5 hours away.  That cuts down on costs so AMZN can lower prices.  The sales tax advantage was always an impermanent advantage and everyone knew it was going away.  This is an anecdote, but I probably spend 2X with AMZN compared with when they started charging sales tax.  It was a bummer the first time I saw I was going to pay sales tax, but that didn't once cause me to even consider driving to Wal-mart or walking to Best Buy! People love AMZN for lower prices that they still have, convenience, selection, reviews, great customer service (I regularly complain for things like massive price drops right after I purchase things and they'll give me money back no questions asked - this is the right way to build trust and loyalty).  Don't forget that now the field is level from a sales tax perspective, but since AMZN has lower op ex. costs, because they're more software-focused, automated and don't operate retail real estate, they can still charge lower prices.  Also, driving to stores is a huge pain and WMT.  I'm 30+ minutes from a WMT (SF).  That's another mark against WMT relative to AMZN - driving to a store, finding what you're looking for, and waiting in line sucks!

I will respond more tomorrow.  It's late here now.  I'm really glad there's more discussion about AMZN now!
Title: Re: AMZN - Amazon.com Inc.
Post by: rkbabang on May 22, 2014, 06:28:54 AM
I agree with you about the sales tax advantage.  I think people made too much of the sales tax advantage and its demise.  I live in a state (New Hampshire) where Amazon has never had a sales tax advantage and my purchases from Amazon have increased every year.
Title: Re: AMZN - Amazon.com Inc.
Post by: saltybit on May 22, 2014, 08:29:16 AM
Just a personal anecdote, but I know quite a few people who worked at AMZN over the years. While the reviews of working there are mixed, they unilaterally say that they are more likely to keep being an AMZN customer after working there than before.
It's rare to say that about something after seeing "how the sausage is made".
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on May 22, 2014, 09:00:41 AM
JAllen - I agree with your 5-10 year time horizon on any stock.  I guess the issue was one where 5-10 years ago people we're saying the exact same thing for amazon (ie just wait until they start throwing off cash flow) and there's no indication that they won't be in the same position 5-10 years from now.  I'd like to see at least some ability or willingness to prove the cash flow machine can work and is not just a "some day" potential.

The other concern on the same point is that with it trading at such ridiculously high FCF multiples (actual FCF not potential), the stock price will be relatively stagnant as the multiple comes down and real FCF goes up.  Even fit they can start to churn out cash it's kind of already reflected in the stock price.

Don't get me wrong, I love the business and the moat.  This will be around for a long time and remain dominant.  But I'm not bought into it as a value stock story.
Title: Re: AMZN - Amazon.com Inc.
Post by: Laxputs on May 22, 2014, 01:16:11 PM
JAllen - I agree with your 5-10 year time horizon on any stock.  I guess the issue was one where 5-10 years ago people we're saying the exact same thing for amazon (ie just wait until they start throwing off cash flow) and there's no indication that they won't be in the same position 5-10 years from now.  I'd like to see at least some ability or willingness to prove the cash flow machine can work and is not just a "some day" potential.

The other concern on the same point is that with it trading at such ridiculously high FCF multiples (actual FCF not potential), the stock price will be relatively stagnant as the multiple comes down and real FCF goes up.  Even fit they can start to churn out cash it's kind of already reflected in the stock price.

Don't get me wrong, I love the business and the moat.  This will be around for a long time and remain dominant.  But I'm not bought into it as a value stock story.

People that bought it 5-10 years ago probably aren't complaining.

I think you are missing the point. If our math is close to correct, the company is already trading at 20-30x owners earnings.  The multiple won't come down, it will just get readjusted.  And if our very reasonable assumptions are correct then the company is doing exactly what an owner of the business would hope it would do: reduce taxes as much as possible while investing cash flows at high ROIC. This is what benefits shareholders; not making the bottom line look good. Think like an owner.

I'm hoping somebody can go over the math used in calculating a rough return assuming it trades at 25x earnings, and using different growth rates over a 5 and 10 year holding.
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on May 22, 2014, 03:22:05 PM
Lax,

I'm just back-of-the-enveloping this but my thinking is along the lines of this:

- assume within 5 years they can be generating $10bn in FCF (real cash, not adjusted.  Cash flow from operations minus actual capex).  That's 5x what they are generating today.
- assume that FCF is without any share dilution;
- put say, a 20x multiple on that cash flow;  ignore debt (that's factored into the FCF);
- that translates to a market cap of $200bn;

With market cap today at $140bn that translates into about a 40-45% total return over 5 years.  And that's with some pretty aggressive and uncertain assumptions that are inconsistent with what they've done in the past.

I'm happy to be wrong on this.  How are you doing the math that makes the stock price today look like a good value investment?
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on May 22, 2014, 03:27:45 PM
Curious on your point that they are reinvesting cash flows at high ROIC.  Despite revenue tripling over the past 5 years, FCF has declined.  Where are you seeing the high ROIC?
Title: Re: AMZN - Amazon.com Inc.
Post by: PatientCheetah on May 22, 2014, 04:21:31 PM
Many brick and mortar stores are struggling right now. I think Barnes and Nobles is the only national book stores left. Some of their problems undoubtedly has to due with AMZN. AMZN is investing in margins right now. It is not inconceivable that when enough brick and mortar stores go under, like any other monopolists, AMZN will probably rise prices.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on May 22, 2014, 05:24:17 PM
Curious on your point that they are reinvesting cash flows at high ROIC.  Despite revenue tripling over the past 5 years, FCF has declined.  Where are you seeing the high ROIC?


It helps to estimate growth and maintenance capex and subtract maintenance capex from OCF.  Also look at tangible invested capital - it's ~$10B.  So you can look at OCF/tangible capital, compare AMZN's to others and see that it's quite high.  I wrote about AMZN's ROIC in a previous post above and how we can estimate it and I'll write more here.


Current FCF, or OCF minus current year capex, doesn't account for maintenance versus growth capex at all.  And we all know that Amazon is investing for the future. It helped us to look at AMZN's pre-2010 capex margins, which were very reliably 2-2.5%.  If you assume that maintenance capex for AMZN is now ~$2B, OCF of $6B gets us to $4B of FCF on ~$10B in tangible capital which is is a nice return on tangible capital (Buffett singled out his 60% tangible-return companies in an 80s annual letter).  Of course I don't need to tell anyone that 40% ROTCs are attractive.


Call us crazy but we actually believe that AMZN's actual ROTC is greater than 50% and that's its true current FCF is almost 10% of sales, somewhere in the range of $7B-$9B now. 


Here is some of the evidence we have for this:
Gross margins cannot be fibbed or manipulated, but operating expenses are inflated by massive investing and spending, e.g. paying HBO, AWS expansion, China competition etc.  AMZN's gross margins are continually increasing (https://docs.google.com/spreadsheet/oimg?key=0AlDQc5JaItpadFpBQTNONEdib0FNSzZ6S0NVemtoTlE&oid=10&zx=xfesllw1jxvy), along with its opex (https://docs.google.com/spreadsheet/oimg?key=0AlDQc5JaItpadFpBQTNONEdib0FNSzZ6S0NVemtoTlE&oid=6&zx=47eo8xxq0t).  Since WMT's operating expense margin is 18% (https://docs.google.com/spreadsheet/oimg?key=0AlDQc5JaItpadFpBQTNONEdib0FNSzZ6S0NVemtoTlE&oid=12&zx=1j8w3bq82apq), we can conclude that AMZN's will be a few points lower because AMZN doesn't operate any retail real estate over time. A pure warehouse infrastructure is cheaper than warehouses + retail to deliver same products.

Prior to the massive spending ramp (https://docs.google.com/spreadsheet/oimg?key=0AlDQc5JaItpadFpBQTNONEdib0FNSzZ6S0NVemtoTlE&oid=7&zx=pgcis0g3ebf1) which increased operating expenses and capex, AMZN generated FCF margins in the 7-12% range.  This linked chart deducted all capex as maintenance capex, despite the fact that the company was growing rapidly.  This means that the capex margin is overstated in the above chart and that FCF would have been higher if you knew how much was growth capex was.  2009 had a large working capital benefit, but FCF would still have been almost 10% of sales.
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on May 22, 2014, 05:52:54 PM
JAllen,

The ROTC is certainly phenomenal.  No argument.  But the stock is trading at 1400% of Tangible Capital which takes the return on YOUR capital invested very low.  Again, my argument is not the quality of the company but the price of it.

It's nitpicking but I'd take the other side on a couple of your assumptions.  First, the concept of maintenance vs growth capex and looking back to 2010 as a basis for maintenance.  Unless Amazon decides to stop growing they are going to need to invest in growth capex and those $ comes straight out of free cash flow.  Also, Amazon has never broken out it's capex spend between maintenance and growth or even that related to AWS vs the retail business.  It's a dangerous assumption (from an investing perspective) to assume that 2010 capex levels can be used as a proxy for maintenance.  For example, they opened 12 new fulfillment centers in 2012 that cost $1.4bn (within capex) - but they still spent $2.4bn beyond that.  And the number was $3.4bn in 2013 and I don't believe they opened another 12 new centers.  Either way, unless you assume growth stops, it's inconsistent to assume growth capex stops.

The second point I'd nitpick with is the opex and that it is inflated due to one time growth initiatives.  It's true that current gross margins less historic opex equate to 13% but that's comparing apples to oranges.  I guess I will believe that it is truly inflated when I see that they are able to bring it back down to historic levels without impacting either sales growth or gross margins.  I think you also need to take into account that gross margin includes growing AWS which is a low COGS, high opex business - so that will inflate gross margins but require an ongoing increased level of opex.

Final point - even if using the $4bn of FCF that you indicated (using $2bn of maintenance capex and $6bn of Op CF), and increasing that by 250% to $10bn in 5 years (and they've indicated no sign of stopping gowth capex) at 20x FCF it's still only a 45% gain over 5 years.  And that's assuming they buy back stock equal to everything issued over the next 5 years.  How are you working the math on the upside for the stock.

Great discussion even if we don't see eye to eye on it.  I appreciate having my assumptions challenged.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on May 22, 2014, 06:06:22 PM
- the price declines in AWS services have been significant over the past year.  Microsoft, Google and IBM have all dropped prices hugely (over 40% I think) in just the past year and have stated they will match any price.  This is high margin, sticky business for AMZN.

If someone asked me what bothered me most about AMZN recently it would be cloud competition (the second would be lack of apparent traction in China).  A 38% price decline is never welcome.  The flip side of the coin is that we know AWS almost surely had greater than 38% gross margins, which is awesome, and that AMZN is currently the cloud-computing leader.  This is hugely valuable.  We like AWS because the costs decrease rapidly with time (AWS has decreased price by about 20% per year).  AMZN will almost surely be one of the leaders in cloud computing, along with Google and a few others over the years to come.  Just like retailing, there is room for more than one competitor to generate strong returns. 

AWS is the segment we would most appreciate hearing from others about.  We are still taking the time to fully understand this segment, its economics and potential.



- they don't really buy back shares but they certainly expense them (your point on timing is a good one but over a longer term this will even out).  The share count hasn't gotten out of hand over the past few years but it certainly isn't helping from a FCF/share perspective.

The share count grows pretty steadily at about 1%.  This is pretty reasonable for a company that is still growing rapidly in our view.  Also, when employees leave, their unvested stock-compensation is forfeited which results in the previous stock-comp. expense being more overstated.

Regarding buying back shares: if you look back, they have bought back shares, twice I think, and both times the stock is up multiple times in the years following the repurchases.  I did some calculations a while back and the CAGR from buying back the stock they did was something like 40% to date.  Bezos is very much concerned about FCF per share.  I'd bet that they will aggressively buy back stock in the future but don't have any idea how they determine at what point to do so.  It would be interesting to perhaps see a price/sales chart showing what the price/sales was when they did repurchase.

In buying this stock I worry very much about the reaction you saw after the 1Q earnings and outlook.  People seem to be pricing it off of the potential FCF it can earn in the future.  But at the FCF multiples it trades at today there's a big risk of the Microsoft situation - i.e. the stock is dead money for 10 years while the cash flow and earnings grow into the stock price as the multiple comes down.


This all depends on what FCF multiple you believe it's trading at today and the long-term growth rates AMZN will experience, and its eventual FCF margin.
Title: Re: AMZN - Amazon.com Inc.
Post by: saltybit on May 22, 2014, 06:14:01 PM
Many brick and mortar stores are struggling right now. I think Barnes and Nobles is the only national book stores left. Some of their problems undoubtedly has to due with AMZN. AMZN is investing in margins right now. It is not inconceivable that when enough brick and mortar stores go under, like any other monopolists, AMZN will probably rise prices.

They can also get lower cost of goods as a result of their suppliers not having as much leverage with them. (once enough brick and mortar stores go down)
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on May 22, 2014, 06:46:06 PM
JAllen,

The ROTC is certainly phenomenal.  No argument.  But the stock is trading at 1400% of Tangible Capital which takes the return on YOUR capital invested very low.  Again, my argument is not the quality of the company but the price of it.

We also welcome having our assumptions challenged.  That is a primary motive of posting them here.

I wish AMZN had less tangible capital - that would make it an even better business. The automation and software component, not to mention the fact that they don't even own all of the warehouses make AMZN's relatively lightly capital-intensive business (historically lightly capital-intensive that is) very attractive to us.  The best businesses have no tangible capital - money managers, Moody's, etc.

It's nitpicking but I'd take the other side on a couple of your assumptions.  First, the concept of maintenance vs growth capex and looking back to 2010 as a basis for maintenance.  Unless Amazon decides to stop growing they are going to need to invest in growth capex and those $ comes straight out of free cash flow.  Also, Amazon has never broken out it's capex spend between maintenance and growth or even that related to AWS vs the retail business.  It's a dangerous assumption (from an investing perspective) to assume that 2010 capex levels can be used as a proxy for maintenance.  For example, they opened 12 new fulfillment centers in 2012 that cost $1.4bn (within capex) - but they still spent $2.4bn beyond that.  And the number was $3.4bn in 2013 and I don't believe they opened another 12 new centers.  Either way, unless you assume growth stops, it's inconsistent to assume growth capex stops.


It's very much about eventual FCF per share for us.  I'm only 33 so I think to myself: 'which stocks are going to make me and my investors rich over the next twenty years?'.


And we looked at 2002-2009 for our capex margin, not just 2010 (which is the year spending started to really ramp).  If the capex margin was 8% from 2002-2008, and then 2% in 2009, it would be a mistake to use 2% as our capex margin estimate.  But it was never much above 2% for 8 years in a row, during a time when AMZN was rapidly growing.  AMZN was only spending a couple hundred million a year.  This is why we have conviction about the true maintenance number being in the low single digits.  It was a revelation seeing how little AMZN was spending prior to 2010 for us.  I don't think this can be said enough and it's crucial to be fully aware of to share most of our views about AMZN.  Their capital spending went up literally ten times in four years (from an average of $350M in 2008 and and 2009 to $3.4B in 2013).  Look at how consistently little AMZN spent prior to 2010.  What has changed since then?  Has their business become more inefficient?  Are they less automated now than they were then or more?  Do they have less leverage with suppliers?  Have their infrastructure costs gone up?  I don't know what changed then, but something serious changed internally.  Probably some of it was the U.S. sales tax issue, but spending just really took off then.

The second point I'd nitpick with is the opex and that it is inflated due to one time growth initiatives.  It's true that current gross margins less historic opex equate to 13% but that's comparing apples to oranges.  I guess I will believe that it is truly inflated when I see that they are able to bring it back down to historic levels without impacting either sales growth or gross margins.  I think you also need to take into account that gross margin includes growing AWS which is a low COGS, high opex business - so that will inflate gross margins but require an ongoing increased level of opex.


I agree that the opex is not inflated because of one-time growth initiatives.  They are intentionally investing tons to grow more in the future, which was always been the goal.  Over time, they will have lower operating expenses relative to WMT because of the lack of retail infrastructure.  We're trying to estimate the underlying FCF, and because of the massive spending they're doing, we believe that FCF and operating income are understated.


We may not be fully accounting for AWS' higher opex.  We'd be happy to learn more about this.  If we use 28% gross margin - WMT's long-term operating expense margin, we still get to 10% op. income/FCF margins though.  We can be quite wrong about AWS's opex and not much off the mark about our company-wide beliefs.  If AWS is $4B in revenues a year and opex is 30% instead of 15% that's less than 1% of sales difference...


Final point - even if using the $4bn of FCF that you indicated (using $2bn of maintenance capex and $6bn of Op CF), and increasing that by 250% to $10bn in 5 years (and they've indicated no sign of stopping gowth capex) at 20x FCF it's still only a 45% gain over 5 years.  And that's assuming they buy back stock equal to everything issued over the next 5 years.  How are you working the math on the upside for the stock.


We can't accurately predict what FCF will be in any year.  We believe that it will be higher than most of us realize because of the way AMZN is managed, its first-mover advantage with selection, automation, and driving costs down, and the long runway ahead.  At some point they won't be able to just throw money at stuff and have higher expenses.  The HBO shows are a prime example: just pay HBO $100M a year, save $40 million in taxes and make customers happier.  This is a no brainer for a rational manager like Bezos.  We hope that they keep massively spending so we'll be earning even more down the road and we pay less in taxes along the way.

Great discussion even if we don't see eye to eye on it.  I appreciate having my assumptions challenged.


As do we!  Happy to be discussing the company more and sharing our views.
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on May 22, 2014, 07:08:02 PM
Your statement sums it up for both of us..."it's very much about eventual FCF per share for us"

Since inception Amazon has put its pedal to the floor on growth at (almost) any cost and lower prices for consumers even if it eats into profits.  While that has led to phenomenal sales growth, it hasn't resulted in much real FCF to date (less than $10bn over the past 5 years combined - excluding stock buybacks and acquisition spend).

Ultimately I think that to be a believer in this stock you have to assume 3 things:  a) the strategy they have followed since inception and that has continued right through 1Q this year, will at some point change to one focusing on cash flow and profitability;  b) they can make that transition without impacting sales growth, margins or competitiveness;  c) the impact of a) and b) together have to be so massive that it justifies the current stock price.

I personally question whether management will make this transition (although judging by the stock reaction after the 1Q call the decision may get taken out of their hands at some point) and if they can whether the cash flows can justify today's price.  My value investing background and naturally conservative nature isn't willing to make that bet based upon the current stock price.  Too many alternatives that throw off a ton of cash today but aren't necessarily growing that fast - bird in the hand vs. two in the bush.  I guess it takes two sides to make a market.

Good luck with your investment.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on May 23, 2014, 09:07:10 AM
This is an interesting read by the founder of Bonobos.  The post is essentially about Amazon and how one can or can't compete with it.  Nice to read an industry-insider's perspective and not an investor's or journalist's.


https://medium.com/what-i-learned-building/d233f02d52a5
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on May 23, 2014, 10:08:31 AM
Someone mentioned that AMZN is a $180B market cap company. It's actually 'only' $140B right now.  This is quite a bit different from a long-term shareholder's and eventual CAGR perspective.


Also, if I'm right it's $140B/ ~$7B in FCF, growing at the rate of gross profit growth which is consistently 30+%.  So it's a 5% yield growing at 30+%, that can continue to do so for a number of years.


It doesn't take very many years for that 5% to become quite a larger number as a percentage of purchase price if AMZN continues to grow at anything like 25-30%.
Title: Re: AMZN - Amazon.com Inc.
Post by: Laxputs on May 23, 2014, 12:25:29 PM
When you say they may grow closer to 30% a year, am I correct in saying it is because their gross margins are increasing due to a higher percent of sales coming from 3P and AWS, which offer greater margins due to less Op Ex? How long are you suggesting that growth rate can continue if you use it as a factor in your valuation? I can see revenue growth continuing for a very long time, but gross margin growth will plateau more quickly, no? Is there a chance gross margins can average out to closer to 24% instead of the 28%?

Amazon derives relatively minimal revenue from their advertising services: 172m projected for 2014. Google will do 4b. FB 5b. Yahoo 1.2b. Their platforms are different but I believe that Amazon's consumer database information is more valuable given it doesn't say just what they searched for, but what they bought and how long ago they bought it. The ad revenue has grown at 40% for each of the last 2 years and will be interesting to watch.

Help me with a valuation range:

Very conservative:
78b revenue. 5% net margins. 8.4$/share. Currently 36x earnings.
Grows that 8.4$/share at 15% for 5 years. We would end up with 15% minus the multiple contraction. Going from a 36 multiple to 15 multiple is a negative CAGR of 16% a year (I think). So downside is roughly breaks even?


Bullish but reasonable:
Gross margins of 28%. WMT Op Ex 18%. Say AMZN are 16%.
78b revenue. 9% net margins. 15.1/share. Currently 20x earnings.
Grows at 25% for 5 years. Is valued at 20x earnings at year 5. We would mimic that CAGR and no multiple contraction.

Tails I don't lose much (opportunity costs of investing elsewhere), heads I win a lot?

And of course there is the potential that they grow faster, that they make more money from untapped pricing power, cost efficiencies/growing gross margins due to massive investments in massive scale, new revenue streams like Fire TV, more potential hardware, Amazon Fresh, etc. That their actual FCF margin is 10% as it was in previous years with lower gross margins. There are many arguments for the bullish valuation to be much more aggressive.




Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on May 23, 2014, 02:39:33 PM
Lax,

Where are you getting the 5% net margin?  Their net margin last year was about 0.3% (and negative the year before).  Gross margins have been improving but operating margins have been declining.  Operating, pre-tax margin was 1% last year, 1.1% the year before and 1.8% the year before that. 

What are you adjusting for?  If it's for "potential" net margin then you need to be careful about how conservative that downside case is.  Using a scenario that is theoretically possible (maybe) but very inflated from the actual is a good exercise but a dangerous place to use as a starting point (especially for a downside). 

Note that the margin improvement from AWS would be gross margin.  But opex will likely be higher because this is a fixed cost business (with healthy capex needs since the routers and servers need to be updated regularly - although D&A will be accounted for in the opex).
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on May 23, 2014, 02:50:33 PM
There's a lot of focus on gross margins but not on the opex.  What worries me is that between 2011 and 2013:
  - sales up 50%

But look at all the components of opex:
  - fulfillment up 88%
  - marketing up 92%
  - technology & content up 126%
  - general & admin up 72%
Total opex up 97% from 20.6% of revenues to 26.2%

Why do you feel they will be able to take this down to 12% (ie to get to your 18% operating margins)?
Title: Re: AMZN - Amazon.com Inc.
Post by: txlaw on May 24, 2014, 07:08:04 AM
I think it would be interesting to discuss possible new billion dollar businesses that Bezos could be working on at AMZN.  Here's what I can think of:

-Robotics/automation (e.g., Kiva Systems and drone biz)
-Transport/courier services (competing with UPS, FDX, and asset-lite transport services)
-Media development biz (Amazon-produced content)

Anything else?  (Not saying these will billion dollar businesses will materialize.  It's just fun to think about what all that investment is going towards.)
Title: Re: AMZN - Amazon.com Inc.
Post by: link01 on May 24, 2014, 09:41:23 AM
I think it would be interesting to discuss possible new billion dollar businesses that Bezos could be working on at AMZN.  Here's what I can think of:

-Robotics/automation (e.g., Kiva Systems and drone biz)
-Transport/courier services (competing with UPS, FDX, and asset-lite transport services)
-Media development biz (Amazon-produced content)

Anything else?  (Not saying these will billion dollar businesses will materialize.  It's just fun to think about what all that investment is going towards.)

off the top of my head, in no particular order there's also:
-tv, tablets, smart phones (rumored), games
-amazon fashion (curated), supply (B2B), fresh (grocery), pantry (bulk)

yes, these (including the things you mentioned above) are big, ambitious projects requiring large investments & upfront expenses, which, according to Bezos himself, on average take between 5 to 7 yrs to reach cash flow breakeven in the amazon world

its still Day 1...
Title: Re: AMZN - Amazon.com Inc.
Post by: Spekulatius on May 24, 2014, 12:29:47 PM

It helps to estimate growth and maintenance capex and subtract maintenance capex from OCF.  Also look at tangible invested capital - it's ~$10B.  So you can look at OCF/tangible capital, compare AMZN's to others and see that it's quite high.  I wrote about AMZN's ROIC in a previous post above and how we can estimate it and I'll write more here.


Current FCF, or OCF minus current year capex, doesn't account for maintenance versus growth capex at all.  And we all know that Amazon is investing for the future. It helped us to look at AMZN's pre-2010 capex margins, which were very reliably 2-2.5%.  If you assume that maintenance capex for AMZN is now ~$2B, OCF of $6B gets us to $4B of FCF on ~$10B in tangible capital which is is a nice return on tangible capital (Buffett singled out his 60% tangible-return companies in an 80s annual letter).  Of course I don't need to tell anyone that 40% ROTCs are attractive.


Call us crazy but we actually believe that AMZN's actual ROTC is greater than 50% and that's its true current FCF is almost 10% of sales, somewhere in the range of $7B-$9B now. 

Where is the basis for these numbers. I feel they are just made up. AMZN itself states the FCF as ~1.5B$ and even that includes 1.2B$ in proceeds from stock based compensation. While I agree that AMZN cash flow would be higher in a steady state, you cannot do better than adding back the complete Capex, which is  3.8B$ during the last 12 month, more realistically add back 1/2 that.

So 1.5B$ nominal FCF-1.2B$ ( stock expense) +0.5x 3.8B$=2.3B$ in steady state cash flow. Not a great deal for a 140B$ market cap company, imo.
Title: Re: AMZN - Amazon.com Inc.
Post by: saltybit on May 24, 2014, 05:17:08 PM
I think it would be interesting to discuss possible new billion dollar businesses that Bezos could be working on at AMZN.  Here's what I can think of:

-Robotics/automation (e.g., Kiva Systems and drone biz)
-Transport/courier services (competing with UPS, FDX, and asset-lite transport services)
-Media development biz (Amazon-produced content)

Anything else?  (Not saying these will billion dollar businesses will materialize.  It's just fun to think about what all that investment is going towards.)

off the top of my head, in no particular order there's also:
-tv, tablets, smart phones (rumored), games
-amazon fashion (curated), supply (B2B), fresh (grocery), pantry (bulk)

yes, these (including the things you mentioned above) are big, ambitious projects requiring large investments & upfront expenses, which, according to Bezos himself, on average take between 5 to 7 yrs to reach cash flow breakeven in the amazon world

its still Day 1...

Advertising. They have the data, and the technology. It sholdn't be too hard to get to $1B for them.
Title: Re: AMZN - Amazon.com Inc.
Post by: Laxputs on May 25, 2014, 08:25:36 PM
Lax,

Where are you getting the 5% net margin? 


I think having 10 years of greater than 5% fcf margins while expensing for growth is so important when analyzing AMZN. To me, using that as a downside doesn't seem unreasonable. I don't think in the time since then their normalized fcf margin has been decreased. I would say it's the opposite. Their moat is growing. Their normalized fcf and their fcf potential is growing.

And their gross margins have increased since then. And it seems like they may be aggressively depreciating. And their revenue streams are likely increasing.
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on May 25, 2014, 09:09:55 PM
Those 10 years of 5%+ FCF margins were a long time ago.  FCF has been declining on both a % basis and an absolute $ basis every year since 2009.  I'm not sure it's accurate (or conservative) to use that as a normalized basis.  The business has changed since then.

You also have to factor in things like:  a) stock based comp - which has been rising fast and in 2013 was over $1.1bn or 20% of operating cash flow (over 50% of FCF);  b) growth in unearned revenues which in 2013 contributed some $400M of cash flow;  c) negative working capital.   

The gross margins have been growing but operating expenses have been increasing even faster.  Operating margins have been steadily declining. 

You can normalize for all these things if you feel the current situation doesn't reflect the ongoing norm, but what's the basis for considering 2008 and earlier the norm?   Or that they are heading back towards that.  If anything it appears they are headed further and further away from it.
Title: Re: AMZN - Amazon.com Inc.
Post by: Laxputs on May 25, 2014, 10:59:52 PM
Well they weren't a long time ago: the average fcf margin over the last 5 years is 5%. 2002-2010 was a bit higher. Some years were very high.

Can you talk more about growth in unearned revenues please? I'm not sure what that means.

And I know nothing about negative working capital but my google search tells me in some cases, like Dell, it is a positive thing. So talking more about this would be good too.

Operating margins have been decreasing but it seems Amazon is heavily expensing growth.
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on May 26, 2014, 07:28:53 AM
I'm assuming the majority of unearned revenues are related to Prime but the concept is that it represents cash received upfront for something earned over time.  So if you pay them $79 for Prime membership, they get cash upfront.  Cash goes on the balance sheet as an asset and the offset is a $79 unearned revenue liability.  Each month throughout the year they will book 1/12th of that as revenues and reduce the unearned revenue liability.

Basically, as long as you are growing deferred revenues you are increasing cash flow.  But it's not really an operating cash flow it's more of a negative working capital item ( where you get paid before having to pay). If growth slows it becomes a usage of cash.

I think you may have meant that operating margins have been decreasing not increasing (gross margins have been increasing but operating declining).  What do you mean by "expensing growth"?  You've mentioned that a couple of times.
Title: Re: AMZN - Amazon.com Inc.
Post by: Laxputs on May 26, 2014, 08:57:44 AM
Fixed the typo, thanks.

I think a portion of their operating expenses are used for growth initiatives. Between their cost of sales, technology and content, marketing, and fulfillment, I think operating expenses needed to maintain earnings power are being inflated with money spent on growth. But I'm not sure how to break those numbers down any more.
Title: Re: AMZN - Amazon.com Inc.
Post by: txlaw on May 28, 2014, 08:39:37 AM
I think it would be interesting to discuss possible new billion dollar businesses that Bezos could be working on at AMZN.  Here's what I can think of:

-Robotics/automation (e.g., Kiva Systems and drone biz)
-Transport/courier services (competing with UPS, FDX, and asset-lite transport services)
-Media development biz (Amazon-produced content)

Anything else?  (Not saying these will billion dollar businesses will materialize.  It's just fun to think about what all that investment is going towards.)

Speaking of a transport/courier biz push, Alibaba, the AMZN+ of China (amazing how many businesses they're in), is purchasing a stake in SingPost.

http://dealbook.nytimes.com/2014/05/28/alibaba-to-buy-stake-in-singaporean-postal-system/?module=BlogPost-Title&version=Blog%20Main&contentCollection=Mergers%20&%20Acquisitions&action=Click&pgtype=Blogs&region=Body
Title: Re: AMZN - Amazon.com Inc.
Post by: Palantir on May 30, 2014, 10:46:13 AM
Hello all, great discussion here.

I'm curious to know how you guys derived the 13% operating margin. I suppose it depends on which year we are looking at, but if you look at 2008 which is before the ramp up in CapX, I have GM: 4.27/19.166 = 22.3%. Operating Expense Margin is: 3.428/19.166 = 17.9%. Today, in 2013, I have the GM: 27.3%. So GM-OEM = 27.3-17.9 = 9.4%.

Overall, it seems to me that with this 9.4% margin we get about 7M in Operating Income, which is fairly substantial.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on May 30, 2014, 11:17:48 AM
Hello all, great discussion here.

I'm curious to know how you guys derived the 13% operating margin. I suppose it depends on which year we are looking at, but if you look at 2008 which is before the ramp up in CapX, I have GM: 4.27/19.166 = 22.3%. Operating Expense Margin is: 3.428/19.166 = 17.9%. Today, in 2013, I have the GM: 27.3%. So GM-OEM = 27.3-17.9 = 9.4%.

Overall, it seems to me that with this 9.4% margin we get about 7M in Operating Income, which is fairly substantial.


It was FCF margin which peaked at 12+% in 2009.  Remove the WC benefit from that year and it's still 9-10%, which is inline with my above comments and your GM-OEM conclusion.  It also assumes slightly above WMT OEM which I think is wrong long-term because of zero retail real estate and a much more automated supply-chain.


RackSpace has an OEM margin of about 23%, so the notion that AWS has permanently and massively increased AMZN's OEM is false.  AWS should have lower long-term OEM margins than RackSpace due to scale and lesser support services, which is what RackSpace is known for.


So if you believe that AMZN's costs won't be lower than WMT's in the long-run, you can still get to a ~10% operating margin.  If you believe that AMZN will have lower costs than WMT in the long-run than you could reach an even more contrary-to-popular-opinion conclusion.


I should note that AMZN's GM continued to expand to 28.8% 1Q 2014.
Title: Re: AMZN - Amazon.com Inc.
Post by: Palantir on May 30, 2014, 11:24:24 AM
Hey, this is the point I was referring to. Just to clarify, you were referring to FCF?


Quote
Here is some of the evidence we have for this:

current gross margin minus historical operating expense margin would equal 13% operating margins or $9B of operating income

Gross margins cannot be fibbed or manipulated, but operating expenses are inflated by massive investing and spending, e.g. paying HBO, AWS expansion, China competition etc.  AMZN's gross margins are continually increasing, along with its opex.  Since WMT's operating expense margin is 18%, we can conclude that AMZN's will be a few points lower because AMZN doesn't operate any retail real estate over time. A pure warehouse infrastructure is cheaper than warehouses + retail to deliver same products.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on May 30, 2014, 11:39:26 AM
Hey, this is the point I was referring to. Just to clarify, you were referring to FCF?


Quote
Here is some of the evidence we have for this:

current gross margin minus historical operating expense margin would equal 13% operating margins or $9B of operating income

Gross margins cannot be fibbed or manipulated, but operating expenses are inflated by massive investing and spending, e.g. paying HBO, AWS expansion, China competition etc.  AMZN's gross margins are continually increasing, along with its opex.  Since WMT's operating expense margin is 18%, we can conclude that AMZN's will be a few points lower because AMZN doesn't operate any retail real estate over time. A pure warehouse infrastructure is cheaper than warehouses + retail to deliver same products.


I've used FCF mostly for Amazon because there are so many non-cash expenses and that's what AMZN management incessantly claims to focus on.  It's also the one that makes the most sense to focus on - you can't buy milk with gross margin, or any other financial metric other than FCF.  The chart I posted earlier is FCF (OCF - All Capex), so yes.


I think that FCF and operating profit should approximate one another over time excluding stock-comp.  The only differences over time between the FCF and OP, for AMZN, should be stock-comp, interest and taxes.  So I use them somewhat interchangeably but focus more on FCF because it's more accurate; isn't affected by non-cash expenses; is what mgmt. focuses on and deducts both interest and taxes.  It doesn't deduct for repayment of capital leases however, which is a financing cash flow, and one that is quite material.


So, again, my core thesis is that because AMZN generated material FCF margins in the eight years prior to 2010, and that because not very much has changed with its core business, except for rapidly accelerated spending and investment since then, that AMZN will again achieve FCF margins approaching that range at some point in the next few years.
Title: Re: AMZN - Amazon.com Inc.
Post by: Palantir on May 30, 2014, 12:10:50 PM
I see, how do you get to your 9M OI figure then? Pardon me if you have explained this earlier.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on May 30, 2014, 12:44:55 PM
I see, how do you get to your 9M OI figure then? Pardon me if you have explained this earlier.


The OI estimate is based on gross margin minus estimated run-rate operating expense margin multiplied by this year's sales of $90B+ or so like you were using above.


It's nice that estimating operating income this way arrives at a very similar number to the historical FCF margins.  And remember that this uses an OEM 5% greater than the mid-teens OEM AMZN delivered prior to increasing automation and Moore's law cost decreases and accelerating growth four years ago.


What are your thoughts about all of this?  I am going to go back and re-read the past few pages to make sure I haven't missed anything posted by others...  I'd love to hear from someone that thinks AMZN's long-term costs will be greater than WMT's.
Title: Re: AMZN - Amazon.com Inc.
Post by: Palantir on May 30, 2014, 12:58:44 PM
Great, thanks. I guess my main concern now is that we could be understating Maintenance CapX because those early years will not have the outlay in AWS server infrastructure. That being said, I don't believe AWS is a big contributor to revenues, and supposedly estimated at about 3B so it may not be yet material.
Title: Re: AMZN - Amazon.com Inc.
Post by: frith2012 on May 30, 2014, 01:01:11 PM
It's interesting that people often cite Amazon's warehouses vs. Walmart's retail stores as a justification for a higher operating margin.  Walmart typically acquires their sites at a subsidized price, sometimes at less than developer cost, because of their ability to anchor the development.  Their presence enables the developer to secure a construction loan as well as lease off of their anticipated traffic.  As a result, they typically pay (either through rent or by purchasing a pad site) a rate well below market rents vs. other retailers.  As a result, I'm not as certain as many Amazon bulls their is a cost advantage in Amazon's real estate vs. Walmart.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on May 30, 2014, 01:02:45 PM
http://www.businessinsider.com/amazon-robotics-kiva-systems-2014-5 (http://www.businessinsider.com/amazon-robotics-kiva-systems-2014-5)


BTW, this video about Kiva is awesome.  Roboticized [sic] FCs are one of the reasons I think AMZN will have lower costs than pretty much all others that currently exist - because they have a head-start on automation and scaling vertically in various ways (software, bandwidth, delivery now).  This automation stuff is non-trivial to implement, to say the least.  It takes years to hone this stuff and get it right.  This particular video shows additional detail above the one that Kiva produced prior to the AMZN acquisition, but I'm not sure how much of that are AMZN's changes/improvements or they're just choosing to release more detail now.


A big question I've had is whether or not Kiva is still selling the pods to other retailers like they were prior to the AMZN acquisition, or perhaps AMZN is selling an older version to appease other retailers and prevent them from complaining.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on May 30, 2014, 01:31:47 PM
It's interesting that people often cite Amazon's warehouses vs. Walmart's retail stores as a justification for a higher operating margin.  Walmart typically acquires their sites at a subsidized price, sometimes at less than developer cost, because of their ability to anchor the development.  Their presence enables the developer to secure a construction loan as well as lease off of their anticipated traffic.  As a result, they typically pay (either through rent or by purchasing a pad site) a rate well below market rents vs. other retailers.  As a result, I'm not as certain as many Amazon bulls their is a cost advantage in Amazon's real estate vs. Walmart.


The increasingly-automated FCs designed to fulfill orders in a purely e-commerce mode are a small part of what I believe will be AMZN's OEM retail cost advantage.


I attribute the vast majority of the advantage I believe AMZN will have compared with WMT (and had prior to the accelerated expansion in 2010; 14-15% OEMs compared to WMT's 18-19%) to the lack of any retail real estate, not just automation advantages.  WMT has 1.1B square feet of retail square footage (still growing 3+%) to maintain.  Regardless of retail land costs, no one sells cement, copper, and other building materials to WMT for below the market price.  Retail land will always cost more than industrial or rural land where most of AMZN's FCs go (even in NJ their Fresh warehouse by definition has to be in an lower-cost industrial area [often blighted looking for redev], not a high-value retail/residential area).  Contractors may bid lower construction gross margins, but that's about it. 

AMZN has essentially zero retail real estate (save the lockers).  WMT doesn't have as much flexibility to move as AMZN does once a FC lease expires.  AMZN can say "we'll just move FCs to a different part of the suburbs" where there are many more options to choose from (for many, but not all of their FC locations) to the RE developers.  Where AMZN built their two recent Bay Area FCs, you can look around and as far as the eye can see there's empty land except for a few other warehouses - it's farm land out there.  The small rural towns are literally competing over having AMZN build a new FC there for jobs.  How many towns are dying to have a WMT go there?  I'm sure there are a couple but I've never heard of this.

So yeah, the lack of retail real estate is where most of the cost advantage will come from, I believe.
Title: Re: AMZN - Amazon.com Inc.
Post by: Spekulatius on May 30, 2014, 07:36:17 PM
Quote
AMZN has essentially zero retail real estate (save the lockers).  WMT doesn't have as much flexibility to move as AMZN does once a FC lease expires.  AMZN can say "we'll just move FCs to a different part of the suburbs" where there are many more options to choose from (for many, but not all of their FC locations) to the RE developers

AMZN does not own much real estate but they lease a lot. if I remember correctly, they lease about 94M sqft of real estate. I think that WMT has ~10x AMZN real estate (much of it is fully owned, at least in the US) but they also have 5x AMZN sales. AMZN business is not really that capital light, if you include all the leased hard assets.

In fact, I think WMT owning their real estate at a low average cost basis is a strong advantage, at least relative to leasing it.
Title: Re: AMZN - Amazon.com Inc.
Post by: Palantir on May 30, 2014, 08:21:11 PM
I think JAllen has made a pretty persuasive case for AMZN. If he is right, then it is a steal at this price IMO.


Long AMZN.
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on May 30, 2014, 09:54:59 PM
What's the basis for the assumption that opex levels can (and will) return to the levels of 5 years ago?  As a % of revenues opex has been rising for 5 years now. 

Also, shouldn't you subtract out stock comp ($1.2bn last year).  It's not cash but it ultimately comes out of the shareholder's pocket. And it's been growing rapidly.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on May 31, 2014, 12:19:06 AM
What's the basis for the assumption that opex levels can (and will) return to the levels of 5 years ago?  As a % of revenues opex has been rising for 5 years now. 


Growth spending went from less than sales growth rate to three times the sales growth rate.  So from 2002-2009 FC space increased at a CAGR of 20%.  Since then it's increased at almost 60%.  This is a proxy for overall spending.  This is why I believe that OEM is inflated right now, not to mention the fact that AMZN should have a lower OEM than WMT long-term.  WMT's OEM is 18-19%.  I just don't see how AMZN's will not be lower without all of the expensive retail real estate.  They do exactly the same thing: buy tons of stuff from suppliers and deliver it to customers, except one company uses only much cheap FC space, that is increasingly automated.  The other uses FC space, but then keeps some of it in expensive buildings in dense cities and has a ton of employees running around managing that inventory and moving it around.  This is my basis for believing that AMZN will have sub-WMT OEMs.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on May 31, 2014, 12:24:58 AM
Also, shouldn't you subtract out stock comp ($1.2bn last year).  It's not cash but it ultimately comes out of the shareholder's pocket. And it's been growing rapidly.


Please read my previous comments about accelerated expensing of stock-comp.  It's a discretionary accelerated expense method that AMZN chooses to take to maximize expenses (clearly stated in 10-Ks).  Because stock-comp expense is accelerated and there are also forfeitures (not all employees stay four years for full vesting; AMZN's vesting schedule is 5, 15, 40, 40% FYI), stock-comp in any year is overstated, but by how much I'm not certain of.

One can easily account for stock-comp accurately by just diluting your FCF projections per share by some X% growth rate of shares outstanding per year.  I'd call it 1% or so.

AMZN has quite a proclivity of buying back shares at opportune times, so I'm hoping that gets to happen in a material way about every five years which could offset some of the dilution.
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on May 31, 2014, 08:58:48 AM
Hi JAllen,

The accelerated spending on the FC's and other growth initiatives would be capitalized (as is much of their software spending) so there shouldn't be much one-off growth spending in the opex number.  As implied, this should just reflect ongoing operating costs. Are you aware of them putting one off growth costs in here?  If so, can you point that out for me?

On the share expense, yes, they are straightlining the expense and back end weighting the issuances.  Maybe I'm looking at this wrong but that's a bad thing in a rising share price environment. For example, if they award $100 of shares that vest 10-10-40-40 but expense them 25-25-25-25, the expense is higher in the first two years but then that reverses in later years. But more importantly the expense number is based off the share price in the first year (say $200) but with a rising share price the majority of those shares are issued at the higher price (say $300) so effectively they are under expensing vs the cost to shareholders of those new shares coming on the market.  Either way, over a 4 year cycle the expense differential will even out - and I think you have a longer term view than 4 years.
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on May 31, 2014, 09:09:46 AM
Sorry, forgot to add:  my point on excluding share based comp was not about how it is expensed but the fact that it is dilutive unless you use a similar amount of cash (or more in a rising share environment) to repurchase the stock being issued.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on May 31, 2014, 09:57:16 AM
Hi JAllen,

The accelerated spending on the FC's and other growth initiatives would be capitalized (as is much of their software spending) so there shouldn't be much one-off growth spending in the opex number.  As implied, this should just reflect ongoing operating costs. Are you aware of them putting one off growth costs in here?  If so, can you point that out for me?

On the share expense, yes, they are straightlining the expense and back end weighting the issuances.  Maybe I'm looking at this wrong but that's a bad thing in a rising share price environment. For example, if they award $100 of shares that vest 10-10-40-40 but expense them 25-25-25-25, the expense is higher in the first two years but then that reverses in later years. But more importantly the expense number is based off the share price in the first year (say $200) but with a rising share price the majority of those shares are issued at the higher price (say $300) so effectively they are under expensing vs the cost to shareholders of those new shares coming on the market.  Either way, over a 4 year cycle the expense differential will even out - and I think you have a longer term view than 4 years.



I wrote about how AMZN also has growth expenses, not every investment is capitalized.  All of the non-shipping Prime benefits are expenses - digital video licensing, giving books away to Prime members, etc...


"Another thing that AMZN does well is to invest using expenses, not always capex, which as you know are immediately tax-deductible and help maximize long-term cash flows by minimizing taxes (remarkably similar to John Malone's modus operandi actually), the only thing Bezos cares about.  So the market thinks AMZN's underlying operations aren't profitable at all when in reality the profit is being obscured by the company's massive growth expenses, much of which are growth expenses.  A great example is the significant sum (http://recode.net/2014/04/23/hbos-amazon-haul-is-big-but-not-as-big-as-you-might-think/) AMZN is now spending on HBO shows."
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on May 31, 2014, 01:47:27 PM
I don't think that's correct.  According to the 10K, not only are content costs put on the balance sheet and expensed (that would include HBO payments) but the expense is consider a cost of goods sold, not an operating expense.

Title: Re: AMZN - Amazon.com Inc.
Post by: txlaw on May 31, 2014, 03:04:35 PM
This is an interesting read by the founder of Bonobos.  The post is essentially about Amazon and how one can or can't compete with it.  Nice to read an industry-insider's perspective and not an investor's or journalist's.


https://medium.com/what-i-learned-building/d233f02d52a5

This is an interesting read. 

However, there is a company I follow (and am invested in) called OSTK that does a pretty damn good job of making real cash profits, despite being an e-commerce company. 
Title: Re: AMZN - Amazon.com Inc.
Post by: Spekulatius on May 31, 2014, 04:44:20 PM
Quote
I wrote about how AMZN also has growth expenses, not every investment is capitalized.  All of the non-shipping Prime benefits are expenses - digital video licensing, giving books away to Prime members, etc

I don't get is. Why is the real cash that they spent on prime members or on HBO considered an investment by some? It's money that goes out the door to deliver a certain service. There is nothing tangible left after that spending, or do you believe that spending let's say 100M$ in cash for HBO creates higher profits in the future?

I agree it will entice members to sign up for the service as long as they offer it, but if they drop the service, the same members that like it for their very reason, would be likely to drop amazon prime.

If anything, offering something like HBO to Amazon prime members creates a liability to offer it in the future. I think the beneficiary of deal is HBO which likely get's a 100M$/year annuity.
Title: Re: AMZN - Amazon.com Inc.
Post by: Palantir on May 31, 2014, 09:45:19 PM
JAllen, what do you think of their growth slowing down? Do you expect the rate of decline to moderate, if so what are you estimating as your long term rate?


Their international operations seem comparatively slow, but I guess that's understandable as it does seem a very US-centric firm.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on May 31, 2014, 10:42:12 PM
I don't think that's correct.  According to the 10K, not only are content costs put on the balance sheet and expensed (that would include HBO payments) but the expense is consider a cost of goods sold, not an operating expense.


They do state that "Cost of sales consists of the purchase price of consumer products and digital content where we are the seller of record, including Prime Instant Video", so you're right about Prime Instant Video being in COS.  However, this doesn't really alter the overall thesis which is simply that AMZN should have a lower OEM than WMT long-termand because AMZN's gross margin has increased so much even with these extra Prime Instant Video expenses supports my GM - OEM = ~7-10% operating margin thesis seeing as AMZN's gross margin continues to increase y/y and q/q (28.8% 1Q 2014) and WMT's OEM is 18-19%.  So if AMZN doesn't achieve lower, just an equal to WMT OEM, we're talking 10% operating/EBIT/probably FCF too margins over time.

Another thing to add is that after re-reading everything about video and content in the 2013 10-K, it is not perfectly clear where all content related items are accounted for to me. There's the self-produced video which should absolutely be capitalized (STRZA capitalized and amortized its over three years if I recall correctly), and licensed content is probably also capitalized. In 'Operating Expenses'on page 26 however, they also list 'Technology and content' so I'm not sure if there's any video in there or whether that's music or books etc. 

Video isn't the only content AMZN is giving away for little if any revenue, there are book expenses too.  I should note that Cost of Sales does not mention Prime book lending, just Prime Instant Video.  There's also 5 years of Fresh Development, drone development, smartphone development, Kiva development, and hopefully lots of other things they're working on and incubating that we don't know about.

It's also hard to come up with a total estimate of how much operating expenses are inflated by - I just know AMZN generally prefers to throw money at customers than to pay 39% of operating income in taxes.  I doubt it's an accident they run at essentially break-even year after year.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on May 31, 2014, 11:05:43 PM
I think JAllen has made a pretty persuasive case for AMZN. If he is right, then it is a steal at this price IMO.


Long AMZN.


Glad we've managed to convince at least two people thus far. 


If you have an indefinite perspective and analyze the company with that lens, it's super attractive.  If you look back at the last handful of years, not the prior ten, and extrapolate the last four years into the future, well I can see how it's hard to imagine what the company would look like financially if they weren't spending so much.  But if you look back 12 years and then ask yourself which company is AMZN most similar to that is operating at a much more stable growth profile and what are that company's financials like long-term, then you've got quite an interesting opportunity to ponder.


I think the 'isn't earning money headlines' and not-for-profit stuff turn many people off in general from even glancing at AMZN's financial statements.  I know they did that to us for a number of years!


Newspapers, book publishers and smaller stores are already talking about the competitive advantages AMZN has - they will be obvious in hindsight - in ten years or so.  But they aren't now to many.




Why don't people think about the big picture here? What is the future of worldwide B2C product distribution?  How will it work?  Will it be store or Internet-based?  Which is more convenient and has lower costs?  Storing 20 million different items in a warehouse and ordering as many as you want in a few seconds with zero hassle or offering 150,000 in a WMT supercenter that requires driving for at least a few minutes, walking around a 4 acre store for the various products you need, waiting in line for a few minutes, then sitting in traffic for another 10-20 minutes.  Not to mention the gas expenditure for this (even if it's only a couple bucks, shipping is less if you're a Prime member and ordering doesn't take any time).


WMT is WAY behind in U.S. e-commerce; who wants to shop there online?  WMT has tried online grocery in the Bay Area.  They reported that 'people don't want it'.  Of COURSE people don't want to buy groceries online from WMT - WMT is known for cheap stuff and many people don't want cheap food.  The people that DO want cheap food aren't shopping online yet. 


If WMT is so far behind, who's going to catch AMZN?  I know Alibaba will try, but aside from ShopRunner, which is nearly the same price as AMZN with a fraction of the selection, and none of the content benefits, I don't see how AMZN will not dominate at least the U.S. e-commerce industry (hopefully cloud-computing too) over the next 1-3 decades.  AMZN is to WMT as WMT was to Sears and K-mart.



The simple fact that the company has had consistent positive operating cash flows should tip investors off to the fact that maybe, just maybe, AMZN could, or is, actually 'making money'.  Think of the companies that have little or negative FCF year after year but report GAAP income.  The headlines should actually state "AMZN reports positive FCF for the year and has every year for more than a decade", but they never do.


Here's to the very long life of the 'ablest CEO in America'.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on May 31, 2014, 11:19:05 PM
JAllen, what do you think of their growth slowing down? Do you expect the rate of decline to moderate, if so what are you estimating as your long term rate?


Their international operations seem comparatively slow, but I guess that's understandable as it does seem a very US-centric firm.


Gross profit is growing 33%.  Doesn't seem slow to me.  If GP was only growing 23% like sales, AMZN wouldn't be nearly as attractive.  I would like to make a long-term quarterly histogram of sales and gross profit growth.  Sales have slowed, but I'm quite sure this is because they are allowing third-parties to sell stuff, but they still earn high-margin commissions (try to sell a used book on AMZN to learn the commission rate).


But again, gross profit is what I care about (operating expenses too but they can be managed and inflated in periods of rapid growth).  Gross profit is a great single metric that shows your financial relationship with customers.  If you're a restaurant chain you could easily inflate your OEM by employing people to open new stores, opening them and having that 1-2 years of sales ramp up, but gross profit and its growth are a direct indicator of changes in your sales mix (e.g. increasing third-party FBA high-margin commission revenue and).


There is greater than sales growth revenue growth in third-party units, digital sales, and AWS (which if AWS is at all comparable to RackSpace has way higher gross margins than AMZN as a whole).  These are all causing gross profit to grow faster than sales.


Yes, I hope they can accelerate international.  Only 18% sales growth there, but the digital transition is just beginning there (http://seekingalpha.com/article/1574282-amazon-com-inc-amzn-management-discusses-q2-2013-results-earnings-call-transcript?part=single) so hopefully things will improve and we will have a nice foothold in one of the massive countries (India or China).


I'll see what I can do about that sales growth histogram.
Title: Re: AMZN - Amazon.com Inc.
Post by: Spekulatius on June 01, 2014, 07:28:51 AM
Quote
Why don't people think about the big picture here? What is the future of worldwide B2C product distribution?  How will it work?  Will it be store or Internet-based?  Which is more convenient and has lower costs?  Storing 20 million different items in a warehouse and ordering as many as you want in a few seconds with zero hassle or offering 150,000 in a WMT supercenter that requires driving for at least a few minutes, walking around a 4 acre store for the various products you need, waiting in line for a few minutes, then sitting in traffic for another 10-20 minutes.  Not to mention the gas expenditure for this (even if it's only a couple bucks, shipping is less if you're a Prime member and ordering doesn't take any time).

This is true, but is AMZN the right vehicle to play this trend. There are already companies that benefit from this trend and are very very profitable. GOOG to find stuff online, MA and V to pay for stuff online and FDX and UPS to ship it. All these stocks have GAAP earnings, good growth and a decent valuation even by traditional metrics.
Title: Re: AMZN - Amazon.com Inc.
Post by: moustachio on June 01, 2014, 10:29:26 AM
JAllen, what do you think of their growth slowing down? Do you expect the rate of decline to moderate, if so what are you estimating as your long term rate?


Their international operations seem comparatively slow, but I guess that's understandable as it does seem a very US-centric firm.


Gross profit is growing 33%.  Doesn't seem slow to me.  If GP was only growing 23% like sales, AMZN wouldn't be nearly as attractive.  I would like to make a long-term quarterly histogram of sales and gross profit growth.  Sales have slowed, but I'm quite sure this is because they are allowing third-parties to sell stuff, but they still earn high-margin commissions (try to sell a used book on AMZN to learn the commission rate).


But again, gross profit is what I care about (operating expenses too but they can be managed and inflated in periods of rapid growth).  Gross profit is a great single metric that shows your financial relationship with customers.  If you're a restaurant chain you could easily inflate your OEM by employing people to open new stores, opening them and having that 1-2 years of sales ramp up, but gross profit and its growth are a direct indicator of changes in your sales mix (e.g. increasing third-party FBA high-margin commission revenue and).


There is greater than sales growth revenue growth in third-party units, digital sales, and AWS (which if AWS is at all comparable to RackSpace has way higher gross margins than AMZN as a whole).  These are all causing gross profit to grow faster than sales.


Yes, I hope they can accelerate international.  Only 18% sales growth there, but the digital transition is just beginning there (http://seekingalpha.com/article/1574282-amazon-com-inc-amzn-management-discusses-q2-2013-results-earnings-call-transcript?part=single) so hopefully things will improve and we will have a nice foothold in one of the massive countries (India or China).


I'll see what I can do about that sales growth histogram.

I've read your posts in the past several pages and I think you make somewhat of a compelling case for AMZN. I haven't thoroughly looked into AMZN, but AWS is one thing that gives me pause and makes me question the thesis. Those data centers cost a lot, and much of the hardware seemingly would have to be replaced at a pretty quick rate. When I looked at Rackspace somewhat briefly in the past, it simply seemed too capital intensive to be attractive.
From AMZN 10K:
"Depreciation is recorded on a straight-line basis over the estimated useful lives of the assets (generally the lesser of 40 years or the remaining life of the underlying building, two years for assets such as internal-use software, three years for our servers, five years for networking equipment, five years for furniture and fixtures, and ten years for heavy equipment). Depreciation expense is classified within the corresponding operating expense categories on our consolidated statements of operations."

Unlike depreciation for a lot of types of capex, three years might actually be pretty close to the useful life for servers, might it not? I wonder what percentage of their capex is being spent on datacenter hardware, and how much of it will be recurring. In short, because of AWS I think some of their growth capex might become recurring maintenance capex, which might make your thesis a little less compelling.
Title: Re: AMZN - Amazon.com Inc.
Post by: Palantir on June 03, 2014, 09:20:35 AM
Can you believe AMZN was $37 per share in November 08?  :o
Title: Re: AMZN - Amazon.com Inc.
Post by: PatientCheetah on June 03, 2014, 08:01:18 PM
http://www.businessinsider.com/the-future-of-retail-2014-slide-deck-sai-2014-3 (http://www.businessinsider.com/the-future-of-retail-2014-slide-deck-sai-2014-3)

a lot of interesting data points
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on June 03, 2014, 09:08:19 PM
Can you believe AMZN was $37 per share in November 08?  :o


We had sold some naked puts in early 2008 but covered them as AMZN declined instead of letting ourselves be put the stock.  Oh well!  At least we wised up after only five more years... 


Here's to hopefully at least five more great years, though they won't be an 8 bagger.
Title: Re: AMZN - Amazon.com Inc.
Post by: Fat Pitch on June 04, 2014, 10:54:08 AM
This is turning into a great thread. JAllen got me to think about Amazon in a different light. I went ahead and looked back on 10yrs+ of the company financials and I do see strong evidence the company is stuffing their growth capex into the expense items: Fulfillment, Marketing, and Tech & Content. This will in turn reduce Operating Cash Flow and give the perception the company is grossly overpriced.

% of Revenue          2013                 04-06 Avg
Gross Margins –     27.23%                     23.3%
Fulfillment –            11.53%                     8.75%
Marketing -               4.21%                     2.46%
Tech & Content –      8.82%                      5.4%
G&A -                         1.52%                    1.86%
Net Op                       1.15%                    4.83%

If you strongly believe these costs will revert back to pre-ramp up spending someday then it is easy to see Operating Margins of 9% or even higher. For those concerned about FCF generation... it's there, but it is hidden in Bezos clever accounting.

My only concern is that the increase in these cost centers are permanent just to keep their edge on the competition in perpetuity so that’s the risk.
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on June 04, 2014, 03:40:57 PM
Fat pitch - I agree that IF they can get back to opex levels from 10 years ago they will be very cash flow positive.  But what I don't get is why the belief that the expense levels of 10 years ago (when growth was much faster than today) should be considered the "normal" level.  What is the evidence that today's expense levels are not the "new normal"?

There seems to be a suggestion that they are stuffing growth expenses into the operating expense line.  What's the basis for this?  I can't find anything in the 10Ks or Q's.  And top line growth is somewhat slower than it was 5-10 yrs ago.  Also, this is a bit of a different beast than in 06.  They now manufacture hardware and their fastest growing business (AWS) is a high opex operation which would suggest the higher expense levels are less than temporary.

Again, IF they can revert to historic levels this can be very profitable but trends and evidence suggest it's headed in the other direction.  Curious as to why the belief this can and will reverse sharply?
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on June 04, 2014, 03:45:03 PM
And before I get called out on it, yes, I know they don't "manufacture" hardware.  I meant that they are designing and creating hardware and other proprietary items instead of reselling purchased items.
Title: Re: AMZN - Amazon.com Inc.
Post by: fareastwarriors on June 04, 2014, 03:52:33 PM
Amazon Planning to Unveil Smartphone to Vie With Apple's



http://www.bloomberg.com/news/2014-06-04/amazon-said-to-be-ready-to-unveil-smartphone-to-vie-with-apple.html (http://www.bloomberg.com/news/2014-06-04/amazon-said-to-be-ready-to-unveil-smartphone-to-vie-with-apple.html)
Title: Re: AMZN - Amazon.com Inc.
Post by: Fat Pitch on June 04, 2014, 04:39:28 PM
Fat pitch - I agree that IF they can get back to opex levels from 10 years ago they will be very cash flow positive.  But what I don't get is why the belief that the expense levels of 10 years ago (when growth was much faster than today) should be considered the "normal" level.  What is the evidence that today's expense levels are not the "new normal"?

Well I'm not 100% sure if they will revert back. Amazon has entered new markets since 2006 so there are obviously high start up costs and investments  being made by them. There's evidence they are extracting more from each dollar of revenue since we are witnessing gross margins creeping up over the years.

There seems to be a suggestion that they are stuffing growth expenses into the operating expense line.  What's the basis for this?  I can't find anything in the 10Ks or Q's.  And top line growth is somewhat slower than it was 5-10 yrs ago.  Also, this is a bit of a different beast than in 06.  They now manufacture hardware and their fastest growing business (AWS) is a high opex operation which would suggest the higher expense levels are less than temporary.

The only basis we got is did Amazon become less efficient at shipping out orders? I seriously doubt it, if anything they gotten more efficient since economies of scale is at play here. So with that logic the increase in these cost centers are probably related to AWS and their other business lines.

Again, IF they can revert to historic levels this can be very profitable but trends and evidence suggest it's headed in the other direction.  Curious as to why the belief this can and will reverse sharply?

The only way we will know if we can get our hands on their line item detail of their financials. You think they'll mail it over if we give IR a call?  :P
Title: Re: AMZN - Amazon.com Inc.
Post by: Spekulatius on June 04, 2014, 08:33:58 PM
I am not sure that the increases in cost reverse themselves either:
FullFillment: Prime and other initiatives lead to smaller order size, which will have higher fullfillment costs. Unless they are willing to give up on this business, this  will likely stay high and probably rise more.

Some of their service/cloud business probably has higher gross margins but also higher expenses than the core retail business, I think the change in AMZN business mix very likely is responsible for the changes in the income statement ratios.

I see no evidence that anything reverts back to where it was a couple if years ago.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on June 10, 2014, 10:31:57 PM

http://recode.net/2014/06/10/with-amazon-in-mind-ibm-begins-giving-retail-clients-same-day-delivery-tool/


“A lot of our clients are really looking at how do we more effectively compete against Amazon,”

Evidence of AMZN's competitive advantages? 


Now, I wonder if partnering with just hundreds of these shops is going to get people to switch from AMZN who has something like 20M products...  It is non-trivial, to say the least to offer that many products.
Title: Re: AMZN - Amazon.com Inc.
Post by: Palantir on June 11, 2014, 06:42:23 AM
What a pain, this keeps rising, was hoping to add to my position.
Title: Re: AMZN - Amazon.com Inc.
Post by: fareastwarriors on June 12, 2014, 08:15:51 AM
Prime Music coming soon

http://online.wsj.com/articles/amazon-launches-music-streaming-service-1402571241 (http://online.wsj.com/articles/amazon-launches-music-streaming-service-1402571241)

Quote
Amazon.com Inc. AMZN -1.55% on Thursday rolled out a music-streaming service, with some limitations.
 
The service, available only to members of Amazon's $99-per-year Prime membership program in the U.S., offers about one million tracks from thousands of albums, the company said. But it doesn't include songs from Vivendi SA VIV.FR -0.08% 's Universal Music Group, the largest label, and tracks from Warner Music Group and Sony Corp. 6758.TO +0.24% will generally be more than six months old.
Title: Re: AMZN - Amazon.com Inc.
Post by: ajc on June 15, 2014, 02:12:03 PM

Amazon’s 3D smartphone is a gimmick—but it could present a huge retail opportunity


It’s rumored that Amazon will launch its own 3D smartphone on June 18.
While it may be compelling, a sexy 3D feature won’t catapult Amazon into the lead of the cut-throat smartphone category.
If this were true, the EVO 3D, introduced two years ago by HTC and the W960, introduced by Samsung four years ago, would have been top sellers rather than niche products.
However, a smartphone that renders 3D images does present an internet retailing opportunity for Amazon. It would be useful to Amazon in selling tangible consumer merchandise, just like Amazon’s Kindle Fire tablet was designed to improve Amazon’s merchandizing of ebooks and video streaming products.

3D images would give consumers a multidimensional mobile view of the products that they might buy on amazon.com, which would likely increase the conversion rates of users viewing product listings into purchases.
Typically, a listing without an image won’t convert as well as one with an image, and a listing with an optimized image will convert even better. The multiple cameras reported to be in the Amazon smartphone could be applied to creating rich 3D images that would improve conversion rates even further.
Data aren’t available on conversion rates attributable to 3D mobile imaging but there are many case studies of increased e-commerce conversion rates from 360-degree rotatable web images. Adobe’s Darin Archer, head of Product Strategy for eCommerce told Quartz...


http://qz.com/221076/amazons-3d-smartphone-is-a-gimmick-but-it-could-present-a-huge-retail-opportunity/ (http://qz.com/221076/amazons-3d-smartphone-is-a-gimmick-but-it-could-present-a-huge-retail-opportunity/)


Title: Re: AMZN - Amazon.com Inc.
Post by: txlaw on June 18, 2014, 09:44:34 AM
http://www.theverge.com/2014/6/18/5820282/12-things-that-turned-amazon-into-a-superpower
Title: Re: AMZN - Amazon.com Inc.
Post by: Liberty on June 18, 2014, 10:59:58 AM
Amazon announcing its new phone right now:

http://live.arstechnica.com/amazons-smartphone-unveil/

Product page: http://www.amazon.com/dp/B00EOE0WKQ
Title: Re: AMZN - Amazon.com Inc.
Post by: Phaceliacapital on June 18, 2014, 12:37:56 PM
Wow
Title: Re: AMZN - Amazon.com Inc.
Post by: txlaw on June 18, 2014, 02:06:19 PM
http://live.arstechnica.com/amazons-smartphone-unveil/
http://www.businessweek.com/articles/2014-06-17/inside-the-secretive-r-and-d-lab-behind-the-amazon-phone
http://www.businessweek.com/articles/2014-06-18/amazons-fire-phone-what-you-need-to-know
Title: Re: AMZN - Amazon.com Inc.
Post by: Viking on June 18, 2014, 02:29:38 PM
Being a current Apple shareholder, I followed todays announcement from Amazon with great interest. Apple's greatest risk is that someone comes out with a devices that displaces the iPhone, Apple's most important piece of hardware. Amazon certainly had everyone's attention today.

My quick read is the Amazon phone launched today is not an iPhone killer. The price point is much higher than I expected (priced as a premium device). It will not carry any Google services (Maps etc). It looks like they are targeting it at Prime members. It looks like a niche product; my guess is it will struggle to gain even as much share as the kindle has in the tablet segment.
Title: Re: AMZN - Amazon.com Inc.
Post by: tengen on June 18, 2014, 02:36:28 PM
The Amazon phone seems designed to turn people into shopping addicts.

Title: Re: AMZN - Amazon.com Inc.
Post by: Liberty on June 18, 2014, 02:59:55 PM
Lots of interesting discussion on the new phone here, with a wide variety of opinions:

https://news.ycombinator.com/item?id=7911934
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on June 18, 2014, 06:52:34 PM
Seems more like the phone Amazon wants you to have than the phone you want to have (unless you live to shop online in which case you're already a big Amazon user).  Somewhat contrary to their whole premise of customer first.
Title: Re: AMZN - Amazon.com Inc.
Post by: rkbabang on June 19, 2014, 05:45:50 AM
Seems more like the phone Amazon wants you to have than the phone you want to have (unless you live to shop online in which case you're already a big Amazon user).  Somewhat contrary to their whole premise of customer first.

Which is what I expected, and why I thought it would be dirt cheap, like $49 for prime members with an Amazon subsidized unbelievably inexpensive all inclusive plan from AT&T.  But what we have is the regular AT&T service at regular prices and a phone that isn't much cheaper than the iPhone.  I don't see much of a reason for anyone to pick the Amazon phone over other options.  Even for Prime members a tablet makes more sense for reading or watching movies than a phone does.  I must be missing something, because I don't get it.
Title: Re: AMZN - Amazon.com Inc.
Post by: txlaw on June 19, 2014, 05:59:31 AM
I'm also skeptical that the Fire Phone will get any meaningful market share from the other high end phone providers at this time.  Certainly not at the price point they will be selling this at.

Having said that, anyone selling smart phones on the "high end" ought to be disturbed because Amazon is likely interested in selling the phone at cost or at a very small profit.  That hardware can't be cheap, and if the next iterations of the phone get better and better but remain on the "high end," then that could lead to accelerated margin compression on the "high end."  Not only do you have a shift in consumer preferences to "good enough" devices on the low- to medium-end, but you also have a "high end" where competitors are starting to sell at cost because of a different biz model.  Not good.
Title: Re: AMZN - Amazon.com Inc.
Post by: txlaw on June 19, 2014, 06:11:34 AM
The most interesting thing to me was Firefly.  That could be a game changer for AMZN in so many ways. 

If I were them, I would eventually partner with other device manufacturers to put that functionality into their phones.  For now, I guess they will keep it exclusive to Fire Phone.
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on June 19, 2014, 06:54:27 AM
That's a great point Txlaw.  The Firefly aspect is really the only differentiating factor of this phone (3d seems gimmicky). Why go to the expense of building and marketing your own phone when you could put this (even free) in other peoples phones.  And to have it for the same price as all the better, more established phones with much broader Eco-systems seems odd. Who is the target market here?

I feel that with all the work they've done and hype they've generated I must be missing some angle to it - but for the life of me I can't figure it out!
Title: Re: AMZN - Amazon.com Inc.
Post by: rkbabang on June 19, 2014, 07:57:25 AM
That's a great point Txlaw.  The Firefly aspect is really the only differentiating factor of this phone (3d seems gimmicky). Why go to the expense of building and marketing your own phone when you could put this (even free) in other peoples phones.  And to have it for the same price as all the better, more established phones with much broader Eco-systems seems odd. Who is the target market here?

I feel that with all the work they've done and hype they've generated I must be missing some angle to it - but for the life of me I can't figure it out!

+1  I would understand that strategy 100%.  It seems to me the way to go.  Why concentrate on the few people who will buy a Fire phone when you could get to every Amazon customer with a smartphone?
Title: Re: AMZN - Amazon.com Inc.
Post by: muscleman on June 19, 2014, 08:07:48 AM
That's a great point Txlaw.  The Firefly aspect is really the only differentiating factor of this phone (3d seems gimmicky). Why go to the expense of building and marketing your own phone when you could put this (even free) in other peoples phones.  And to have it for the same price as all the better, more established phones with much broader Eco-systems seems odd. Who is the target market here?

I feel that with all the work they've done and hype they've generated I must be missing some angle to it - but for the life of me I can't figure it out!

+1  I would understand that strategy 100%.  It seems to me the way to go.  Why concentrate on the few people who will buy a Fire phone when you could get to every Amazon customer with a smartphone?


I don't agree because I think the main profit source will be from the app store. I know for Apple's app store, whenever some app developer tries to charge a customer, he has to give 30% of that to Apple. So this is a capital light investment that has lots of growth potential.
Title: Re: AMZN - Amazon.com Inc.
Post by: rkbabang on June 19, 2014, 10:31:52 AM
That's a great point Txlaw.  The Firefly aspect is really the only differentiating factor of this phone (3d seems gimmicky). Why go to the expense of building and marketing your own phone when you could put this (even free) in other peoples phones.  And to have it for the same price as all the better, more established phones with much broader Eco-systems seems odd. Who is the target market here?

I feel that with all the work they've done and hype they've generated I must be missing some angle to it - but for the life of me I can't figure it out!

+1  I would understand that strategy 100%.  It seems to me the way to go.  Why concentrate on the few people who will buy a Fire phone when you could get to every Amazon customer with a smartphone?


I don't agree because I think the main profit source will be from the app store. I know for Apple's app store, whenever some app developer tries to charge a customer, he has to give 30% of that to Apple. So this is a capital light investment that has lots of growth potential.

That would be the case if the main idea was to sell phones or apps, but if it is to get people to shop at Amazon.com (which is what this phone looks like it was specifically designed to do) then creating Firefly android/iphone apps and giving them away for free would be a better strategy.
Title: Re: AMZN - Amazon.com Inc.
Post by: Liberty on June 19, 2014, 12:40:36 PM
http://stratechery.com/2014/amazons-whale-strategy/
Title: Re: AMZN - Amazon.com Inc.
Post by: Sunrider on June 21, 2014, 03:50:45 AM
Guys

Apologies if this is (a) overly simplistic, (b) has been discussed and I'm just not aware of it.

In fact I'm sure this has been discussed but I thought I'd throw it out there to get some views. I've held a small position in AMZN for ages and recently added to it with LEAPS. The recent Economist and FT articles got me thinking though ... I'm a fan of toy models and the following is a rough calc, please bear with me:

AMZN is doing about 75bn sales a year (more this year but some article I saw said about 74bn in its own sales). So assuming that eventually they choose to make "normal" margins on this and stop investing - what would it mean? Well, WMT has about a 5.9% operating margin. Let's say AMZN can do much better (because the cloud stuff may be higher margin, they killed competitions, whatever). Say it's 10%, so 7.4bn in Earnings. So at today's market cap of 149bn that would put us at a 20 P/E. Not cheap, not outrageous either.

Of course the margin assumptions are key here - but just for discussion purposes - does this make AMZN a good buy because you expect them to keep growing in excess of what one would discount back from the point that they choose to make profits?

... not trying to start a possible war-of-words here. I think AMZN has growth ahead of it but I also believe that eventually fundamental laws of economics assert themselves. Just curious how others here see it?

Thanks - C.
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on June 21, 2014, 08:26:10 AM
Sun rider - I think your point have been the crux of the discussion for the past few pages. IF they can make "normal" margins, yes they will make good profits.  But what is "normal" and the willingness and ability to do this is the question.  My view is that to improve margins would be to sacrifice growth (if it could be done at all).  And the fact that all of the margin metrics (operating margins not simply gross margins) have been moving in the other direction for 4-5 years would suggest this shift is not in the foreseeable future.  Just my view though.  I know others disagree.
Title: Re: AMZN - Amazon.com Inc.
Post by: Palantir on June 21, 2014, 08:41:22 AM
Sun rider- you don't think 20 PE is decent for a company as fast growing as AMZN?
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on June 21, 2014, 10:28:51 AM
It's a 400 PE right now.  It's only 20 if they change the business model and can do it successfully without impacting sales - none of which appears in the cards for the near or medium term future.  Even if they can make that huge transition you need to discount the earnings/cash flow for the years between now and when that could happen (at least 5 years if not more).
Title: Re: AMZN - Amazon.com Inc.
Post by: DTEJD1997 on June 21, 2014, 12:44:37 PM
I know what I asay is going to be very unpopular...but I'm going to do it anyway.

I don't see any way that AMZN does not end in tears for investors.

I also think this is a signal the market is getting frothy or near a top.  There are many people on this board discussing it as "value" investment.  I just can't do the mental acrobats to think this is a "value" investment.

I also think the market is giving AMZN a "pass" as they don't have to make any meaningful money on anything.  If AMZN had to make a 1,2,3% NET margin, their sales would probably be drastically lower.  I would also suggest that if they had to make a profit, their business model would be broken.

If the "no profits" model is such a great thing, why don't all companies do it?  AMZN is somehow different?  Or maybe, AMZN is a "special company" and "it is different this time"?

I would suggest it is very easy to build millions & billions in sales if you can sell items for a loss or breakeven.

Who is to say that some other competitor in the future doesn't get favorable attention or a dispensation from Wall Street to sell at breakeven or a loss and AMZN can NEVER make any money?

Why would anybody invest in AMZN when you can get GROWING, PROFITABLE, dividend paying companies with single digit P/E's?  AMZN is 40 EV/EBIDTA, 15X book value, 400 or 500 P/E?

AMZN also faces the problem that they have $75BB in sales.  This is not some startup company.  Are they going to be able to grow sales to $150BB, or $300BB?

I just don't see how this can end well for shareholders...
Title: Re: AMZN - Amazon.com Inc.
Post by: PatientCheetah on June 21, 2014, 01:05:39 PM
I know what I asay is going to be very unpopular...but I'm going to do it anyway.

I don't see any way that AMZN does not end in tears for investors.

I also think this is a signal the market is getting frothy or near a top.  There are many people on this board discussing it as "value" investment.  I just can't do the mental acrobats to think this is a "value" investment.

I also think the market is giving AMZN a "pass" as they don't have to make any meaningful money on anything.  If AMZN had to make a 1,2,3% NET margin, their sales would probably be drastically lower.  I would also suggest that if they had to make a profit, their business model would be broken.

If the "no profits" model is such a great thing, why don't all companies do it?  AMZN is somehow different?  Or maybe, AMZN is a "special company" and "it is different this time"?

I would suggest it is very easy to build millions & billions in sales if you can sell items for a loss or breakeven.

Who is to say that some other competitor in the future doesn't get favorable attention or a dispensation from Wall Street to sell at breakeven or a loss and AMZN can NEVER make any money?

Why would anybody invest in AMZN when you can get GROWING, PROFITABLE, dividend paying companies with single digit P/E's?  AMZN is 40 EV/EBIDTA, 15X book value, 400 or 500 P/E?

AMZN also faces the problem that they have $75BB in sales.  This is not some startup company.  Are they going to be able to grow sales to $150BB, or $300BB?

I just don't see how this can end well for shareholders...

There is an article talking about why there has not been any other billion dollar e-commerce. Valuation concern aside, Amazon's competitive position is close to as unassailable as Visa or Mastercard. Anything resembled competitors, Zappos and Diapers.com, are all part of Amazon now. Don't underestimate the value of a high stock price, Amazon is in the position to either play the game of attrition and bleed its competitors out or buy them out with its stocks. I am not where near as smart as Munger. I wouldn't go against his opinion.

The biggest lesson that I learned in the last few years is to never dismiss anything that's strongly positioned based on valuation concern alone. In order for me to become bearish, I need to see disruptive technology or competitor that is clearly taking shares away from the incumbent. Through the error of omission, I missed out wonderful companies like Priceline, Amazon, and Chipotle. I take solace in that I could've done much worse if I have shorted them based on high valuations.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on June 21, 2014, 01:26:31 PM
Guys

Apologies if this is (a) overly simplistic, (b) has been discussed and I'm just not aware of it.

In fact I'm sure this has been discussed but I thought I'd throw it out there to get some views. I've held a small position in AMZN for ages and recently added to it with LEAPS. The recent Economist and FT articles got me thinking though ... I'm a fan of toy models and the following is a rough calc, please bear with me:

AMZN is doing about 75bn sales a year (more this year but some article I saw said about 74bn in its own sales). So assuming that eventually they choose to make "normal" margins on this and stop investing - what would it mean? Well, WMT has about a 5.9% operating margin. Let's say AMZN can do much better (because the cloud stuff may be higher margin, they killed competitions, whatever). Say it's 10%, so 7.4bn in Earnings. So at today's market cap of 149bn that would put us at a 20 P/E. Not cheap, not outrageous either.

Of course the margin assumptions are key here - but just for discussion purposes - does this make AMZN a good buy because you expect them to keep growing in excess of what one would discount back from the point that they choose to make profits?

... not trying to start a possible war-of-words here. I think AMZN has growth ahead of it but I also believe that eventually fundamental laws of economics assert themselves. Just curious how others here see it?

Thanks - C.


Remember that gross profit is growing almost 50% faster than sales: 33% versus 23% sales growth.


If you owned a restaurant which would you rather increase faster, sales or gross profit?
Title: Re: AMZN - Amazon.com Inc.
Post by: Sportgamma on June 21, 2014, 01:36:26 PM
Guys

Apologies if this is (a) overly simplistic, (b) has been discussed and I'm just not aware of it.

In fact I'm sure this has been discussed but I thought I'd throw it out there to get some views. I've held a small position in AMZN for ages and recently added to it with LEAPS. The recent Economist and FT articles got me thinking though ... I'm a fan of toy models and the following is a rough calc, please bear with me:

AMZN is doing about 75bn sales a year (more this year but some article I saw said about 74bn in its own sales). So assuming that eventually they choose to make "normal" margins on this and stop investing - what would it mean? Well, WMT has about a 5.9% operating margin. Let's say AMZN can do much better (because the cloud stuff may be higher margin, they killed competitions, whatever). Say it's 10%, so 7.4bn in Earnings. So at today's market cap of 149bn that would put us at a 20 P/E. Not cheap, not outrageous either.

Of course the margin assumptions are key here - but just for discussion purposes - does this make AMZN a good buy because you expect them to keep growing in excess of what one would discount back from the point that they choose to make profits?

... not trying to start a possible war-of-words here. I think AMZN has growth ahead of it but I also believe that eventually fundamental laws of economics assert themselves. Just curious how others here see it?

Thanks - C.


Remember that gross profit is growing almost 50% faster than sales: 33% versus 23% sales growth.


If you owned a restaurant which would you rather increase faster, sales or gross profit?

So if we extrapolate that, GM should exceed revenues by about 33% in 20 years time.

Full disclosure: I´m joking
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on June 21, 2014, 01:40:56 PM
I know what I asay is going to be very unpopular...but I'm going to do it anyway.

I don't see any way that AMZN does not end in tears for investors.

I also think this is a signal the market is getting frothy or near a top.  There are many people on this board discussing it as "value" investment.  I just can't do the mental acrobats to think this is a "value" investment.

I also think the market is giving AMZN a "pass" as they don't have to make any meaningful money on anything.  If AMZN had to make a 1,2,3% NET margin, their sales would probably be drastically lower.  I would also suggest that if they had to make a profit, their business model would be broken.

If the "no profits" model is such a great thing, why don't all companies do it?  AMZN is somehow different?  Or maybe, AMZN is a "special company" and "it is different this time"?

I would suggest it is very easy to build millions & billions in sales if you can sell items for a loss or breakeven.

Who is to say that some other competitor in the future doesn't get favorable attention or a dispensation from Wall Street to sell at breakeven or a loss and AMZN can NEVER make any money?

Why would anybody invest in AMZN when you can get GROWING, PROFITABLE, dividend paying companies with single digit P/E's?  AMZN is 40 EV/EBIDTA, 15X book value, 400 or 500 P/E?

AMZN also faces the problem that they have $75BB in sales.  This is not some startup company.  Are they going to be able to grow sales to $150BB, or $300BB?

I just don't see how this can end well for shareholders...


Any specific points you want to debate?  What in particular is a sign that the market is at a top?  What if


Also, which growing, single digit companies are you referring to?  I know of two, but they're unlisted...


Quote
AMZN also faces the problem that they have $75BB in sales.  This is not some startup company.  Are they going to be able to grow sales to $150BB, or $300BB?


It should be $90B this year.

Why do you think they won't be able to keep growing?  AMZN sales continue to grow faster than e-commerce as a whole and are just 10% of WMT's sales as a percentage of the American economy - ~1% versus ~10%.  E-commerce sales are still small relative to all consumer spending in the U.S.  Why won't AMZN eventually have greater than WMT sales because they sell two orders of magnitude more individual SKUs and aren't constrained by social class and geographical proximity to only two-thirds of the U.S. population like WMT is for most of its sales?  AMZN also isn't consumer-physical product limited as well; they're also B2B, digital, computing, product exchange, etc.

Are you an Amazon customer?  Have you reviewed AMZN's long-term FCF history?  Do you believe AMZN is incapable of making any income or FCF at all?
Title: Re: AMZN - Amazon.com Inc.
Post by: Palantir on June 21, 2014, 02:22:10 PM
I know what I asay is going to be very unpopular...but I'm going to do it anyway.

I don't see any way that AMZN does not end in tears for investors.

I also think this is a signal the market is getting frothy or near a top.  There are many people on this board discussing it as "value" investment.  I just can't do the mental acrobats to think this is a "value" investment.

I also think the market is giving AMZN a "pass" as they don't have to make any meaningful money on anything.  If AMZN had to make a 1,2,3% NET margin, their sales would probably be drastically lower.  I would also suggest that if they had to make a profit, their business model would be broken.

If the "no profits" model is such a great thing, why don't all companies do it?  AMZN is somehow different?  Or maybe, AMZN is a "special company" and "it is different this time"?

I would suggest it is very easy to build millions & billions in sales if you can sell items for a loss or breakeven.

Who is to say that some other competitor in the future doesn't get favorable attention or a dispensation from Wall Street to sell at breakeven or a loss and AMZN can NEVER make any money?

Why would anybody invest in AMZN when you can get GROWING, PROFITABLE, dividend paying companies with single digit P/E's?  AMZN is 40 EV/EBIDTA, 15X book value, 400 or 500 P/E?

AMZN also faces the problem that they have $75BB in sales.  This is not some startup company.  Are they going to be able to grow sales to $150BB, or $300BB?

I just don't see how this can end well for shareholders...

Have you read this thread from the start (especially JAllen's posts)? You will see why some find the bull case for AMZN to be quite persuasive. I think the fact that people keep bringing the 400 PE, something that has been discussed many times here, shows that people are not trying to see the other side of the case.

This is not a "value investment" at all, this is something that is not obviously cheap, but I think there is reason to believe that this can be a great investment.

Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on June 21, 2014, 02:31:02 PM
Patient cheetah - those competitors were internet only models.  Now the company is up against competitors that they won't be able win a war of attrition against. Walmart's internet sales grew faster than Amazons last year.  Target, best buy, Home Depot etc are all growing internet sales as an adjunct to their bricks and mortar.  And in AWS, Microsoft and IBM have matched pride drops dollar for dollar (or even initiated them).  The low hanging fruit is gone.  There's no way amazon can both continue its growth trajectory AND double or triple bottom line margins.

To the point about if you owned a restaurant would you rather grow sales or gross margin, I'd say that I would rather grow NET margins. Gross margin growth is only impressive if you can do it off flat or declining cost base - Amazons operating margin has been shrinking for years. And this new phone is unlikely to help that.
Title: Re: AMZN - Amazon.com Inc.
Post by: txlaw on June 21, 2014, 02:35:38 PM
Economist on Amazon:

http://www.economist.com/news/briefing/21604559-20-amazon-bulking-up-it-notyetslowing-down-relentlesscom
Title: Re: AMZN - Amazon.com Inc.
Post by: DTEJD1997 on June 21, 2014, 03:20:06 PM

Have you read this thread from the start (especially JAllen's posts)? You will see why some find the bull case for AMZN to be quite persuasive. I think the fact that people keep bringing the 400 PE, something that has been discussed many times here, shows that people are not trying to see the other side of the case.

This is not a "value investment" at all, this is something that is not obviously cheap, but I think there is reason to believe that this can be a great investment.

I will admit that I have not read EVERY single post in the thread, but I've read maybe 2/3 of them.  The thread is rather long.

It is not simply the 400 P/E, but that is certainly a part of it.

Sales that are not profitable, or are only barely profitable, are not very valuable sales at all.  What is the point if at the end of the day you do not get to keep anything?  This goes for me, or for anyone else.

Customer loyalty is fine, but it is easy to buy loyalty with cheap prices.  AMZN or anyone else will find that customer loyalty based on low prices is as fleeting as the wind.

The other side of the case is that AMZN is foregoing profitability to grow sales, to gather customers...Profitability is also masked by spending on infrastructure & technology.  If AMZN were in a good field they would be able to DO BOTH.  Grow & invest in the business AND have profits left over.

I've purchased a few things from AMZN in the past.  Their prices are good, but I can frequently find lower prices elsewhere.  A good percentage of items I purchase I need right now...gasoline, vegetables & consumables, precious metals, computer components, etc.  Some items I purchase such as clothes I need to see in person.  I suppose some clothes (socks, underwear, belts) could be bought online, but a lot I want to see in person.

I can remember during the internet bubble of the 90's, there were similar arguments made...that profit was a secondary or tertiary concern.  We all know how that ended.

I would also suggest that if a company, ANY COMPANY, can't/won't achieve profitability after $75BB in sales, they never will...
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on June 21, 2014, 03:35:47 PM
Good economist article. I thought the quote summed it up well:

"A charitable organization run by elements of the investment community for the benefit of consumers."

Great company.  Not a great investment.
Title: Re: AMZN - Amazon.com Inc.
Post by: Sunrider on June 22, 2014, 04:44:23 AM
Thanks everyone - I suppose the best summary question I can ask in response is that: Yes it's a 20 per fast growing company but only if it stops growing?  Coming back to what I said, this seems to make sense only if you believe in the normal margin thesis AND that the gains until that time will be at a higher rate than what you discount it back by.
Title: Re: AMZN - Amazon.com Inc.
Post by: jouni1 on June 22, 2014, 05:06:52 AM
is it REALLY worth 20 times better-than-walmart-margins earnings of the future? (at that point i imagine the growth is pretty much done, and amazon will grow at general retail rates)

i mean, what if while doing this and never making any money, a new disruptor comes along? or what if it takes 15 years to get profitable?

would be easier to wait if it was earning something.
Title: Re: AMZN - Amazon.com Inc.
Post by: Palantir on June 22, 2014, 07:40:14 AM
Sigh...
Title: Re: AMZN - Amazon.com Inc.
Post by: PatientCheetah on June 22, 2014, 07:59:19 AM
Sigh...

Think of this way, we always need someone to sell us the shares.
Title: Re: AMZN - Amazon.com Inc.
Post by: Patmo on June 22, 2014, 08:19:00 AM
Personally I'll just stay on the sidelines and eat my popcorn. Good luck to everyone who takes action, it'll be interesting to see how this plays out.
Title: Re: AMZN - Amazon.com Inc.
Post by: wachtwoord on June 22, 2014, 09:25:18 AM
Sigh...

Think of this way, we always need someone to sell us the shares.

I don't own any but this one is certainly on my too difficult pile.
Title: Re: AMZN - Amazon.com Inc.
Post by: DTEJD1997 on June 22, 2014, 11:44:37 AM

I don't own any but this one is certainly on my too difficult pile.

You bring up a good point that I should have made...If a thesis takes a substantial amount of explaining logic leaps is there not some risk in that? 

If the company can do X, and keep growing for Y periods of time, enter these other Z markets, then they raise profitability in the distant future...BAMMO! PROFIT!

If an investment idea has arguments going back & forth for 50 pages maybe that should go in the "too difficult pile".

Wasn't it WEB that said something like this?
Title: Re: AMZN - Amazon.com Inc.
Post by: Myth465 on June 22, 2014, 07:24:49 PM
Aw but we have threads on =

Sandridge Energy (Im a big part of this one  :)) )
Sears Holding
Level 3
Altius
Blackberry

and about 3 other threads which goes against that....
Title: Re: AMZN - Amazon.com Inc.
Post by: txlaw on June 23, 2014, 07:44:20 AM
http://recode.net/2014/06/20/bezos-amazon-fire-phone-was-a-long-time-coming/
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on June 26, 2014, 06:02:48 AM

Have you read this thread from the start (especially JAllen's posts)? You will see why some find the bull case for AMZN to be quite persuasive. I think the fact that people keep bringing the 400 PE, something that has been discussed many times here, shows that people are not trying to see the other side of the case.

This is not a "value investment" at all, this is something that is not obviously cheap, but I think there is reason to believe that this can be a great investment.

I will admit that I have not read EVERY single post in the thread, but I've read maybe 2/3 of them.  The thread is rather long.

It is not simply the 400 P/E, but that is certainly a part of it.

Sales that are not profitable, or are only barely profitable, are not very valuable sales at all.  What is the point if at the end of the day you do not get to keep anything?  This goes for me, or for anyone else.

Customer loyalty is fine, but it is easy to buy loyalty with cheap prices.  AMZN or anyone else will find that customer loyalty based on low prices is as fleeting as the wind.

The other side of the case is that AMZN is foregoing profitability to grow sales, to gather customers...Profitability is also masked by spending on infrastructure & technology.  If AMZN were in a good field they would be able to DO BOTH.  Grow & invest in the business AND have profits left over.

I've purchased a few things from AMZN in the past.  Their prices are good, but I can frequently find lower prices elsewhere.  A good percentage of items I purchase I need right now...gasoline, vegetables & consumables, precious metals, computer components, etc.  Some items I purchase such as clothes I need to see in person.  I suppose some clothes (socks, underwear, belts) could be bought online, but a lot I want to see in person.

I can remember during the internet bubble of the 90's, there were similar arguments made...that profit was a secondary or tertiary concern.  We all know how that ended.

I would also suggest that if a company, ANY COMPANY, can't/won't achieve profitability after $75BB in sales, they never will...


But what if they intentionally choose not to?  Have you opened your mind to this possibility?


How is waiting to be and choosing not to be profitable by investing so heavily and with expenses not possible even with a company with $90B in sales?  The two don't directly follow actually.  It seems like lots of looking at the past and not enough being curious about the future.


With this thread, the AMZN proponents have mostly written in the last ten or fifteen pages I believe, so it's not necessary to review the whole thread by any means.  Have you seen my charts with eight years of historical close to double-digit FCF margins and the chart with the rate at which they've expanded their warehouses compared with 2002-2009?  That is a 57% FC square footage increase versus a 20% FC square footage increase.  There's also the many other programs they're developing that have non-trivial expenses.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on June 26, 2014, 06:12:20 AM

I don't own any but this one is certainly on my too difficult pile.

You bring up a good point that I should have made...If a thesis takes a substantial amount of explaining logic leaps is there not some risk in that? 

If the company can do X, and keep growing for Y periods of time, enter these other Z markets, then they raise profitability in the distant future...BAMMO! PROFIT!

If an investment idea has arguments going back & forth for 50 pages maybe that should go in the "too difficult pile".

Wasn't it WEB that said something like this?


Couldn't one also argue that the longer the thesis, potentially the more evidence has been provided and/or the less obvious it is?  Would either of these things be bad?  Weschler claims to spend 500 hours researching each investment (https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&sqi=2&ved=0CBwQFjAA&url=http%3A%2F%2Fwww.bloomberg.com%2Fnews%2F2012-10-22%2Fweschler-rise-from-grace-leads-to-role-advising-buffett.html&ei=dRqsU4K1EoutsAS1h4GoDg&usg=AFQjCNHCeFm9WGSmep9mfuCCLyj9jtRAbA&sig2=_KQ4_0x96B_2DToEecFRfA&bvm=bv.69837884,d.cWc) - are his investments mistakes because of this?


I could also have stated my thesis succinctly and not backed it up with evidence, like this:


But this wouldn't have provided any evidence for why I believe these various items and I believe would clearly have been less productive for the forum.




Also, I have only been posting much for a few pages here and the actual consideration of AMZN as an investment has only really occurred in the past few as well, I believe.


This statement also continues to not really argue against anything I've said - it just attacks the thesis for what I'll call meta-reasons that aren't actually part of the thesis.
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on June 26, 2014, 10:34:21 AM
JAllen - you have summarized where the two theses differ.

Your view is that they CHOOSE not to be profitable by reinvesting all profits back in the business but they will be highly profitable when they stop.

My thesis (or more accurately the opposing thesis) is that they have built up a business and cost structure whereby they cannot make that transition without killing the factors that have made them successful to date.  And importantly, they show no desire to make that transition - so even if true it's hard to base an investment thesis on something the company isn't supporting for the foreseeable future.

There is no way to prove either theory right or wrong except through time and experience.  I personally am not comfortable making a value investment without knowing those key factors.
Title: Re: AMZN - Amazon.com Inc.
Post by: LC on June 26, 2014, 10:43:06 AM
JAllen - you have summarized where the two theses differ.

Your view is that they CHOOSE not to be profitable by reinvesting all profits back in the business but they will be highly profitable when they stop.

My thesis (or more accurately the opposing thesis) is that they have built up a business and cost structure whereby they cannot make that transition without killing the factors that have made them successful to date.  And importantly, they show no desire to make that transition - so even if true it's hard to base an investment thesis on something the company isn't supporting for the foreseeable future.

There is no way to prove either theory right or wrong except through time and experience.  I personally am not comfortable making a value investment without knowing those key factors.

I completely agree with you. I don't know enough about the organization to know whether these expense investments are maintenance or growth. And I don't see convincing evidence one way or the other. This is what the investment hinges on, therefore if I don't know then I don't invest.
Title: Re: AMZN - Amazon.com Inc.
Post by: DTEJD1997 on June 26, 2014, 05:28:04 PM
But what if they intentionally choose not to?  Have you opened your mind to this possibility?

No, I can't honestly say that I've opened my mind to the possibility that a company the size of AMZN is INTENTIONALLY choosing not to make any profit.   They certainly don't pay most of their employees very much.  There have been numerous articles on poor working conditions in AMZN warehouses...But profit is the name of the game.  Why can't AMZN do both?  Perhaps it is a poor business that they are in?

Have you opened your mind to the possibility that this is a very foolish thing to do?  Or maybe opened it to the possibility that the CAN'T make a profit, thus they "CHOOSE" to forego it?
How is waiting to be and choosing not to be profitable by investing so heavily and with expenses not possible even with a company with $90B in sales?  The two don't directly follow actually.  It seems like lots of looking at the past and not enough being curious about the future.


With this thread, the AMZN proponents have mostly written in the last ten or fifteen pages I believe, so it's not necessary to review the whole thread by any means.  Have you seen my charts with eight years of historical close to double-digit FCF margins and the chart with the rate at which they've expanded their warehouses compared with 2002-2009?  That is a 57% FC square footage increase versus a 20% FC square footage increase.  There's also the many other programs they're developing that have non-trivial expenses.

Investing in infrastructure is all fine & good, but it still comes back to an economic return.

I would posit this...if AMZN is a good buy at $325, is it still a buy at $400?  $600?  $1,000?  At what price is it fairly valued?

As for it being difficult, why not invest in AWLCF with solid cash flow, earnings and dividends?  It also has a strong chance to increase the aforementioned in the short term too.  Or what about precious metal miners with zero debt, solid earnings, cash flow and DIVIDENDS?  There are numerous stocks where the investment is "plain on it's face".

I wish you luck with AMZN, but I can't see how it does not end in a train wreck for investors.
Title: Re: AMZN - Amazon.com Inc.
Post by: Palantir on June 27, 2014, 07:47:50 AM
^You are not reading the thread. Amazon IS profitable, but they are doing what they can to minimize what shows up on the Income statements in order to reduce taxation.
Title: Re: AMZN - Amazon.com Inc.
Post by: ItsAValueTrap on June 27, 2014, 08:04:40 AM
^You are not reading the thread. Amazon IS profitable, but they are doing what they can to minimize what shows up on the Income statements in order to reduce taxation.

All companies keep one set of books for taxes and another set for their financial statements (for investors).  In rare cases, the financial statements have to use the same methodology as taxes, e.g. LIFO/FIFO inventory.  But otherwise, Amazon can reduce taxes without reducing their GAAP profitability.
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on June 27, 2014, 10:06:25 AM
Palantir - can you put some more clarity on that?  People keep mentioning that they are stuffing growth expenses for tax purposes but without specifics.

The distribution centers are all capitalized as are the payments to HBO and others for content.  Stock based comp is front end weighted but that actually hurts as an investor (unless the stock is dropping) because you are expensing shares at say $300 and then issuing them at $400.  What expenses are being stuffed or are inflated?

I'd also note as others have that most of these are not really one time growth expenses but actually ongoing expenses with the business.  They actually comment in the 10Q on the increased capex with "we expect this trend to continue over time".  They make the same comment on the technology and content expense which has risen much much faster than revenues or grow margins.  By the way, to the previous comments on the expansion of gross margins I'd note they specifically state "We believe that income from operations is a more meaningful measure than gross profit and gross margin due to the diversity of our product categories and services."
Title: Re: AMZN - Amazon.com Inc.
Post by: prevalou on June 27, 2014, 10:23:14 AM
A other way to frame the question: what "technology and content" consists of exactly ?
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on June 27, 2014, 03:44:17 PM
Palantir - can you put some more clarity on that?  People keep mentioning that they are stuffing growth expenses for tax purposes but without specifics.

The distribution centers are all capitalized as are the payments to HBO and others for content.  Stock based comp is front end weighted but that actually hurts as an investor (unless the stock is dropping) because you are expensing shares at say $300 and then issuing them at $400.  What expenses are being stuffed or are inflated?

I'd also note as others have that most of these are not really one time growth expenses but actually ongoing expenses with the business.  They actually comment in the 10Q on the increased capex with "we expect this trend to continue over time".  They make the same comment on the technology and content expense which has risen much much faster than revenues or grow margins.  By the way, to the previous comments on the expansion of gross margins I'd note they specifically state "We believe that income from operations is a more meaningful measure than gross profit and gross margin due to the diversity of our product categories and services."


If they pay a billion dollars in cash to the studios in a year for the right to display content to their users, they expense that much even if they capitalized it initially.  They can't show video to Prime subs without expensing something for that year.  I guess that the capitalized content is probably only self-produced content.



Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on June 27, 2014, 03:56:47 PM


Stock based comp is front end weighted but that actually hurts as an investor (unless the stock is dropping) because you are expensing shares at say $300 and then issuing them at $400.  What expenses are being stuffed or are inflated?



This ignores the fact that AMZN has one of the highest turnovers in the industry causing much of the granted stock to be forfeited since the median employee leaves after one year (http://www.businessinsider.com/companies-ranked-by-turnover-rates-2013-7) and the first year vesting is 5%.


Also you can assume that their share count continues growing at 1% a year like it consistently has.


The fact that AMZN chooses to accelerate their stock-comp. expense prove that they do things to minimize income.  When you consider everything they're doing, like building smartphones, drones, Fresh, China etc. these are all growth expenses, most of these ventures are developer salaries expensed in the current year, there's not much capital equipment.  For instance, the Fresh trucks are owned by Ryder...
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on June 27, 2014, 04:25:34 PM
I'd also note as others have that most of these are not really one time growth expenses but actually ongoing expenses with the business.  They actually comment in the 10Q on the increased capex with "we expect this trend to continue over time".  They make the same comment on the technology and content expense which has risen much much faster than revenues or grow margins.  By the way, to the previous comments on the expansion of gross margins I'd note they specifically state "We believe that income from operations is a more meaningful measure than gross profit and gross margin due to the diversity of our product categories and services."
How are Fresh, smartphone, making TV shows, massively investing in China AWS etc. to grow, drones, increasing the rate at which they expand FC space and all of the other stuff they're doing NOT growth expenses? 
To assume that ongoing, run-rate expenses have gone up, there's something that must have happened, and that's that one or more of AMZN's major expenses must have skyrocketed over the last four years or either their competitive position eroded/changed drastically in 2010 and all of a sudden they needed way more FC space.  Which do you think happened and which expenses do you think went up? Do you agree with the above statement?
AMZN's FCs are way more automated now, FCs and construction costs have not skyrocketed with continued low interest rates.  Developer salaries are higher, but not twice as much or anything like that by any means.  Computing equipment and bandwidth have decreased 20% per year.  So which of their individual expenses have gone up?  Or has AMZN, become way more inefficient and capital intensive over the last four years?
Something that should really stand out, and this would be easy to tell if someone had read only a few of the annuals or made a spreadsheet with just the historical capex is that capex went up 10X in just three years, from an average of 2% of sales or only a few hundred million dollars in 2009(on tens of billions of sales) to $3.78B in 2012 $4.3B in 2013.  So AMZN became that much more capital intensive in 2010?  What happened?  Did they have to increase their spending by this much or did they choose to put FCs closer to population centers?
They've more rapidly expanded since 2010 before they had to to widen their moat and for other reasons (state taxes etc.), but it appears at a cursory glance that these are maintenance expenses.  They're throwing money at consumers so as not to pay taxes and to increase their first-mover advantage, but people think they have to do this - that they have to do Prime Video and the book lending library and Fresh etc. - but this is ALL to widen the moat by increasing selection and lowering costs.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on June 27, 2014, 04:32:15 PM
Quote
They actually comment in the 10Q on the increased capex with "we expect this trend to continue over time".

The idea is to have a larger business in ten years and to widen the moat.  Isn't it a good thing to have ideas worth investing in and wanting to have a larger business in 10-20 years?  I'm not trying to get dividends in retirement here.

Does anyone fault Buffett for increasing capital expenditures every year? Bezos actually wants to go to Mars and everything he does with AMZN is designed to enable him to do that in a few decades.  Maybe I've just read more about the whole AMZN story and get what he's doing and how special it is.  This guy is literally operating in a different universe than every other executive except for Musk.  When you're thinking about twenty years from now you are thinking VERY differently from 99.8% of every other executive and this alone is a massive advantage and something to hitch a ride on.
Title: Re: AMZN - Amazon.com Inc.
Post by: DTEJD1997 on June 27, 2014, 04:46:42 PM
^You are not reading the thread. Amazon IS profitable, but they are doing what they can to minimize what shows up on the Income statements in order to reduce taxation.

I am reading the thread, but I don't buy it.  A lot of these accelerated expenses are truly expenses...I also suspect a lot of them will wind up being "stranded" investments also...

If you think AMZN is going to be a great investment, at what point is it fairly valued or overvalued?
Title: Re: AMZN - Amazon.com Inc.
Post by: Spekulatius on June 27, 2014, 10:54:37 PM
A good business can grow while showing profits and FCF. There are enough examples of companies who have done just that in the past or who are doing it right now, like MSFT, GOOG etc.

I don't really see a reason to pay a rich multiple for a stock, where I need to go through mental hoops to determine that they may be profitable in the the future. I can see doing this for a real cheap stock, but I would not pay a high multiple for stock.
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on June 27, 2014, 11:05:49 PM
If they pay a billion dollars in cash to the studios in a year for the right to display content to their users, they expense that much even if they capitalized it initially.  They can't show video to Prime subs without expensing something for that year.  I guess that the capitalized content is probably only self-produced content.

I don't think that's accurate.  From the 10K they indicate they recognize an asset for the content and a corresponding liability and then amortize the asset into cost of goods sold over the life of the contract's window of availability.  So if they pay $300M for years of rights that is capitalized and amortized into COGS over the 5 year window.  It's not all expensed upfront, only the proportional amount related to the expected revenues earned off it.
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on June 27, 2014, 11:11:25 PM

This ignores the fact that AMZN has one of the highest turnovers in the industry causing much of the granted stock to be forfeited since the median employee leaves after one year (http://www.businessinsider.com/companies-ranked-by-turnover-rates-2013-7) and the first year vesting is 5%.


Also you can assume that their share count continues growing at 1% a year like it consistently has.


The fact that AMZN chooses to accelerate their stock-comp. expense prove that they do things to minimize income.  When you consider everything they're doing, like building smartphones, drones, Fresh, China etc. these are all growth expenses, most of these ventures are developer salaries expensed in the current year, there's not much capital equipment.  For instance, the Fresh trucks are owned by Ryder...

They indicate that they cancel and reverse the expense for people who resign and forfeit options/stock.  So that gets evened out. 

The 1% dilution doesn't seem like much but it's $1.4bn of value.  And when you only generate $2.5bn of free cash flow it becomes pretty significant.

The development expenses (including developers etc) would typically be capitalized not expensed.  They would then get expensed as the related revenues are earned. 

I would also say that for Amazon, those are the cost of doing business. If you expect them to stop developing new products like phones or Fresh then yes, the cash costs will decline but then you would have to expect growth from all those new initiatives stop too.
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on June 27, 2014, 11:18:23 PM
Isn't the whole concept supposed to be the size and volume beget efficiencies and therefore getting bigger should make you more profitable?  Amazon revenues have what, tripled over the past 5 years, but as you rightly point out, their operating margins have declined substantially.  That flies in the face of logic and the drive for growth.

The company has been in business for 20 years now and hasn't really generated any profit.  If they are now investing for the next 10-20 years, at what point does "long term" actually happen.  At some point you have to show the ability to be profitable.

Curious - if you are basing you investment thesis on the idea that they can turn profitable when they stop all the growth spending, when do you see that happening?  The company acknowledges that the cost basis and capex will continue into the future.   At some point the time it takes to get there more than offsets any level of profitability that they could even theoretically achieve.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on June 28, 2014, 08:20:50 AM

This ignores the fact that AMZN has one of the highest turnovers in the industry causing much of the granted stock to be forfeited since the median employee leaves after one year (http://www.businessinsider.com/companies-ranked-by-turnover-rates-2013-7) and the first year vesting is 5%.


Also you can assume that their share count continues growing at 1% a year like it consistently has.


The fact that AMZN chooses to accelerate their stock-comp. expense prove that they do things to minimize income.  When you consider everything they're doing, like building smartphones, drones, Fresh, China etc. these are all growth expenses, most of these ventures are developer salaries expensed in the current year, there's not much capital equipment.  For instance, the Fresh trucks are owned by Ryder...

The development expenses (including developers etc) would typically be capitalized not expensed.  They would then get expensed as the related revenues are earned. 


I'm not sure all software development is capitalized, but that would be fine if so.  Regardless, the capitalized amount is then amortized over three years.  This is an expense, isn't it?  All things that are capitalized are later expensed, correct?  So you can increase spending in one year, and then have higher amortization expense the following three years.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on June 28, 2014, 08:28:13 AM
Arguably the guy that knows the most about how much digital video content costs said that AMZN was 'losing' $500M-$1B per year two years ago

Do we agree that this is an expense regardless of any amount capitalized?

"Hastings says he generated those numbers based on the value of the content deals that Amazon won when the two companies competed head to head. "


Did AMZN have to do this or was it designed to make Prime and AMZN more desirable for customers in the future?

http://allthingsd.com/20121116/netflix-ceo-amazon-losing-up-to-1-billion-a-year-on-streaming-video/ (http://allthingsd.com/20121116/netflix-ceo-amazon-losing-up-to-1-billion-a-year-on-streaming-video/)
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on June 28, 2014, 08:28:29 AM

This ignores the fact that AMZN has one of the highest turnovers in the industry causing much of the granted stock to be forfeited since the median employee leaves after one year (http://www.businessinsider.com/companies-ranked-by-turnover-rates-2013-7) and the first year vesting is 5%.


Also you can assume that their share count continues growing at 1% a year like it consistently has.


The fact that AMZN chooses to accelerate their stock-comp. expense prove that they do things to minimize income.  When you consider everything they're doing, like building smartphones, drones, Fresh, China etc. these are all growth expenses, most of these ventures are developer salaries expensed in the current year, there's not much capital equipment.  For instance, the Fresh trucks are owned by Ryder...

The development expenses (including developers etc) would typically be capitalized not expensed.  They would then get expensed as the related revenues are earned. 


I'm not sure all software development is capitalized, but that would be fine if so.  Regardless, the capitalized amount is then amortized over three years.  This is an expense, isn't it?  All things that are capitalized are later expensed, correct?  So you can increase spending in one year, and then have higher amortization expense the following three years.

True.  But then that would suggest that it's not a growth expense, that's just the cost of providing a product and cannot be removed down the road to achieve profitability.  To your point, if all the expense is eventually amortized it's not really a tax reduction angle.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on June 28, 2014, 08:31:21 AM

This ignores the fact that AMZN has one of the highest turnovers in the industry causing much of the granted stock to be forfeited since the median employee leaves after one year (http://www.businessinsider.com/companies-ranked-by-turnover-rates-2013-7) and the first year vesting is 5%.


Also you can assume that their share count continues growing at 1% a year like it consistently has.


The fact that AMZN chooses to accelerate their stock-comp. expense prove that they do things to minimize income.  When you consider everything they're doing, like building smartphones, drones, Fresh, China etc. these are all growth expenses, most of these ventures are developer salaries expensed in the current year, there's not much capital equipment.  For instance, the Fresh trucks are owned by Ryder...

The development expenses (including developers etc) would typically be capitalized not expensed.  They would then get expensed as the related revenues are earned. 


I'm not sure all software development is capitalized, but that would be fine if so.  Regardless, the capitalized amount is then amortized over three years.  This is an expense, isn't it?  All things that are capitalized are later expensed, correct?  So you can increase spending in one year, and then have higher amortization expense the following three years.

True.  But then that would suggest that it's not a growth expense


But they're growing and building new things: phone; audio streaming; Fresh; FCs.  These all require additional developers to grow.
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on June 28, 2014, 08:33:39 AM
 :D
Arguably the guy that knows the most about how much digital video content costs said that AMZN was 'losing' $500M-$1B per year two years ago

Do we agree that this is an expense regardless of any amount capitalized?

"Hastings says he generated those numbers based on the value of the content deals that Amazon won when the two companies competed head to head. "


Did AMZN have to do this or was it designed to make Prime and AMZN more desirable for customers in the future?

http://allthingsd.com/20121116/netflix-ceo-amazon-losing-up-to-1-billion-a-year-on-streaming-video/ (http://allthingsd.com/20121116/netflix-ceo-amazon-losing-up-to-1-billion-a-year-on-streaming-video/)

But then shouldn't two years later the company be MORE profitable if the argument was that they were growing into the expense?  Two years ago they were losing up to $1bn on this product and they have grown since then so they should be at least $500-$1bn more profitable today (or at least a good portion of that they as they grow into it).
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on June 28, 2014, 08:38:16 AM

This ignores the fact that AMZN has one of the highest turnovers in the industry causing much of the granted stock to be forfeited since the median employee leaves after one year (http://www.businessinsider.com/companies-ranked-by-turnover-rates-2013-7) and the first year vesting is 5%.


Also you can assume that their share count continues growing at 1% a year like it consistently has.


The fact that AMZN chooses to accelerate their stock-comp. expense prove that they do things to minimize income.  When you consider everything they're doing, like building smartphones, drones, Fresh, China etc. these are all growth expenses, most of these ventures are developer salaries expensed in the current year, there's not much capital equipment.  For instance, the Fresh trucks are owned by Ryder...

The development expenses (including developers etc) would typically be capitalized not expensed.  They would then get expensed as the related revenues are earned. 


I'm not sure all software development is capitalized, but that would be fine if so.  Regardless, the capitalized amount is then amortized over three years.  This is an expense, isn't it?  All things that are capitalized are later expensed, correct?  So you can increase spending in one year, and then have higher amortization expense the following three years.

True.  But then that would suggest that it's not a growth expense, that's just the cost of providing a product and cannot be removed down the road to achieve profitability.  To your point, if all the expense is eventually amortized it's not really a tax reduction angle.


They have zero plans to remove anything.  Every action is designed to have a larger business in ten years.  If investors don't also have the same mindset, they won't view AMZN as attractively as I do and I think that's the crux of our differences.  You're concerned about current income and I want them to have a larger piece of the pie down the road.  I'm trying to maximize my wealth over the next few decades, not this year or next, so I appreciate spending that is designed to result in the largest possible business then.  I would rather them not pay taxes now and would rather them spend instead of doing so, and I'm certain they're doing that.


Eventually they will grow to a point where they won't be able to invest as much as their cash flow and they will start showing more income which I guess will happen in a handful of years.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on June 28, 2014, 08:52:30 AM
:D
Arguably the guy that knows the most about how much digital video content costs said that AMZN was 'losing' $500M-$1B per year two years ago

Do we agree that this is an expense regardless of any amount capitalized?

"Hastings says he generated those numbers based on the value of the content deals that Amazon won when the two companies competed head to head. "


Did AMZN have to do this or was it designed to make Prime and AMZN more desirable for customers in the future?

http://allthingsd.com/20121116/netflix-ceo-amazon-losing-up-to-1-billion-a-year-on-streaming-video/ (http://allthingsd.com/20121116/netflix-ceo-amazon-losing-up-to-1-billion-a-year-on-streaming-video/)

But then shouldn't two years later the company be MORE profitable if the argument was that they were growing into the expense? 


No, they continue to INCREASE this number to make it more attractive!  It's not necessarily a one or two year investment - they are twenty year investments.


Quote
Two years ago they were losing up to $1bn on this product and they have grown since then so they should be at least $500-$1bn more profitable today (or at least a good portion of that they as they grow into it).

Remember that they're not necessarily charging for access to the Prime video content, or at least not as much as it costs them.  The digital video is bundled with Prime.  AMZN was getting $79 for access to this content AND a whole bunch of other stuff with non-trivial expenses that are also growing, like unlimited free shipping.  I ordered from AMZN 42 times in 2012 and if other peoples' estimates of order delivery cost of $5-$10 in shipping are correct AMZN had something like $300 of shipping costs attributable to me.  They only got $79 from me that year.  Some people get FREE books every month which cost AMZN more than they charge normal users for - like $15-$20  per book to the publishers from AMZN (this is a very interesting subject in itself, how they sell most or all Kindle books for less than they cost and also I don't know how much AMZN must pay the publishers for a monthly rental, but it's greater than zero), so AMZN gets $79 but for users that consume a book each month they very well may have lost money on that Prime sub from books alone, not to mention how much in shipping that sub might have cost AMZN that year.

I think that until one understands the extent AMZN of customer friendliness and how it gives tons of benefits away, you won't understand why they're not making a ton of money now.  And when you fully understand this customer-friendly approach, how unique it is and how they've managed to create something that no one else comes close to, it becomes easier to see what AMZN could turn into over a number of years.
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on June 28, 2014, 08:56:33 AM

This ignores the fact that AMZN has one of the highest turnovers in the industry causing much of the granted stock to be forfeited since the median employee leaves after one year (http://www.businessinsider.com/companies-ranked-by-turnover-rates-2013-7) and the first year vesting is 5%.


Also you can assume that their share count continues growing at 1% a year like it consistently has.


The fact that AMZN chooses to accelerate their stock-comp. expense prove that they do things to minimize income.  When you consider everything they're doing, like building smartphones, drones, Fresh, China etc. these are all growth expenses, most of these ventures are developer salaries expensed in the current year, there's not much capital equipment.  For instance, the Fresh trucks are owned by Ryder...

The development expenses (including developers etc) would typically be capitalized not expensed.  They would then get expensed as the related revenues are earned. 


I'm not sure all software development is capitalized, but that would be fine if so.  Regardless, the capitalized amount is then amortized over three years.  This is an expense, isn't it?  All things that are capitalized are later expensed, correct?  So you can increase spending in one year, and then have higher amortization expense the following three years.

True.  But then that would suggest that it's not a growth expense, that's just the cost of providing a product and cannot be removed down the road to achieve profitability.  To your point, if all the expense is eventually amortized it's not really a tax reduction angle.


They have zero plans to remove anything.  Every action is designed to have a larger business in ten years.  If investors don't also have the same mindset, they won't view AMZN as attractively as I do and I think that's the crux of our differences.  You're concerned about current income and I want them to have a larger piece of the pie down the road.  I'm trying to maximize my wealth over the next few decades, not this year or next, so I appreciate spending that is designed to result in the largest possible business then.  I would rather them not pay taxes now and would rather them spend instead of doing so, and I'm certain they're doing that.


Eventually they will grow to a point where they won't be able to invest as much as their cash flow and they will start showing more income which I guess will happen in a handful of years.

Fair enough.  I'm not really concerned about current income (or the lack thereof) I'm concerned about the ability to generate income at any point in the future.

But again, how do you value this as an investment today if the shift to profitability May not happen for 5 yrs, 10 yrs, or even another 20 yrs.  ten or 20 yrs is a long time to hold an investment based upon an unproven thesis.  (Sorry about typos, I'm on an iPad which is impossible to type on)
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on June 28, 2014, 09:03:55 AM
:D
Arguably the guy that knows the most about how much digital video content costs said that AMZN was 'losing' $500M-$1B per year two years ago

Do we agree that this is an expense regardless of any amount capitalized?

"Hastings says he generated those numbers based on the value of the content deals that Amazon won when the two companies competed head to head. "


Did AMZN have to do this or was it designed to make Prime and AMZN more desirable for customers in the future?

http://allthingsd.com/20121116/netflix-ceo-amazon-losing-up-to-1-billion-a-year-on-streaming-video/ (http://allthingsd.com/20121116/netflix-ceo-amazon-losing-up-to-1-billion-a-year-on-streaming-video/)

But then shouldn't two years later the company be MORE profitable if the argument was that they were growing into the expense? 


No, they continue to INCREASE this number to make it more attractive!  It's not necessarily a one or two year investment - they are twenty year investments.


Quote
Two years ago they were losing up to $1bn on this product and they have grown since then so they should be at least $500-$1bn more profitable today (or at least a good portion of that they as they grow into it).

Remember that they're not necessarily charging for access to the Prime video content, or at least not as much as it costs them.  The digital video is bundled with Prime.  AMZN was getting $79 for access to this content AND a whole bunch of other stuff with non-trivial expenses that are also growing, like unlimited free shipping.  I ordered from AMZN 42 times in 2012 and if other peoples' estimates of order delivery cost of $5-$10 in shipping are correct AMZN had something like $300 of shipping costs attributable to me.  They only got $79 from me that year.  Some people get FREE books every month which cost AMZN more than they charge normal users for - like $15-$20  per book to the publishers from AMZN (this is a very interesting subject in itself, how they sell most or all Kindle books for less than they cost and also I don't know how much AMZN must pay the publishers for a monthly rental, but it's greater than zero), so AMZN gets $79 but for users that consume a book each month they very well may have lost money on that Prime sub from books alone, not to mention how much in shipping that sub might have cost AMZN that year.

I think that until one understands the extent AMZN of customer friendliness and how it gives tons of benefits away, you won't understand why they're not making a ton of money now.  And when you fully understand this customer-friendly approach, how unique it is and how they've managed to create something that no one else comes close to, it becomes easier to see what AMZN could turn into over a number of years.

But J, that's exactly my point!  All these things are going into the customer experience.  You can't stop spending on them without reducing the customer experience - so how do you shift to profits? 

It's great all these freebies for Prime and as you point out they are losing a lot of money shipping free to you.  How do you stop these losses without losing your competitive advantage?  The minute they start charging enuf for Prime to make money for these costs people will stop paying for it.  I'd love to see how many people cancelled Prime when they upped the price.  I know I did and now just order everything thru my wife's account (and boy are they losing money on that one now)
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on June 28, 2014, 09:13:43 AM

This ignores the fact that AMZN has one of the highest turnovers in the industry causing much of the granted stock to be forfeited since the median employee leaves after one year (http://www.businessinsider.com/companies-ranked-by-turnover-rates-2013-7) and the first year vesting is 5%.


Also you can assume that their share count continues growing at 1% a year like it consistently has.


The fact that AMZN chooses to accelerate their stock-comp. expense prove that they do things to minimize income.  When you consider everything they're doing, like building smartphones, drones, Fresh, China etc. these are all growth expenses, most of these ventures are developer salaries expensed in the current year, there's not much capital equipment.  For instance, the Fresh trucks are owned by Ryder...

The development expenses (including developers etc) would typically be capitalized not expensed.  They would then get expensed as the related revenues are earned. 


I'm not sure all software development is capitalized, but that would be fine if so.  Regardless, the capitalized amount is then amortized over three years.  This is an expense, isn't it?  All things that are capitalized are later expensed, correct?  So you can increase spending in one year, and then have higher amortization expense the following three years.

True.  But then that would suggest that it's not a growth expense, that's just the cost of providing a product and cannot be removed down the road to achieve profitability.  To your point, if all the expense is eventually amortized it's not really a tax reduction angle.


They have zero plans to remove anything.  Every action is designed to have a larger business in ten years.  If investors don't also have the same mindset, they won't view AMZN as attractively as I do and I think that's the crux of our differences.  You're concerned about current income and I want them to have a larger piece of the pie down the road.  I'm trying to maximize my wealth over the next few decades, not this year or next, so I appreciate spending that is designed to result in the largest possible business then.  I would rather them not pay taxes now and would rather them spend instead of doing so, and I'm certain they're doing that.


Eventually they will grow to a point where they won't be able to invest as much as their cash flow and they will start showing more income which I guess will happen in a handful of years.

Fair enough.  I'm not really concerned about current income (or the lack thereof) I'm concerned about the ability to generate income at any point in the future.


There's been a lot of concern about eventual profitability and suggestions that they will have to do something different or raise prices. 


I don't believe they will have to really change anything or raise prices. 


They are already have a higher average price relationship across their businesses with their customers than WMT: AMZN has 28% and expanding gross margins versus WMT's 24% stagnant gross margins.  They just need to continue executing, improving the service, adding benefits and they will continue to grow and like I said, they won't always be able to invest as much as their operating cash flow is.  They also won't need to; there's a critical mass of benefits that will become a no-brainer at least to American consumers.  Why would you be a NFLX, Costco and WMT shopper when you can get Prime for the cost of one of these loyalty programs and get the books and audio subscriptions, free shipping and everything else they will add for free?


Only if there's a better service with a greater selection, lower prices, more benefits included in Prime, and faster shipping ability will AMZN not continue to grow, and to my knowledge this isn't close to happening.  eBay is stopping their same-day shipping business and Google does have Shopping Express (https://www.google.com/shopping/express/), but it doesn't come anywhere near the selection and other benefits AMZN offers.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on June 28, 2014, 09:26:05 AM
:D
Arguably the guy that knows the most about how much digital video content costs said that AMZN was 'losing' $500M-$1B per year two years ago

Do we agree that this is an expense regardless of any amount capitalized?

"Hastings says he generated those numbers based on the value of the content deals that Amazon won when the two companies competed head to head. "


Did AMZN have to do this or was it designed to make Prime and AMZN more desirable for customers in the future?

http://allthingsd.com/20121116/netflix-ceo-amazon-losing-up-to-1-billion-a-year-on-streaming-video/ (http://allthingsd.com/20121116/netflix-ceo-amazon-losing-up-to-1-billion-a-year-on-streaming-video/)

But then shouldn't two years later the company be MORE profitable if the argument was that they were growing into the expense? 


No, they continue to INCREASE this number to make it more attractive!  It's not necessarily a one or two year investment - they are twenty year investments.


Quote
Two years ago they were losing up to $1bn on this product and they have grown since then so they should be at least $500-$1bn more profitable today (or at least a good portion of that they as they grow into it).

Remember that they're not necessarily charging for access to the Prime video content, or at least not as much as it costs them.  The digital video is bundled with Prime.  AMZN was getting $79 for access to this content AND a whole bunch of other stuff with non-trivial expenses that are also growing, like unlimited free shipping.  I ordered from AMZN 42 times in 2012 and if other peoples' estimates of order delivery cost of $5-$10 in shipping are correct AMZN had something like $300 of shipping costs attributable to me.  They only got $79 from me that year.  Some people get FREE books every month which cost AMZN more than they charge normal users for - like $15-$20  per book to the publishers from AMZN (this is a very interesting subject in itself, how they sell most or all Kindle books for less than they cost and also I don't know how much AMZN must pay the publishers for a monthly rental, but it's greater than zero), so AMZN gets $79 but for users that consume a book each month they very well may have lost money on that Prime sub from books alone, not to mention how much in shipping that sub might have cost AMZN that year.

I think that until one understands the extent AMZN of customer friendliness and how it gives tons of benefits away, you won't understand why they're not making a ton of money now.  And when you fully understand this customer-friendly approach, how unique it is and how they've managed to create something that no one else comes close to, it becomes easier to see what AMZN could turn into over a number of years.

But J, that's exactly my point!  All these things are going into the customer experience.  You can't stop spending on them without reducing the customer experience - so how do you shift to profits? 


People are increasingly using the service and will continue to do so as they add more benefits like Prime audio.  Consumers are shifting their shopping towards AMZN at a greater than e-commerce growth rate.  The gross margin received from actually buying things will continue to grow resulting in a profitable relationship.  That gross profit minus Prime benefits equation results in a profitable individual customer relationship.  It's mainly the new products, services, FCs and AWS infrastructure they are adding that I believe are obscuring that underlying profitability. 


There's no argument I'm aware of that says that AMZN's long-term, run-rate operating expenses will be greater than WMT's - not with being way more automated, capital light by not owning retail real estate and a higher percentage of sales that are digital.  And with gross margins of 28% that will hopefully continue to expand, AMZN will be quite profitable.
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on June 28, 2014, 09:27:49 AM
The higher gross margins are likely due to the AWS and other service offerings not the products (which is why the company says its a poor metric to judge them by).

Your point goes to the crux of the disagreement. You believe they can start to turn profits without raising prices or doing anything differently. I don't see any indication that is possible and don't think they can. And if they change anything growth will grind to a halt (it's easy to grow when you give things away free).

I think this new phone is interesting.  My personal guess is that they have lost so much money giving the kindle fire away at cost that they realized they couldn't do that for the phone too. So now they're charging a "competitive" price for it and I haven't heard anyone who thinks it will be successful.

By the way you didn't get to my question on how you are valuing the stock today without knowing when they plan to shift gears and focus on profits.  Is $320 a value?  Is $400?  $500?  What is intrinsic value when you don't have a time frame to profitability?
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on June 28, 2014, 09:31:49 AM
If they pay a billion dollars in cash to the studios in a year for the right to display content to their users, they expense that much even if they capitalized it initially.  They can't show video to Prime subs without expensing something for that year.  I guess that the capitalized content is probably only self-produced content.

I don't think that's accurate.  From the 10K they indicate they recognize an asset for the content and a corresponding liability and then amortize the asset into cost of goods sold over the life of the contract's window of availability.  So if they pay $300M for years of rights that is capitalized and amortized into COGS over the 5 year window.  It's not all expensed upfront, only the proportional amount related to the expected revenues earned off it.


Yes, the amount amortized/expensed in a year is a portion of the total contract amount.  They capitalize the some initial total contract amount and then amortize it a portion of it each year.  I'm not sure we're disagreeing on anything.  Hopefully we both agree that paying studios for content is an expense that is recognized each year, whether they capitalize an amount initially or not and that they pay the studios each year for a bunch of digital video content that is given away to Prime members.  I haven't focused on how much is capitalized because we're not really talking about the balance sheet here - just expenses - because everyone seems to be focused on headline-income numbers and not cash flow and growth spending.


You can get an idea of how much AMZN spends on digital video by assuming AMZN spends 50%+ of what NFLX spends on content because the two offer comparably sized libraries.


Annualized the most recent quarter for NFLX, NFLX is spending $3.5B on content this year.  This digital video content licensing is the single biggest knowable expense that I consider to be a growth expense for AMZN.  They're spending billions on it and are mostly giving it away to Prime Members.  This expense alone could be 2% of revenue.


You can look at the recent AMZN-HBO deal which is $300M over three years.  So this will be a $100M expense for a few hundred movies and shows.  AMZN offers tens of thousands of movies and TV shows - this stuff is expensive. 


To understand these digital video expenses better I suggest looking at STRZA - we spent a lot of time on STRZA during the spinoff last year - they discuss the content and various accounting issues and costs associated with licensing digital video content extensively.  The moral of the story is that this content is super expensive regardless of the accounting.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on June 28, 2014, 10:27:02 AM
The higher gross margins are likely due to the AWS and other service offerings not the products (which is why the company says its a poor metric to judge them by).

Your point goes to the crux of the disagreement. You believe they can start to turn profits without raising prices or doing anything differently. I don't see any indication that is possible and don't think they can. And if they change anything growth will grind to a halt (it's easy to grow when you give things away free).

I think this new phone is interesting.  My personal guess is that they have lost so much money giving the kindle fire away at cost that they realized they couldn't do that for the phone too. So now they're charging a "competitive" price for it and I haven't heard anyone who thinks it will be successful.

By the way you didn't get to my question on how you are valuing the stock today without knowing when they plan to shift gears and focus on profits.  Is $320 a value?  Is $400?  $500?  What is intrinsic value when you don't have a time frame to profitability?


I don't have a specific intrinsic value - I believe it's going to continue to grow and that the current valuation is nothing like 300X earnings.  You can use EV/FCF which takes you down to 50X and if you believe that a few percent of revenue are further obscured by spending than it's 20-30X.  And because they can grow rapidly for a decade or two the returns will be something like growth rate minus multiple compression.  Because we won't sell for a long time we won't pay any taxes until then making the pre-tax equivalent return 1.6X the CAGR from now until we sell and the final after-tax return, if we ever sell, closer and closer to the CAGR the longer we hold it.  But of course AMZN's growth will slow from the low thirties it's growing now over the coming years - so higher returns in the next few years and slowing down over time.


I'm hoping they will be able to buy back significant slugs of the stock once every five years or so, or during times of distress like they have twice in the past as well.


You can note that I wasn't writing about AMZN when the stock was at $400 but began to when it fell to $300.  I haven't bought any over $310 or so.
Title: Re: AMZN - Amazon.com Inc.
Post by: Palantir on June 28, 2014, 02:02:13 PM
Dwy, why are you using net income to determine profitability and not cash flow?
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on June 28, 2014, 03:28:06 PM
I'm not (or not intending to). I much prefer free cash flow as a measure of earnings power (after adding back stock based comp).  Not sure it changes the argument much here though, especially over time as all capitalized expenses get amortized over time. 
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on June 28, 2014, 03:46:30 PM
J - sounds like you think intrinsic value is somewhere between today's price and $400? 

Where are you getting EV/FCF of 50x??  FCF is about $2-$2.5bn (and that's without the $1.4bn of stock dilution) and EV is closer to $150 bn.  Are you using your theoretical FCF if and when they shift the business model?  Because you the further adjust that 50x to 30x for the same reason.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on June 28, 2014, 08:18:51 PM
J - sounds like you think intrinsic value is somewhere between today's price and $400? 


I don't think that.  What discount rate are you using?  Intrinsic value is different for each investor.  I think that at $400, the investor's return will be lower than someone that bought it at $300, that's about it - it's more desirable now - that's why I'm writing here now.  I'm not expressing an opinion on what the intrinsic value is, and I don't on basically all of our stocks - I just believe each of their intrinsic values are higher.  In other words I believe the returns from holding them will be way higher than the market returns and should fare well next to the historical super-investors long-term returns (i.e. > 20%).


To me it would be a mistake to assume all of the various things one would have to assume.  I just believe the stock will go way higher over the next decade.  What was the intrinsic value of WMT in 1984 or MSFT in 1992 - it didn't matter - you just bought and held on.  What was the intrinsic value of BRK in 1985?  Did it matter at what price you bought that year?  Maybe you wanted to not buy it after it ran up tons in the last six months - just like now for AMZN.  You could just slowly add more over time.


What I do believe are the following:
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on June 28, 2014, 08:49:57 PM
Here is the final AWS versus U.S./IBM opinion cross-posted from the IBM thread:

http://regmedia.co.uk/2013/11/08/amazon_v_ibm_cia_2013.pdf (http://regmedia.co.uk/2013/11/08/amazon_v_ibm_cia_2013.pdf)

Anyways, it's surprisingly accessible for a large legal document.

Some of my favorite parts are:
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on June 28, 2014, 09:10:58 PM
J - sorry but that doesn't  make sense.  You feel the return is justified at $300 and too low at $400 but you don't calculate an intrinsic value?  Sounds like you have an intrinsic value in mind and $400 is close to it.  If you believe it's just rocket growth at any price then even $400 is a steal.  To get as precise to say that the returns at $400 are too low then you must have a value in mind, right? 

Sounds like you follow more of a growth investor strategy than value (which is buying $'s for less than a $). 

The EV/FCF isn't 30 today. EV is about $150bn and FCf is $2.5bn (before subtracting stock based comp).  The 4.5% FCf margin doesn't exist today except in theory. The company even calculates FCf in the 10K
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on June 28, 2014, 09:59:40 PM
J - sorry but that doesn't  make sense.  You feel the return is justified at $300 and too low at $400 but you don't calculate an intrinsic value?


Returns at $400 will be "lower" than at $320, not "too low".  I'm confident that returns from this price range will be way higher than the market over the next decade.  Of course a lower price is better and $320 is lower than $400. 


One would need a discount rate to discount any future price back to estimate a current intrinsic value and to make lots of assumptions about all of the moving parts - yours maybe different than mine.  I stated my beliefs that are sometimes implicitly assumptions above.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on June 30, 2014, 09:13:41 AM
Does anyone disagree with any of the following assertions?
Title: Re: AMZN - Amazon.com Inc.
Post by: Palantir on June 30, 2014, 09:38:10 AM
It's all about how you phrase it. :D

Amazon is a tax-efficient compounder, run by an owner-operator with his entire net worth invested in the firm, who has a very long-term view. It has a well known brand, a defensible franchise and an economic moat, whose operations create float.
Title: Re: AMZN - Amazon.com Inc.
Post by: Liberty on June 30, 2014, 12:10:00 PM
http://www.peridotcapital.com/2014/06/profitless-amazon-myth-lives-on-thanks-to-lazy-financial-media.html
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on June 30, 2014, 05:43:20 PM
Does anyone disagree with any of the following assertions?
  • AMZN purchases digital video rights from studios
  • AMZN pays the studios cash each year for these rights (regardless of any intangible asset on BS that is created upfront)
  • AMZN's very large content library costs somewhere in the range of $1-$3B, probably in the middle of this range this year because it is comparable in size to NFLX's library, which is $3.5B
  • The amount AMZN pays to studios in any given year is an accounting expense
  • Because this amount is an expense and not an investment in a tangible asset such as a FC, this outgoing cash flow is an operating cash flow.  This payment is just like any other purchase from other suppliers
  • Because the amount paid to content studios is a current year expense, operating income is reduced by the amount paid to the studios + any revenue allocated to digital video
  • AMZN doesn't charge directly for access to this content - it gives access to it away to Prime subscribers and allocates some portion of total Prime revenue to these digital video costs

I'd disagree with a couple of technical points (all based on 10k).
- the amount paid to the studios is not an accounting expense.  The amount is capitalized and then amortized into expense based upon the anticipated related revenue stream related to those rights.  The expense is the amortization.  Any excess paid in cash in a given year vs the amortized amount is put on the balance sheet.  So cash flow doesn't necessarily match expense.
- the expense is amortized into COGS so goes to gross margin not operating expense
 - Amazon doesn't charge Prime members for the access.  They do charge non
Prime customers for access.  A portion of Prime income is allocated to this and a portion to delivery revenue.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on June 30, 2014, 06:15:09 PM
Quote from: dwy000 link=topic=7789.msg177945#msg177945

I'd disagree with a couple of technical points (all based on 10k).
- the amount paid to the studios is not an accounting expense. 

So COS isn't an expense?  If it isn't an accounting expense, what is it?

From the 10-K: "Cost of sales consists of the purchase price of consumer products and digital content where we are the seller of record, including Prime Instant Video"
You say 'is not an accounting expense' but below you say:
Quote
The expense is the amortization. 

What do you mean?  Do you not believe that amortization is an expense?
Quote
Any excess paid in cash in a given year vs the amortized amount is put on the balance sheet.  So cash flow doesn't necessarily match expense.

Can you point me to where it discusses this?
Quote

- the expense is amortized into COGS so goes to gross margin not operating expense


Doesn't matter if operating expense or COS, still reduces income and cash flow.  Do you disagree?  Would income and/or cash flow have been higher or lower if they didn't give access to Prime subs to the video content?
Quote

 -Amazon doesn't charge Prime members for the access.  They do charge non
Prime customers for access.  A portion of Prime income is allocated to this and a portion to delivery revenue.


A portion of Prime revenue is allocated to purchases non-Prime members make?  How can that even be possible - allocating revenue to revenue?  Can you point me to where it says this?

There's Prime and there's digital video purchases.  Reed Hastings said AMZN was losing $.5B-$1B two years ago; do you really think he was talking about digital video purchases and not Prime?  How would AMZN be losing money on selling access to this video? 
Do you disagree that AMZN doesn't directly charge Prime members for access to a large video library?  Would income and cash flow have been higher or lower had they not?  These are simple questions.

You didn't really say whether or not you disagree with any of my assertions (nor has anyone else I should point out) - you just nitpicked at them in a confusing (at least to me) manner, which suggests you're being disingenuous.  Can you answer any of my questions above?
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on July 01, 2014, 03:52:30 AM
Maybe I'm not wording it right but you are twisting or confusing my comments. 

1.  COS is obviously an expense.  What I said was the cash paid to the studios is not an expense.  The point being the cash amount paid to studios does not necessarily equate to the amount expensed that year.  If they pay HBO $300MM upfront for a 3 year contract, they don't expense $300MM upfront.  They capitalize it and then expense it over the estimated revenue stream generated during the contract period.  This is not a difference of opinion this is accounting.

2.  Of course I believe amortization is an expense.  Hence my comment "the expense is the amortization".  The point being the amount expensed through the income statement each year is the amortization amount from the point above not necessarily the amount capitalized.

3. From the 10K:
"Content Costs:  We obtain digital video content through licensing agreements that have a wide range of licensing provisions and generally have terms from one to five years with fixed payment schedules. When the license fee for a specific movie or television title is determinable or reasonably estimable and available for streaming, we recognize an asset representing the fee per title and a corresponding liability for the amounts owed. We relieve the liability as payments are made and we amortize the asset as cost of sales on a straight-line basis over each title’s contractual window of availability, which typically ranges from six months to five years. If we are unable to reasonably estimate the cost per title, no asset or liability is recorded and licensing costs are expensed as incurred"

Also in Other Assets which includes "digital video content, net of amortization"

4. No it doesn't matter whether it's expensed to COGS or opex (which is why I keep going on about their gross margin growth being less relevant than operating margins).  I was clarifying the accounting - from above it goes into COGS. The bottom line doesn't change either way.

5.  Again, you confused my point on Prime.  You said that they don't charge for the content, they give it away to Prime users.  My point was that they do charge some peopel for the content - they charge non-Prime users.  Prime users get it free. 

6.  I never said a portion of Prime revenue is allocated to purchases by non-Prime users.  Where did you get that???  I said a portion of Prime revenue is allocated to COGS for digital products and a portion to delivery.


I'm not sure what you're getting at with all of this.  At the end of the day the company is paying for digital content that they are giving away to Prime users.  That's not a point of argument.  It's a fact that any Amazon user could tell you (and now Amazon is paying for music content and giving that away free to Prime users too). 

At the end of the day the company has very little Free Cash Flow per share (as defined by the company itself).  They have no intention of changing their business model and indicate they expect existing level of costs and capex to continue.  You believe this will miraculously turn around for no reason despite a lack of evidence of it or the stated intention of the company to keep spending.  The accounting minutae above doesn't change any of this.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on July 03, 2014, 10:16:31 PM
http://mobileopportunity.blogspot.com/2014/07/the-real-meaning-of-fire-phone.html


"Amazon everywhere. Futurist Paul Saffo put it this way: “Firefly allows Amazon to invade every store in every mall on the planet and turn it into a de facto showroom for Amazon” (link). I’d go even further. I’d say Firefly is an effort to turn the entire world into an Amazon store.
If Amazon makes that phone first, it takes another big chunk out of Walmart and Target and eBay and every other retailer out there, physical or virtual. If someone else makes it first, Amazon itself is in mortal danger."
Title: Re: AMZN - Amazon.com Inc.
Post by: jtvalue on July 10, 2014, 08:02:00 AM
Bill Nygren, a noted value investor, just purchased AMZN in his concentrated Oakmark Select fund

http://www.oakmark.com/Commentary/Commentary-Archives/2Q14--Bill-Nygren.htm
Title: Re: AMZN - Amazon.com Inc.
Post by: Grenville on July 10, 2014, 08:29:22 AM
Bill Nygren, a noted value investor, just purchased AMZN in his concentrated Oakmark Select fund

http://www.oakmark.com/Commentary/Commentary-Archives/2Q14--Bill-Nygren.htm

I'm a fan of AMZN, but remember that this noted value investor had 13% of his fund in WaMu.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on July 10, 2014, 09:12:11 AM
Bill Nygren, a noted value investor, just purchased AMZN in his concentrated Oakmark Select fund

http://www.oakmark.com/Commentary/Commentary-Archives/2Q14--Bill-Nygren.htm (http://www.oakmark.com/Commentary/Commentary-Archives/2Q14--Bill-Nygren.htm)


"So if you buy a $100 item on amazon.com from a third party, Amazon is only allowed to show about $13 of revenue, nearly all of which is gross profit.  For third-party sales, Amazon is effectively functioning as the mall owner, collecting a percentage of sales as rent.  Amazon earns less gross profit on that sale than an average retailer would, but it is also a much lower risk endeavor.  For that reason, we think a dollar of third-party sales should be worth about the same as a dollar that Amazon sells directly."

The FBA/third-party business is the most overlooked part of AMZN IMO.  It is an awesome business and the reason sales are 'only' growing 23% while gross profit is growing 33%.  Like the paragraph below points out, sales would be much higher if AMZN sold more than 60% of units itself. 

"It gets interesting when we adjust our cap-to-sales ratio comparison to include estimated gross third-party sales.  Instead of selling at twice the ratio to sales of the average bricks–and-mortar retailer, Amazon is selling at only 80%.  So, relative to gross sales, Amazon's stock would have to increase 25% to be priced consistent with the very companies whose survival Amazon is threatening.  On that metric, Amazon has never been cheaper."

Can't say I agree with him about every retailer deserving 2X sales regardless of other factors.  WMT isn't growing and is the lowest margin so it deserves a discount for instance.  What does AMZN deserve?  Time will tell.

"In an asset–lite business like Amazon, however, most growth spending gets directly expensed to the income statement, creating a much larger immediate reduction in income.  We believe that if Amazon sharply curtailed its growth spending so that it only grew at the rate other retailers grow, it could produce similar operating margins.  But we don't want them to do that.  We believe that management is maximizing value by investing heavily for super-normal organic growth.  So, yes, Amazon is a rapidly growing business.  But at this price, we believe it is also a value stock."



Hmm, sounds familiar.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on July 11, 2014, 09:05:54 AM


Here's the letter AMZN sent the FAA requesting the FAA grant it the first commercial exemption, using Congress-granted authority from the FAA Modernization and Reform Act of 2012.

http://www.regulations.gov/#!documentDetail;D=FAA-2014-0474-0001 (http://www.regulations.gov/#!documentDetail;D=FAA-2014-0474-0001)

"Amazon shares Congress’s goal of getting small aerial vehicles (a.k.a., small unmanned aircraft systems, or “sUAS”)"


AMZN is:
Imagine what these sUAS will do to shipping costs if/when they are commercially approved.


I'm thrilled that AMZN is investing our money into endeavors like sUAS, not TAXES.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on July 11, 2014, 09:23:20 AM
While I'm spamming everyone with AMZN drivel, how about I post one of my favorite AMZN charts again?


This presents a difficult counterpoint to those who say AMZN HAS to have lower prices that it's competitors, as it already has a more gross profitable relationship with its customers than all discount retailers and even some non-discount retailers with gross margins consistently increasing and nearing 30%.  AMZN has already moved outside of the discount-retailer box and has developed a rapidly-growing exchange-business ( Channel Advisor reports clients experienced SSS growth of 34% in Q2 (http://ebaystrategies.blogs.com/ebay_strategies/2014/07/june-2014-channeladvisor-same-store-sales-sss-for-ebay-amazon-search-cse-and-other-e-commerce-channe.html)), FBA, my favorite part of AMZN because of its light capital-intensity and competitive-advantage-inducing effects on greater Amazon.



Title: Re: AMZN - Amazon.com Inc.
Post by: Laxputs on July 11, 2014, 09:43:40 AM
Keep the drivel coming.
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on July 11, 2014, 10:48:49 AM
what do the operating margins look like if you overlay them on the same chart?
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on July 11, 2014, 12:11:35 PM
what do the operating margins look like if you overlay them on the same chart?


Everyone knows that operating margins are essentially zero.  Do you believe this is the only thing investors should consider and that GAAP numbers portray the truth?
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on July 11, 2014, 12:19:46 PM
No, but I believe operating margins are more important than gross margins.  Just like I believe that free cash flow (after adjusting for stock based comp) is more important than GAAP earnings.
Title: Re: AMZN - Amazon.com Inc.
Post by: PatientCheetah on July 11, 2014, 04:55:49 PM
just like there are a variety of investment horizons, there are a variety of investor base. in the end of day, we all should do what make the most money for us. thanks to this thread, i am happy with my amazon gains, i understand the speculative element in the investment thesis. If I see a shift in the amzn investor base's belief system, i will be flexible enough to sell.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on July 24, 2014, 04:22:55 PM
I wrote up our notes on today's conference call here:


http://jallencapitalmanagement.com/amzn-amazon.html


A couple highlights:
AWS reported usage growth of 90%We believe this is the first time AMZN has reported this figure. Usage growth of 90% with price declines of ~40% to revenue growth of ~55%.

AMZN is now expensing $100 million per quarter on original video content alone
Mr. Szkutak stated that AMZN is expensing $100 million per quarter on original video content that AMZN is producing. He also stated that costs are not capitalized (at: 23:25), which we believe is a departure from how other companies that produce their own video content like Starz (STRZA) account for their self-produced content. We believe that AMZN now spends at least $2 billion on video content per annum.

Title: Re: AMZN - Amazon.com Inc.
Post by: Laxputs on July 24, 2014, 04:32:15 PM
-Large earnings miss.
-23% growth over last year's quarter.
-Highest gross margins ever at 31%.
-Stock down 10% after hours.

It's hard for me to comprehend the amount of investment capital expenditures taking place at Amazon:
-Started an innovative smartphone company.
-Funding pilot programs for Fire TV.
-Massive infrastructure spending at home and abroad (India, China).
-Amazon Game Studios putting out new games.
-Prime music.
-Kindle Unlimited.
-Amazon Fresh expansions.
-AWS expansions

The company's revenue can organically grow for years and years at double digit numbers given trends of e-commerce. The company's revenue will also grow from apparent multiple new revenue streams. My investment thesis is based on normalized earnings after expansions/growth spending have stopped. I can't imagine expansions stopping for several years though. I would guess, based on previous earnings margins in several years before the massive fulfillment center expansions and massive growth expansions, they have underlying earnings margins of between 7-12%. And I own a company that is priced around 18-40x normalized earnings that is growing like a weed.  I get rich if the estimation is conservative. I have reasonable returns if it's at the high end.
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on July 24, 2014, 07:21:18 PM
Tough quarter.  Same old story:
- good revenue growth;
- gross margin growth but operating margins crushed;
- every category of operating expense increased as a % of revenues;
- negative free cash flow for the quarter (before stock based comp);
- TTM free cash flow of only $1.0bn (again, before subtracting stock based comp).
- guidance that things are only going to get worse on the expense front - op losses of $400 to $800MM?!?!

"Other" revenue growth slowed to 38% from over 60% (Other is assumed to include AWS). 

Employee count is astounding - up 8,000 in the quarter alone.  Up 35,000 in the past year.

The "invest for the long term" thesis may continue to hold for some, but the time frame to convert to "normalized" operating earnings appears to be getting further away not closer.

Investor (and stock) reaction would suggest the patience to prove out that thesis is waning.
Title: Re: AMZN - Amazon.com Inc.
Post by: LC on July 24, 2014, 08:16:08 PM
I wrote up our notes on today's conference call here:


http://jallencapitalmanagement.com/amzn-amazon.html


A couple highlights:
AWS reported usage growth of 90%We believe this is the first time AMZN has reported this figure. Usage growth of 90% with price declines of ~40% to revenue growth of ~55%.

AMZN is now expensing $100 million per quarter on original video content alone
Mr. Szkutak stated that AMZN is expensing $100 million per quarter on original video content that AMZN is producing. He also stated that costs are not capitalized (at: 23:25), which we believe is a departure from how other companies that produce their own video content like Starz (STRZA) account for their self-produced content. We believe that AMZN now spends at least $2 billion on video content per annum.



thanks for sharing.
Title: Re: AMZN - Amazon.com Inc.
Post by: DTEJD1997 on July 24, 2014, 08:28:50 PM
Maybe AMZN is just going to lose a very little bit of money on each sale...

BUT

They are going to make up for it by doing VOLUME!
Title: Re: AMZN - Amazon.com Inc.
Post by: Palantir on July 24, 2014, 08:50:10 PM
I dare you guys to short it.  ;)
Title: Re: AMZN - Amazon.com Inc.
Post by: peter1234 on July 24, 2014, 08:54:50 PM
Maybe AMZN is just going to lose a very little bit of money on each sale...

BUT

They are going to make up for it by doing VOLUME!

You are obviously not a believer.
 ;D

I appreciate and understand the bull case but would like to see evidence.

Being such a large cap that needs to compound at double digit rates over a long term just makes it a tough proposition.
 ;)
Title: Re: AMZN - Amazon.com Inc.
Post by: saltybit on July 24, 2014, 09:22:26 PM
Amazon to Make It Easier to Buy Its Ads With Self-Serve Tool

http://adage.com/article/digital/amazon-make-easier-buy-ads-serve-tool/294243/

Quote
Amazon doesn't disclose its ad revenue, but eMarketer estimates it pulled in $707.7 million from advertisers last year.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on July 24, 2014, 11:41:00 PM
The "invest for the long term" thesis may continue to hold for some, but the time frame to convert to "normalized" operating earnings appears to be getting further away not closer.


But we've only been talking about it for a single quarter - so being disappointed or surprised that they didn't make money this quarter (not saying you are but others are) is just flatly ignoring what the company repeatedly states over and over.  Some of us are thinking in terms of 40 quarters.  There was frankly nothing really to take away from this quarter except for AWS price declines, AWS usage, Prime sub. strength and growth pretty much the same as it has been for a few years.


You either think long-term and get that and believe that that's how they're investing or you don't.  And it seems that the vast majority of individuals don't, and that's of course fine.


I on the other hand am thrilled with how they're running their business, the underlying fundamentals and will probably buy some more tomorrow as the rest of our portfolio has gone up recently so AMZN has shrunk to just a massive position  ;D

It seems that the truly long-term approach is so unique that it's nearly impossibly to grasp.  This is what makes it so good for those that believe in it and are practitioners of it.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on July 25, 2014, 12:05:33 AM
So we know that AMZN doesn't show much GAAP/net/headline profitability, we can all agree on that.


I think we could also agree that AMZN is consistently growing sales at ~22% and gross profit at ~33%.  I don't know what I will do if we disagree on this...


Here's the question: Do you see something on the horizon that will cause AMZN's sales growth to change?  Do you see an offering that is nearly as good or better?  Is there a retailer with a comparable selection, consistently competitive prices, amazing service, and free two-day shipping and getting faster?  Is AMZN's approach on the verge of being disrupted like RIMM was in 2007-2008?


I ask because it would be hard for me to have the cognitive dissonance of something like 'This stock is unattractive to me because it doesn't show current profits but I can't see anything on the horizon that will cause its sales growth to slow or reverse'.  Those two things wouldn't sit well in my head.  You can be disappointed all you want with AMZN not generating current income, and that's understandable - I totally agree that buying stocks for 5X current net income is super fun - but don't you think that at some point with the continued sales growth and expansion in their 3 main (large) businesses that they will be profitable at some point, perhaps not super far into the future?  How can you believe one and not the other? 


Or does it come back to the long-term/short-term perspective thing again?  This seems to be the insistence that stocks investors own have to show positive net income now or soon/on the horizon.


Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on July 25, 2014, 12:30:41 AM

Another question I have is: Do you believe that AMZN is truly the only company on the planet that can't and won't generate material profitability with hundreds of billions of dollars of sales? 

Here's a company that says they don't care about current profitability, they're investing heavily - more heavily than they did for a decade prior to this current period.  And they continually harp on the fact that they're not managing the business for current earnings and they also don't indeed generate much current earnings.  They do and say all of these little things like put the cash flow statement first and republish the first annual letter that says 'I will always take the cash flows over profit'. 

The implication from naysayers are that even though they say they're intentionally managing the business this way, they're actually lying and just covering something up for some reason (people have actually stated things like this with more euphemistic words) .  Amazon management isn't credible.  They don't have a massive track record of success.  This isn't the way to run a business.  Amazon doesn't have any sort of moat and that if they raised their prices at all people would flee the company.

They've managed their business this way and said these things for years, yet it's a surprise that they aren't generating income. What's more is that not many people seem to believe that it's ever possible. 

Why don't more people believe Bezos, someone who has been fabulously successful at what he's put his mind to? He's managed to disrupt and dominate no less than three industries in 20 years.  This is an incredible feat.  How many others have disrupted more than one?  You can count them on one hand.  But no one believes that his company will be profitable?  This astounds me.

Wouldn't it be an unprecedented occurrence for a company to consistently not generate income on this level of sales?  It's not a lack of scale, is it?  They have 100 fulfillment and sortation centers (which are yet another recently discovered use of many hundreds of millions of dollars of capex over the last couple of years). 

The largest e-commerce company in the world (that actually fulfills orders) just can't generate a profit because users only use it because its prices are so low (which is disproved by gross margins of 31% versus WMT's 24%) and that if they raised prices 5% they would suddenly start trying to buy all of their stuff on walmart.com or deciding to visit multiple stores to purchase what they need?

Is it a coincidence that AMZN doesn't generate a profit and management says they don't currently intend to or is it possible that this is actually what they are doing?

Is AMZN's long-term strategy working or not?  I think it is.  I think it would be a huge mistake to raise prices at AWS or elsewhere.  Why not widen the moat instead?

Late night rant over...
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on July 25, 2014, 12:34:34 AM
Ok one more.


One thing we haven't discussed is how AMZN sells e-books for less than what they cost (so negative gross margins on these sales).  This is to build and widen the e-book moat.  This is paradoxically a smart thing to do.  Publishing is moving towards AMZN.  Amazon pays authors way better than the legacy publishing houses do.


This is another thing that artificially depresses current income but is designed to build a long-term moat.  This is one of the many reasons there's not much GAAP income.


Does anyone think this is a wrong approach?   If you do, that's fine, I know it's hard to truly think with the long-term in mind.  That's why there's so much controversy surrounding AMZN. 
Title: Re: AMZN - Amazon.com Inc.
Post by: Palantir on July 25, 2014, 06:34:12 AM
Allah be praised!

AMZN is down 11%, need to buy more.

I feel analysts might be focusing on the Cloud number. That is interesting.
Title: Re: AMZN - Amazon.com Inc.
Post by: Vish_ram on July 25, 2014, 06:46:52 AM
Ok one more.


One thing we haven't discussed is how AMZN sells e-books for less than what they cost (so negative gross margins on these sales).  This is to build and widen the e-book moat.  This is paradoxically a smart thing to do.  Publishing is moving towards AMZN.  Amazon pays authors way better than the legacy publishing houses do.


This is another thing that artificially depresses current income but is designed to build a long-term moat.  This is one of the many reasons there's not much GAAP income.


Does anyone think this is a wrong approach?   If you do, that's fine, I know it's hard to truly think with the long-term in mind.  That's why there's so much controversy surrounding AMZN.


Once they built the moat and became a monopoly, the Govt may step in. They'll end up without getting the return that they sought for.
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on July 25, 2014, 07:37:22 AM
We have only been talking about it for a quarter but the trends have been going on for many years.  If the thesis is that they will eventually be able to cut the spend or raise prices and this becomes a wonderful cash flowing investment, my,point is that not only are they heading in the wrong direction but that it is getting worse. The deeper the hole, the further you have to climb to get out of it.

I get the 40 quarter view.  I do.  The problem with it in my mind is that's been the argument for 20 years now.  At some point the long term thesis needs to turn into results but it just keeps being a long term thesis with no end in sight. What happens if 40 quarters from now they still aren't profitable and say they are investing for the long term?
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on July 25, 2014, 08:24:18 AM
Amazon had 10% FCF margins four years ago so it hasn't been twenty years, unless you care more about operating income than FCF.


Similar FCF margins now would result in FCF of $9B or and the market cap./FCF multiple would be 16X.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on July 25, 2014, 08:34:09 AM

Once they built the moat and became a monopoly, the Govt may step in. They'll end up without getting the return that they sought for.

There's not much precedent for actually breaking up monopolies in the U.S.  Standard Oil and AT&T come to mind, both of which actually had monopolies. 

WMT is 10X larger than AMZN as a percentage of retail sales in the U.S.  There hasn't been even discussion of breaking WMT up.

They might achieve a monopoly with books, but I doubt that will happen with retail or computing.  I'm guessing books will be a $30B industry (it's ~$15B now).  They could break up the book business and we could still do very well.

Monopolies are 40%-100%.  They have a retail share of 1% now so let's hope that share grows to something like monopoly status  - 45% of retail  - but that just won't happen (would be 3X my most optimistic expectation).
Title: Re: AMZN - Amazon.com Inc.
Post by: Palantir on July 25, 2014, 08:41:34 AM
Quote
In Q2, we had usage growth close to 90% year-over-year for the quarter.

Other revenue in NA was 1168. Assuming a price cut of 25%, which is on the low end, that implies without the price cut, the revenue would have been 1168/0.75 = 1557. Which means usage growth of 1557/844 = 84.5%, which matches their figure, considering I used a smaller discount.
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on July 25, 2014, 08:52:09 AM
Quote
In Q2, we had usage growth close to 90% year-over-year for the quarter.

Other revenue in NA was 1168. Assuming a price cut of 25%, which is on the low end, that implies without the price cut, the revenue would have been 1168/0.75 = 1557. Which means usage growth of 1557/844 = 84.5%, which matches their figure, considering I used a smaller discount.

I think it's tough to extrapolate usage and revenues.  He sidestepped the question a bit on the call but if the usage figure referred mostly to storage - which is effectively free - then the numbers won't tie and the metric isn't meaningful.  But if usage referred to analytics and computing then that's going to be higher revenue business and is very positive.  They won't give details though.
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on July 25, 2014, 09:11:21 AM
JAllen.  You asked a couple of questions.  But first, my comment on the past 20 years is that they have said "focus on the long term" for 20 years.  They got to FCF positive briefly and then immediately turned it around.  I question (don't think) they can get back there.  When does long term become now?

Is something going to cause sales growth to change?

A couple of things there.  a) size ultimately.  It's tough to grow 20% indefinitely at $100bn in revenues.  The fruit is higher and higher up the tree and the investment required to get them gets higher and higher  b) competition - already happening on AWS as price is offsetting volume growth but other retailers are starting to get their act together (Walmart grew online 30% last year, Alibaba is coming, etc.);  c) most importantly!!!!  I firmly believe the only way they can continue the growth is if they maintain a focus on sales over profits.  The minute they shut off the freebies, cut spending or raise prices, they lose their competitive advantage and growth will slow substantially or stop.

Do you believe that Amazon is the only company that cant/wont get material profitability on multi $-billions of sales:

Well actually there are lots of billion-$ retailers that can't or don't make money (Sears, JC Penney, Radio Shack, etc).  Many, many in the retail graveyard.  The question of whether Amazon can is still to be seen.  They certainly aren't showing a willingness to even try.
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on July 25, 2014, 09:23:30 AM
I also want to reiterate - I think Amazon is a fantastic company.  I use them regularly.  I would even invest in the stock very happily given the moat I think they have.  But anything near today's stock price just doesn't make sense to me.

Market cap is over $150bn and there's $1bn of FCF.  If you are investing for the next 40 quarters, to get say a 12% annualized return on your investment (which is not excessive given the time and risk) implies that in 10 years the market cap will be $520bn.  Assuming that it is then trading off of a FCF multiple (and not still a revenue multiple with no profitability), even at a 20x multiple implies $26bn of FCF.  That's a MASSIVE assumption for only 12% annual return.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on July 25, 2014, 09:38:30 AM
AMZN generated 5-10% FCF margins for a number of years.  But then that stopped right when they massively increased the growth rate of FCs etc.


The retailers you cited above made money for many years.  They didn't not make money in every single year of their existence.  Even Costco earns 3% operating margins on their 13% gross margin.


They don't have to 'shutoff any freebies'.  I don't watch Instant Video nor do I use the Kindle book library.  That's not why I and many others shop at AMZN.  It's because I trust that I'm getting a good price and what I order will reliably arrive in two days.  I don't even price shop anymore (except for the occasional large ticket item).  I don't listen to the music either. 


I believe AMZN can continue to grow at comparable rates for a number of years because of its small size relative to retail sales and the fact that cloud-computing is still nascent.


I'd rather be AMZN than Walmart any day of the week when it comes to e-commerce. 


Size will ultimately drag on growth, but not for ten or more years.


The FCs and logistical knowledge are competitive advantages.  The Kiva robots are competitive advantages.  The Kindle ecosystem is a competitive advantage.  The dozens of applications they've built for AWS are competitive advantages. The fact that I don't price shop and now think of AMZN when buying pretty much everything except for food and some clothes is a competitive advantage.


The logistical stuff takes years to figure out and build.  If they stopped tomorrow they would still have lower costs and better knowledge at this stuff than anyone else.  But why would you ever want to stop when you could have more in the future? 


WMT is good at the retail store model, but AMZN handles 100X the number of items and e-commerce ultimately presents different logistical challenges.
Title: Re: AMZN - Amazon.com Inc.
Post by: Palantir on July 25, 2014, 09:41:48 AM
The AWS alone could potentially be bigger than the retail operations, aka a monster. This is a 4B Revenue business growing at 40% annually.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on July 25, 2014, 09:48:43 AM
Last saturday I went to return a quad-copter I had purchased that had a motor stop working after a couple of days.


At about noon I did the two step process to return it; I marked it as defective.  I checked that I wanted a replacement. I finished the process and an hour later I got an email saying, we're sending you a replacement and it will be there in a few hours.  A replacement showed up at about 6PM.

You can't beat that. 
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on July 25, 2014, 09:50:36 AM
I also want to reiterate - I think Amazon is a fantastic company.  I use them regularly.  I would even invest in the stock very happily given the moat I think they have.  But anything near today's stock price just doesn't make sense to me.

Market cap is over $150bn and there's $1bn of FCF.  If you are investing for the next 40 quarters, to get say a 12% annualized return on your investment (which is not excessive given the time and risk) implies that in 10 years the market cap will be $520bn.  Assuming that it is then trading off of a FCF multiple (and not still a revenue multiple with no profitability), even at a 20x multiple implies $26bn of FCF.  That's a MASSIVE assumption for only 12% annual return.


Yeah so digging really deeply into the financials and estimating what they're spending on growth expenses is really important to thinking AMZN's a good investment now.
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on July 25, 2014, 10:31:47 AM
Last saturday I went to return a quad-copter I had purchased that had a motor stop working after a couple of days.


At about noon I did the two step process to return it; I marked it as defective.  I checked that I wanted a replacement. I finished the process and an hour later I got an email saying, we're sending you a replacement and it will be there in a few hours.  A replacement showed up at about 6PM.

You can't beat that.

You can't beat that as a customer.  No question.  But did Amazon make money on that?

Two weeks ago we got my daughter a little sand box.  I ordered 2 50lb bags of sand on Amazon.  It cost less than $10 a bag and because I did it thru my wife's Prime account it was free shipping.  When we got it we realized that we needed more (100lbs of sand isn't as much as you'd think!).  So we repeated the process.  We paid less than $40 for 200lbs of sand that was delivered for free.  As a customer I'm thrilled.  But there's no way Amazon made money on that sale.
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on July 25, 2014, 10:36:13 AM
I also want to reiterate - I think Amazon is a fantastic company.  I use them regularly.  I would even invest in the stock very happily given the moat I think they have.  But anything near today's stock price just doesn't make sense to me.

Market cap is over $150bn and there's $1bn of FCF.  If you are investing for the next 40 quarters, to get say a 12% annualized return on your investment (which is not excessive given the time and risk) implies that in 10 years the market cap will be $520bn.  Assuming that it is then trading off of a FCF multiple (and not still a revenue multiple with no profitability), even at a 20x multiple implies $26bn of FCF.  That's a MASSIVE assumption for only 12% annual return.


Yeah so digging really deeply into the financials and estimating what they're spending on growth expenses is really important to thinking AMZN's a good investment now.

It's better investment strategy than hoping!  My point is you can't extrapolate the general assumption of future long term growth and potential profitability to justify any price today.  At some price today it's a steal and at some price it's way overvalued.  How do you make that determination without putting some implicit numbers on that future cash flow or stock price?
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on July 25, 2014, 10:43:19 AM

The retailers you cited above made money for many years.  They didn't not make money in every single year of their existence.  Even Costco earns 3% operating margins on their 13% gross margin.


They don't have to 'shutoff any freebies'.  I don't watch Instant Video nor do I use the Kindle book library.  That's not why I and many others shop at AMZN.  It's because I trust that I'm getting a good price and what I order will reliably arrive in two days.  I don't even price shop anymore (except for the occasional large ticket item).  I don't listen to the music either. 

You may not care about the freebies but I'm guessing you have been a Prime customer for years.  In order to sign up new Prime customers Amazon obviously feels that the freebies are important (otherwise why do it - why give away something you don't have to).  And once you start the freebies it's tough to stop them.  If they started charging separately for all those freebies on Prime, how difficult would it be to sign up new customers and how many existing would decide to drop it?

Those retailers made money for years and then slowly stopped and are dying.  Amazon is hoping to do the reverse (not die, turn from no profits to profits).  I'd argue, how many multi billion dollar retailers have shown the ability to do that - while growing revenues?  I can't think of any.
Title: Re: AMZN - Amazon.com Inc.
Post by: Laxputs on July 25, 2014, 01:22:18 PM
This really reminds me of studying Thomas Kuhn's Incommensurability in University years ago. Where two theorists are not speaking the same language as one another so trying to present their respective arguments is futile. As in two different paradigms of thought.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on July 25, 2014, 01:32:58 PM
I don't think we're quite that different. 


It's just that I have more conviction about somethings and am weighing certain items more positively than dwy000 is.  I have more conviction about the future because of certain past items and these aren't convincing (or I haven't conveyed the material that convinces me) enough to dwy000, which is of course fine.


We do agree that AMZN is a fantastic company though, so that's nice.
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on July 25, 2014, 02:01:29 PM
I don't think we're quite that different. 


It's just that I have more conviction about somethings and am weighing certain items more positively than dwy000 is.  I have more conviction about the future because of certain past items and these aren't convincing (or I haven't conveyed the material that convinces me) enough to dwy000, which is of course fine.


We do agree that AMZN is a fantastic company though, so that's nice.

Completely agree!!!!
Title: Re: AMZN - Amazon.com Inc.
Post by: DTEJD1997 on July 25, 2014, 08:27:55 PM
Two weeks ago we got my daughter a little sand box.  I ordered 2 50lb bags of sand on Amazon.  It cost less than $10 a bag and because I did it thru my wife's Prime account it was free shipping.  When we got it we realized that we needed more (100lbs of sand isn't as much as you'd think!).  So we repeated the process.  We paid less than $40 for 200lbs of sand that was delivered for free.  As a customer I'm thrilled.  But there's no way Amazon made money on that sale.

I am going to assume that your are serious...

WHO'S IDEA IS IT TO SELL SAND ON THE INTERWEB????I want to see the account executive that said "selling 50 lbs. bags of sand is where we need to take this company."  Better yet, we'll offer FREE SHIPPING & put local mom & pop sand sellers out of business!  Just think when we've cornered the market on sand!

This makes me think of internet bubble 2.0.
Title: Re: AMZN - Amazon.com Inc.
Post by: LC on July 25, 2014, 09:00:42 PM
Last saturday I went to return a quad-copter I had purchased that had a motor stop working after a couple of days.


At about noon I did the two step process to return it; I marked it as defective.  I checked that I wanted a replacement. I finished the process and an hour later I got an email saying, we're sending you a replacement and it will be there in a few hours.  A replacement showed up at about 6PM.

You can't beat that.

You can't beat that as a customer.  No question.  But did Amazon make money on that?

Two weeks ago we got my daughter a little sand box.  I ordered 2 50lb bags of sand on Amazon.  It cost less than $10 a bag and because I did it thru my wife's Prime account it was free shipping.  When we got it we realized that we needed more (100lbs of sand isn't as much as you'd think!).  So we repeated the process.  We paid less than $40 for 200lbs of sand that was delivered for free.  As a customer I'm thrilled.  But there's no way Amazon made money on that sale.

You're right. But do you order books on Amazon? Kitchen supplies? Etc. etc. etc.? Those orders they do make money on. Moreso than Walmart and others. So delivering you that sand (which Amazon assumues you order less frequently than books etc.) ensures that you remain a customer, and it ingrains you into the "Amazon ecosystem" (to steal a term from the Apple thesis).

Also, do we know the specifics of their contracts with their delivery partners? We don't know how much they lost on the sale. Perhaps due to the massive volume of business they do with Fedex or UPS or whomever, they may have broken even on the sale.
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on July 25, 2014, 09:18:33 PM
I was completely serious about the sand story.  I was shocked myself.

Yes, I order a bunch of smaller items on Amazon.  So they make money off me on the items sold I guess but most of that has to be offset by the shipping costs where we have gotten more than our $99 worth.  We're pretty inefficient about it.  We'll order a single book, then later that day order some stickers for the kids or something.  So we will get multiple deliveries of $5 items.  Before Prime I would have grouped them all into a single purchase but will free delivery we don't even think about it. Not my cost.
Title: Re: AMZN - Amazon.com Inc.
Post by: Laxputs on July 25, 2014, 09:47:27 PM
We're pretty inefficient about it.  We'll order a single book, then later that day order some stickers for the kids or something.

I literally laughed out loud when I read this. Good stuff.
Title: Re: AMZN - Amazon.com Inc.
Post by: bargainman on July 26, 2014, 03:34:04 PM
I was completely serious about the sand story.  I was shocked myself.

Yes, I order a bunch of smaller items on Amazon.  So they make money off me on the items sold I guess but most of that has to be offset by the shipping costs where we have gotten more than our $99 worth.  We're pretty inefficient about it.  We'll order a single book, then later that day order some stickers for the kids or something.  So we will get multiple deliveries of $5 items.  Before Prime I would have grouped them all into a single purchase but will free delivery we don't even think about it. Not my cost.

Fair enough, but until you get to that point remember that you have given Amazon the money upfront and therefore this is essentially some sort of float. I do pretty much the same though :-)
Title: Re: AMZN - Amazon.com Inc.
Post by: bargainman on July 26, 2014, 03:38:02 PM

Another question I have is: Do you believe that AMZN is truly the only company on the planet that can't and won't generate material profitability with hundreds of billions of dollars of sales? 


I think it ultimately comes down to the old adage about one bird in the hand versus two in the bush:-) ultimately you are trusting that all of this investment is going to become some kind of moneymaker in the future because Amazon is not booking these profits today. I think they are certainly investing in some things that are going to be long-term investments, but there are other things where they are seemingly just not making A profit. 

To be honest I think one of their biggest advantages is that they are willing to run a very tight margin operation but go into businesses that have traditionally had really wide margins.
Title: Re: AMZN - Amazon.com Inc.
Post by: Palantir on July 28, 2014, 08:26:21 AM
This article's title is not entirely accurate in that MS and IBM make a lot of their revenues on higher margin applications, whereas AMZN is more of an infrastructure provider, but going forward I think this is going to be a big concern for AMZN. MS has a presence in both public and private clouds, and has obviously a much larger portfolio on the application end in addition to a very large installed base of clients. Google is also emerging in this space, but I don't really see what Google's edge is.

I would like to see AMZN increase their applications portfolio....if only Salesforce was cheaper.

Amazon Is Facing A Cloud Crisis, As Microsoft Muscles In
http://www.forbes.com/sites/georgeanders/2014/07/28/amazon-is-facing-a-cloud-crisis-as-microsoft-muscles-in/?partner=yahootix
Title: Re: AMZN - Amazon.com Inc.
Post by: Liberty on July 29, 2014, 09:39:31 AM
Interesting piece on how Amazon might be losing its strategic focus:

http://stratechery.com/2014/losing-amazon-religion/
Title: Re: AMZN - Amazon.com Inc.
Post by: Grenville on July 29, 2014, 11:31:15 AM
"CEO Who Sold Diapers.com to Amazon Raises $55 Million to Challenge Amazon Again"

http://recode.net/2014/07/29/ceo-who-sold-diapers-com-to-amazon-raises-55-million-to-challenge-amazon-again/ (http://recode.net/2014/07/29/ceo-who-sold-diapers-com-to-amazon-raises-55-million-to-challenge-amazon-again/)


Marc Lore's Blog post confirming capital raise:

http://marcericlore.tumblr.com/post/93220359281/jet-a-new-era-of-transparency-and-empowerment-in (http://marcericlore.tumblr.com/post/93220359281/jet-a-new-era-of-transparency-and-empowerment-in)
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on July 31, 2014, 09:03:19 AM

http://recode.net/2014/07/30/why-amazon-is-pouring-2-billion-into-india-in-three-charts/ (http://recode.net/2014/07/30/why-amazon-is-pouring-2-billion-into-india-in-three-charts/)


AMZN started expanding internationally at the age of ~6, not 30 like Walmart.  Their international expansion is probably the biggest reason they don't show more income.  Indeed the N. American segment does have a 4% operating margin if you allocate half of stock-comp. to it despite having all technology (developers) costs allocated to it (which is the right thing to do in your highest corp. tax jurisdiction if you care about maximizing cash flows).  You won't see this fact in any headline though!


Startup operations may take years to become profitable. To us, it's definitely worth making a huge investment and effort in trying to gain footholds in additional wealthy and/or populous countries like India. 


Wouldn't you rather your company make a huge effort in immediately expanding internationally or just develop its own market and let others have the rest?


Title: Re: AMZN - Amazon.com Inc.
Post by: txlaw on August 02, 2014, 03:46:31 PM
From Scratch interview with the Quidsi founders:

http://www.fromscratchradio.com/show/vinnie-bharara-and-marc-lore

Incidentally, I believe Vinnie Bharara is Preet Bharara's brother.
Title: Re: AMZN - Amazon.com Inc.
Post by: Grenville on August 02, 2014, 04:20:44 PM
From Scratch interview with the Quidsi founders:

http://www.fromscratchradio.com/show/vinnie-bharara-and-marc-lore

Incidentally, I believe Vinnie Bharara is Preet Bharara's brother.

He is his brother. This is an old interview, but still good. The version I have on my computers is longer ~51mins. It might be this one:
http://www.npr.org/2013/09/18/223785364/marc-lore-and-vinnie-bharara-founders-of-diapers-com (http://www.npr.org/2013/09/18/223785364/marc-lore-and-vinnie-bharara-founders-of-diapers-com)
Title: Re: AMZN - Amazon.com Inc.
Post by: frommi on August 07, 2014, 07:26:01 AM
After reading Buffet and Pabrai both mention Amazon as a very nice business, i am scratching my head around what the right price may be.
At 10xEV/EBITDA its probably really cheap, 15-20x EV/EBITDA can be a fair price when i look at KO or GOOG. For me at the current price its too expensive, even if it grows EBITDA by 30%. What are you using to value Amazon?
Title: Re: AMZN - Amazon.com Inc.
Post by: Palantir on August 07, 2014, 07:39:25 AM
Use CFO, and estimate a normalized CapX figure to estimate "owner earnings". Curious to know what multiple of this figure you think it should be worth. I would say that it is not "cheap", but given its growth ahead, I think it is reasonable.
Title: Re: AMZN - Amazon.com Inc.
Post by: frommi on August 07, 2014, 08:11:54 AM
Thats 2 billion $ or 1.4% owner earnings?  So it takes 5 years of 30% growth to come to something more reasonable like 4-5%?
Title: Re: AMZN - Amazon.com Inc.
Post by: Palantir on August 07, 2014, 08:29:09 AM
Why are you using such a high capX figure? Did you just use CapX = D&A?
Title: Re: AMZN - Amazon.com Inc.
Post by: frommi on August 07, 2014, 08:59:32 AM
Why are you using such a high capX figure? Did you just use CapX = D&A?

I used the numbers out of the last annual report. What numbers do you use?

Quote
Capital expenditures were $3.4 billion, $3.8 billion, and $1.8 billion during 2013, 2012, and 2011.
Title: Re: AMZN - Amazon.com Inc.
Post by: LC on August 07, 2014, 09:16:24 AM
What the heck did they spend 2b on? (Sorry I just follow Amzn for the entertainment)
Title: Re: AMZN - Amazon.com Inc.
Post by: Palantir on August 07, 2014, 09:22:04 AM
^ Hookers and blow?
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on August 07, 2014, 11:51:46 AM
^ Hookers and blow?

And the rest was just wasted.  (old joke but a good one)
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on August 07, 2014, 11:54:18 AM
It was building out data centers and distribution centers (and capitalizing software and content etc).

Interesting that Microsoft indicated they expected to spend $5bn in capex building out infrastructure for their cloud platform this year - and they are a far distant second to AMZN in terms of size.
Title: Re: AMZN - Amazon.com Inc.
Post by: dolce far niente on August 09, 2014, 11:06:43 PM
First post :D

http://gigaom.com/2014/08/09/3-areas-where-amazon-web-services-might-be-vulnerable-if-the-competition-can-exploit-them/
Title: Re: AMZN - Amazon.com Inc.
Post by: Palantir on August 13, 2014, 11:19:46 AM

How Amazon Intends to Crush Square in Mobile Payments

http://www.thestreet.com/story/12843173/2/how-amazon-intends-to-crush-square-in-mobile-payments.html

This reader + Kindle would be a great combo. Just went to two Gyro places where the only checkout counter ran a Square reader + iPad. This will do the same thing and and likely be cheaper.
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on August 13, 2014, 12:14:48 PM
I was in Half Moon Bay, CA this weekend and every single store we went in - every one - was using Square.  It was like they were giving them away!

Apparently Square is struggling because they continue to lose money despite the volume growth.  It will be interesting to see how Amazon plans to make money at it with lower fees (although one could argue that big revenue dollars with no profits is right up Amazon's area of expertise).
Title: Re: AMZN - Amazon.com Inc.
Post by: ni-co on August 13, 2014, 11:15:44 PM
Thats 2 billion $ or 1.4% owner earnings?  So it takes 5 years of 30% growth to come to something more reasonable like 4-5%?

This is exactly what I'm thinking, too. At the end I put it into the "to hard" pile, not because it's difficult to understand – quite the opposite. My problem with AMZN is that its growth potential is obvious, its strategy to achieve that growth makes complete sense and I don't see why they shouldn't succeed. My problem is that everybody knows this. I have to come up with far better growth estimates than the consensus does to make money with AMZN – and I don't think I'm able to do that.
Title: Re: AMZN - Amazon.com Inc.
Post by: dolce far niente on August 14, 2014, 08:11:24 AM
http://www.bloomberg.com/news/2014-08-13/amazon-helps-mom-and-pop-store-in-barcelona-reach-global-village.html

"The company offers two separate services. Marketplace allows retailers to list their products on Amazon.com where they are picked up alongside Amazon’s own offerings in client searches. The logistics service goes a step further, handling the delivery as well. Amazon even stores products for some clients in its own warehouses to reduce delivery times. Retailers pay a monthly fee of 39 euros plus a commission starting at 7 percent.

Spanish third-party sales on Amazon’s websites have risen 300 percent over the past year while the logistics business grew 200 percent, Alvira said."
Title: Re: AMZN - Amazon.com Inc.
Post by: muscleman on August 14, 2014, 09:06:38 AM
http://www.oakmark.com/Commentary/Commentary-Archives/2Q14--Bill-Nygren.htm?rf=dr

"You bought what?
That brings me to our newest position, which will no doubt make some question our credentials as value investors: Amazon.

Consensus forward earnings for Amazon are a little over a dollar. At the median forward P/E multiple, Amazon would be priced in the low $20s. So, even though the stock fell $124 from its January high of $408 to a May low of $284, its P/E ratio remained in nosebleed territory. But we have never believed the P/E ratio was the be-all and end-all for valuation. Amazon is a retailer – a very efficient retailer. When we compare stocks in the same industry, we often compare their market caps to their sales rather than their earnings.  Since 2001, Amazon has generally traded at a cap-to-sales ratio of two to four times that of the average bricks-and-mortar retailer.  Having fallen to just under two recently, one might say that, as an advantaged retailer, Amazon looks somewhat attractive.

But that metric misses an important change in Amazon’s business.  Third-party sales (sales on amazon.com where the seller is not Amazon) have grown more rapidly than Amazon’s direct business.  And on those transactions, accounting rules credit only Amazon's commission as revenue.  So if you buy a $100 item on amazon.com from a third party, Amazon is only allowed to show about $13 of revenue, nearly all of which is gross profit.  For third-party sales, Amazon is effectively functioning as the mall owner, collecting a percentage of sales as rent.  Amazon earns less gross profit on that sale than an average retailer would, but it is also a much lower risk endeavor.  For that reason, we think a dollar of third-party sales should be worth about the same as a dollar that Amazon sells directly.

It gets interesting when we adjust our cap-to-sales ratio comparison to include estimated gross third-party sales.  Instead of selling at twice the ratio to sales of the average bricks–and-mortar retailer, Amazon is selling at only 80%.  So, relative to gross sales, Amazon's stock would have to increase 25% to be priced consistent with the very companies whose survival Amazon is threatening.  On that metric, Amazon has never been cheaper.

Should Amazon sell at a discount on sales? The answer largely rests on what Amazon could earn if it wasn’t investing so heavily for future growth.  For most asset heavy businesses, growth investment is primarily on the balance sheet, and is slowly expensed on the income statement as depreciation throughout its useful life.  In an asset–lite business like Amazon, however, most growth spending gets directly expensed to the income statement, creating a much larger immediate reduction in income.  We believe that if Amazon sharply curtailed its growth spending so that it only grew at the rate other retailers grow, it could produce similar operating margins.  But we don't want them to do that.  We believe that management is maximizing value by investing heavily for super-normal organic growth.  So, yes, Amazon is a rapidly growing business.  But at this price, we believe it is also a value stock."



=============================================================
This is a new perspective that I've never seen from other value investors. I flipped through the 10-Q and 10-K but didn't find anything about the breakdown of their service revenue, which consists of third-party commissions and AWS. Do you have any thoughts?
Title: Re: AMZN - Amazon.com Inc.
Post by: muscleman on August 14, 2014, 09:11:35 AM
After reading Buffet and Pabrai both mention Amazon as a very nice business, i am scratching my head around what the right price may be.
At 10xEV/EBITDA its probably really cheap, 15-20x EV/EBITDA can be a fair price when i look at KO or GOOG. For me at the current price its too expensive, even if it grows EBITDA by 30%. What are you using to value Amazon?

Where did you see Buffet saying that? Could you share with us a link?
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on August 14, 2014, 10:04:41 AM
Muscleman: the FBA business is the reason I harp on the fact that gross profit is growing at 33% while sales are 'only' growing at 23%. 


The third-party business is why I believe that gross profit growth is a more accurate measure of how fast AMZN's total retail business is growing.  AWS accounts for some of this gross profit growth, or at least it did until last quarter.


The FBA business is another reason why AMZN will eventually settle with FCF margins greater than 10%, especially if AWS and FBA continue to grow like they have.


http://www.bidnessetc.com/24122-amazon-rises-ebay-falters-after-channeladvisor-reports-july-comps-sales/ (http://www.bidnessetc.com/24122-amazon-rises-ebay-falters-after-channeladvisor-reports-july-comps-sales/)


"Amazon was the pick of the lot last month with a 40.4% jump in same-store sales from the same month last year. That was up considerably from the 34.4% year-over-year (YoY) growth it posted in June, and its highest gain in over 12 months. Amazon’s comp sales growth has in fact risen consistently every month over the course of the year. That confirmed what many on Wall Street know already – Amazon’s might in the online retail space has not lost its luster.Meanwhile, same-store sales at the company’s rival eBay, Inc. (EBAY) (http://www.bidnessetc.com/company/ebay/) rose only 9.7%, down from the 12.3% growth in June, showing a slight weakness of late. Auction sales declined 8.2% at eBay, while comp sales of fixed price items rose 12.8%. Auto sales at eBay rose 8% for the month."
Title: Re: AMZN - Amazon.com Inc.
Post by: link01 on August 14, 2014, 12:08:54 PM
Muscleman: the FBA business is the reason I harp on the fact that gross profit is growing at 33% while sales are 'only' growing at 23%. 


The third-party business is why I believe that gross profit growth is a more accurate measure of how fast AMZN's total retail business is growing.  AWS accounts for some of this gross profit growth, or at least it did until last quarter.


The FBA business is another reason why AMZN will eventually settle with FCF margins greater than 10%, especially if AWS and FBA continue to grow like they have.


http://www.bidnessetc.com/24122-amazon-rises-ebay-falters-after-channeladvisor-reports-july-comps-sales/ (http://www.bidnessetc.com/24122-amazon-rises-ebay-falters-after-channeladvisor-reports-july-comps-sales/)


"Amazon was the pick of the lot last month with a 40.4% jump in same-store sales from the same month last year. That was up considerably from the 34.4% year-over-year (YoY) growth it posted in June, and its highest gain in over 12 months. Amazon’s comp sales growth has in fact risen consistently every month over the course of the year. That confirmed what many on Wall Street know already – Amazon’s might in the online retail space has not lost its luster.Meanwhile, same-store sales at the company’s rival eBay, Inc. (EBAY) (http://www.bidnessetc.com/company/ebay/) rose only 9.7%, down from the 12.3% growth in June, showing a slight weakness of late. Auction sales declined 8.2% at eBay, while comp sales of fixed price items rose 12.8%. Auto sales at eBay rose 8% for the month."

I doubt amzn is targeting FCF or any other kind of margin close to 10%. their whole modus operandi has been to trade margin or profitability for profit dollars. their predominantly digital retail assets give them a cost advantage over retailers with physical stores, allowing them to price goods lower at higher profit dollars. along with size, scale, network effect, its part of their secret sauce. my guess is that they are targeting operating margins somewhere between Costco's & walmart's 3 & 6%. and considering amzn's continued 20-30% growth I'd say they can price most things lower at their margin---whatever it really is underneath all those massive growth expenses- and steal share from everybody else.as Bezos has said: "your margin is our opportunity."
Title: Re: AMZN - Amazon.com Inc.
Post by: muscleman on August 14, 2014, 06:27:24 PM
Muscleman: the FBA business is the reason I harp on the fact that gross profit is growing at 33% while sales are 'only' growing at 23%. 


The third-party business is why I believe that gross profit growth is a more accurate measure of how fast AMZN's total retail business is growing.  AWS accounts for some of this gross profit growth, or at least it did until last quarter.


The FBA business is another reason why AMZN will eventually settle with FCF margins greater than 10%, especially if AWS and FBA continue to grow like they have.


http://www.bidnessetc.com/24122-amazon-rises-ebay-falters-after-channeladvisor-reports-july-comps-sales/ (http://www.bidnessetc.com/24122-amazon-rises-ebay-falters-after-channeladvisor-reports-july-comps-sales/)


"Amazon was the pick of the lot last month with a 40.4% jump in same-store sales from the same month last year. That was up considerably from the 34.4% year-over-year (YoY) growth it posted in June, and its highest gain in over 12 months. Amazon’s comp sales growth has in fact risen consistently every month over the course of the year. That confirmed what many on Wall Street know already – Amazon’s might in the online retail space has not lost its luster.Meanwhile, same-store sales at the company’s rival eBay, Inc. (EBAY) (http://www.bidnessetc.com/company/ebay/) rose only 9.7%, down from the 12.3% growth in June, showing a slight weakness of late. Auction sales declined 8.2% at eBay, while comp sales of fixed price items rose 12.8%. Auto sales at eBay rose 8% for the month."

Could you please tell me where you get the revenue number for FBA? In the 10-Q and 10-K, I don't find the breakdown of their services revenue.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on August 14, 2014, 06:45:31 PM
No one knows FBA revenue.  We do know third-party units sold are 41% of total units which Amazon makes just commissions on.  This is the biggest contributor to gross profit and gross margin growth.

I don't think AMZN is targeting any FCF margin, agreed; that's just what I think the very long-term base of what AMZN will earn.  I'm thinking 10+ years so we might not be on the same page with with the time horizon...
Title: Re: AMZN - Amazon.com Inc.
Post by: muscleman on August 15, 2014, 07:47:20 AM
No one knows FBA revenue.  We do know third-party units sold are 41% of total units which Amazon makes just commissions on.  This is the biggest contributor to gross profit and gross margin growth.

I don't think AMZN is targeting any FCF margin, agreed; that's just what I think the very long-term base of what AMZN will earn.  I'm thinking 10+ years so we might not be on the same page with with the time horizon...

so it is pretty much a guess. I don't mean FBA revenue along. I meant third party revenue. Some third party choose FBA but some don't.
The over $4bn services revenue is from third party commissions + AWS + a few other things, so it is hard to find out what exactly is the third party revenue.
Title: Re: AMZN - Amazon.com Inc.
Post by: muscleman on August 15, 2014, 10:21:03 AM
I read through these comments again but still can't understand it.

"It gets interesting when we adjust our cap-to-sales ratio comparison to include estimated gross third-party sales.  Instead of selling at twice the ratio to sales of the average bricks–and-mortar retailer, Amazon is selling at only 80%."
http://www.oakmark.com/Commentary/Commentary-Archives/2Q14--Bill-Nygren.htm?rf=dr


Right now Costco and Walmart has price/sales ratio of 0.5, so Nygren is saying that AMZN's adjusted price/sales is 0.4 right now.
AMZN's market cap is 154 B. So Nygren's estimated adjusted sales is 385 B.

http://google.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=9739502-812-328695&type=sect&TabIndex=2&companyid=7235&ppu=%252fdefault.aspx%253fsym%253dAMZN
I am not sure how to get to this 385 B number. According to 2013 10-K, product sales revenue is 60 B and services revenue is 13 B, which includes third party fees, AWS etc.
Even if we assume the 13 B is entirely third party fees, and we assume AMZN charges 13% commision, then the third party sales is merely 100 B, which makes the total annual adjusted sales to be 160 B.

How does he get the 385 B number? ::)
Title: Re: AMZN - Amazon.com Inc.
Post by: handycap5 on August 15, 2014, 10:27:33 AM
My guess at GMV (excl. AWS) is ~$140B in 2014. I use the 40% 3P units (given by company), $3.8B guess for AWS revenue, 1P and 3P having same ASP, and 10% 3P take rate (Nygren seems to imply 13% take rate).
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on August 15, 2014, 12:45:46 PM
I read through these comments again but still can't understand it.

"It gets interesting when we adjust our cap-to-sales ratio comparison to include estimated gross third-party sales.  Instead of selling at twice the ratio to sales of the average bricks–and-mortar retailer, Amazon is selling at only 80%."
http://www.oakmark.com/Commentary/Commentary-Archives/2Q14--Bill-Nygren.htm?rf=dr


Right now Costco and Walmart has price/sales ratio of 0.5, so Nygren is saying that AMZN's adjusted price/sales is 0.4 right now.
AMZN's market cap is 154 B. So Nygren's estimated adjusted sales is 385 B.

http://google.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=9739502-812-328695&type=sect&TabIndex=2&companyid=7235&ppu=%252fdefault.aspx%253fsym%253dAMZN
I am not sure how to get to this 385 B number. According to 2013 10-K, product sales revenue is 60 B and services revenue is 13 B, which includes third party fees, AWS etc.
Even if we assume the 13 B is entirely third party fees, and we assume AMZN charges 13% commision, then the third party sales is merely 100 B, which makes the total annual adjusted sales to be 160 B.

How does he get the 385 B number? ::)

My guess is two things:  a) that he's not using WalMart or Costco as the typical bricks and mortar stores.  If he says they're trading at double the typical bricks store he must be using 1x sales as his typical figure (since Amazon trades at 2x 2013 sales).  b) if you take 80% of the "typical" sales/cap multiple he's saying Amazon is trading at 0.80 of grossed up revenues.  That would imply total revenues of about $190bn if you grossed up the 3rd party sales.  That still implies third party sales of $115bn which can't be right (and that's starting with total revenues not product revenues which would balloon the third party sales even more).
Title: Re: AMZN - Amazon.com Inc.
Post by: muscleman on August 15, 2014, 01:42:42 PM
I read through these comments again but still can't understand it.

"It gets interesting when we adjust our cap-to-sales ratio comparison to include estimated gross third-party sales.  Instead of selling at twice the ratio to sales of the average bricks–and-mortar retailer, Amazon is selling at only 80%."
http://www.oakmark.com/Commentary/Commentary-Archives/2Q14--Bill-Nygren.htm?rf=dr


Right now Costco and Walmart has price/sales ratio of 0.5, so Nygren is saying that AMZN's adjusted price/sales is 0.4 right now.
AMZN's market cap is 154 B. So Nygren's estimated adjusted sales is 385 B.

http://google.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=9739502-812-328695&type=sect&TabIndex=2&companyid=7235&ppu=%252fdefault.aspx%253fsym%253dAMZN
I am not sure how to get to this 385 B number. According to 2013 10-K, product sales revenue is 60 B and services revenue is 13 B, which includes third party fees, AWS etc.
Even if we assume the 13 B is entirely third party fees, and we assume AMZN charges 13% commision, then the third party sales is merely 100 B, which makes the total annual adjusted sales to be 160 B.

How does he get the 385 B number? ::)

My guess is two things:  a) that he's not using WalMart or Costco as the typical bricks and mortar stores.  If he says they're trading at double the typical bricks store he must be using 1x sales as his typical figure (since Amazon trades at 2x 2013 sales).  b) if you take 80% of the "typical" sales/cap multiple he's saying Amazon is trading at 0.80 of grossed up revenues.  That would imply total revenues of about $190bn if you grossed up the 3rd party sales.  That still implies third party sales of $115bn which can't be right (and that's starting with total revenues not product revenues which would balloon the third party sales even more).

I am not a fan of relative valuation. In addition, I think AMZN is more comparable to WMT and Costco instead of the department stores. WMT and Costco sell at razor thin margins and gain the advantage from scale and efficiency. Department stores sell things at a premium but they can because their location is good and people want to spend time there.

So if we use $140 B adjusted sales, AMZN is trading at 1.1x P/S, which is much more expensive than WMT and Costco.
Title: Re: AMZN - Amazon.com Inc.
Post by: Laxputs on August 22, 2014, 02:53:43 PM
Been reading this piece of capital allocation:  http://www.valuewalk.com/wp-content/uploads/2014/08/document-1036635381.pdf

Just thought it was interesting how R&D is expensed on the income statement because its future is thought of as too uncertain to quantify. Given the ridiculous amount of new products at Amazon, the amount of R&D expenditures must be huge and eventually that will get drastically reduced. This has been mentioned a few times though I know.
Title: Re: AMZN - Amazon.com Inc.
Post by: Laxputs on August 22, 2014, 03:56:36 PM
Funny, Bezos is quoted in the report as I keep reading:

Finally, recognize that the debate about the short term versus the long term is an empty one. Instead,
acknowledge that the goal is to maximize long-term value per share. This applies to activities that
management expects to pay off quickly or in the distant future. Amazon.com is a company that appears
comfortable taking a long-term view. The company’s CEO, Jeff Bezos, argues that there is less competition
for long-term initiatives. He says, “If everything you do needs to work on a three-year time horizon, then you’re
competing against a lot of people. But if you’re willing to invest on a seven-year time horizon, you’re now
competing against a fraction of those people, because very few companies are willing to do that. Just by
lengthening the time horizon, you can engage in endeavors that you could never otherwise pursue. At Amazon
we like things to work in five to seven years.” 109
Title: Re: AMZN - Amazon.com Inc.
Post by: muscleman on August 23, 2014, 10:05:17 AM
I read through these comments again but still can't understand it.

"It gets interesting when we adjust our cap-to-sales ratio comparison to include estimated gross third-party sales.  Instead of selling at twice the ratio to sales of the average bricks–and-mortar retailer, Amazon is selling at only 80%."
http://www.oakmark.com/Commentary/Commentary-Archives/2Q14--Bill-Nygren.htm?rf=dr


Right now Costco and Walmart has price/sales ratio of 0.5, so Nygren is saying that AMZN's adjusted price/sales is 0.4 right now.
AMZN's market cap is 154 B. So Nygren's estimated adjusted sales is 385 B.

http://google.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=9739502-812-328695&type=sect&TabIndex=2&companyid=7235&ppu=%252fdefault.aspx%253fsym%253dAMZN
I am not sure how to get to this 385 B number. According to 2013 10-K, product sales revenue is 60 B and services revenue is 13 B, which includes third party fees, AWS etc.
Even if we assume the 13 B is entirely third party fees, and we assume AMZN charges 13% commision, then the third party sales is merely 100 B, which makes the total annual adjusted sales to be 160 B.

How does he get the 385 B number? ::)

My guess is two things:  a) that he's not using WalMart or Costco as the typical bricks and mortar stores.  If he says they're trading at double the typical bricks store he must be using 1x sales as his typical figure (since Amazon trades at 2x 2013 sales).  b) if you take 80% of the "typical" sales/cap multiple he's saying Amazon is trading at 0.80 of grossed up revenues.  That would imply total revenues of about $190bn if you grossed up the 3rd party sales.  That still implies third party sales of $115bn which can't be right (and that's starting with total revenues not product revenues which would balloon the third party sales even more).

I am not a fan of relative valuation. In addition, I think AMZN is more comparable to WMT and Costco instead of the department stores. WMT and Costco sell at razor thin margins and gain the advantage from scale and efficiency. Department stores sell things at a premium but they can because their location is good and people want to spend time there.

So if we use $140 B adjusted sales, AMZN is trading at 1.1x P/S, which is much more expensive than WMT and Costco.

JAllen, do you have any thoughts on that? The numbers don't seem to match Nygren's conclusion. :-\
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on August 23, 2014, 11:15:58 AM
I've never really thought about AMZN in a relative-value way.  I think relative value is one of the less reliable valuation methods except for when there's a structural reason one stock is trading lower than comps., like tiny illiquid stocks trading cheaper than SEC-registered counterparts. 


I also think that AMZN isn't directly comparable to these other companies: AMZN is in many, much different, arguably better businesses than WMT/TGT/COST. AMZN's FBA revenue, however much it is, should be priced similarly to eBay's commission revenue (FBA is more capital intensive than eBay's pure commission model but is growing way faster).


But anyways, I've always thought about AMZN in an absolute way: how much will our sales and FCF be in 5-10-20 years.  I do think about AMZN's sales relative to WMT's current/peak sales and how much bigger they could be because AMZN is operating in more parts of the economy and sells orders of magnitude more SKUs.  But AMZN is structurally very different than WMT.


Chad from Peridot Capital rightfully pointed out that AMZN already has operating cash flow margins higher than the big B&M retailers (http://www.peridotcapital.com/2014/06/profitless-amazon-myth-lives-on-thanks-to-lazy-financial-media.html) which would make AMZN's sales worth more than theirs.  We know that not ever having to purchase sub-urban real estate, more automation and software driven makes AMZN less capital intensive so every dollar of sales should be worth more. 


Last thing: AMZN's gross margin this past quarter, 30.7%, just matched TGT's and is still expanding, so now it has gross margins that are higher than WMT/TGT/COST too.
Title: Re: AMZN - Amazon.com Inc.
Post by: Palantir on August 23, 2014, 11:44:59 AM
Amazon Prepares Online Advertising Program
http://online.wsj.com/articles/amazon-preps-a-challenge-to-googles-ad-business-1408747979

Quote
Amazon.com Inc. AMZN -0.40%  is gearing up to more directly challenge Google Inc. GOOGL +0.02%  's dominance of the online advertising market, developing its own software for placing ads online that could leverage its knowledge of millions of Web shoppers.

Initially, Amazon plans to replace those ads on its pages that Google chiefly supplies with a new in-house ad placement platform, said people familiar with the matter. In the future, that system could challenge Google's $50 billion-a-year advertising business and Microsoft Corp.'s MSFT -0.15%  , they added.
Title: Re: AMZN - Amazon.com Inc.
Post by: KCLarkin on August 23, 2014, 11:53:18 AM
I've never really thought about AMZN in a relative-value way.

It is useful as a sanity test, especially to avoid a story stock that is crazy over-valued. 

I think that is what Nygren's analysis is all about. He knows that he can't reliably predict future free cash flow for AMZN. By doing a back-of-the-envelope relative analysis, he is just making sure valuation is in a range of reasonableness. Then he can make a qualitative judgement about the stock.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on August 23, 2014, 03:11:26 PM
I don't disagree that relative valuations are useful, they're just the least useful, IMO.  You never heard Buffett say 'Pepsi was trading at 20, Coke was trading at 13 so I bought it'.  He got rich because he bought companies for 10X, but often much less (NFM was 4X, believe it or not!) or companies that had 20 years or more to grow.


And also, because I'm concerned with how much AMZN will earn in 10 years, whether or not AMZN is priced perfectly relative to companies that aren't even directly comparable is not a major focus of mine.  Relative value is a very now focused method, inherently.


Regardless I think AMZN should trade at a large EV/sales premium to the companies mentioned, though that probably goes without saying.
Title: Re: AMZN - Amazon.com Inc.
Post by: wbr on August 25, 2014, 11:43:18 AM
Apparently Amazon, not Google, is going to buy Twitch.tv

http://www.bloomberg.com/news/2014-08-25/amazon-said-to-buy-twitch-for-1-billion.html?cmpid=yhoo (http://www.bloomberg.com/news/2014-08-25/amazon-said-to-buy-twitch-for-1-billion.html?cmpid=yhoo)
Title: Re: AMZN - Amazon.com Inc.
Post by: Palantir on August 25, 2014, 11:53:21 AM
JAllen, you think AMZN should start investing its "float" in equities?
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on August 25, 2014, 12:04:23 PM
No, I would save it to buy back stock every few years like they've done and continue to selectively make acquisitions to build and protect the moat.


AMZN has relatively less cash than the other tech titans, so I think ~$10B is a good number for them to have.


They've been quite selective with acquisitions, preferring to build their own products, which I think is a good approach.  Acquire networks like Twitch or companies like Kiva with true hard-earned domain expertise, patents and hardware solutions - build the rest.
Title: Re: AMZN - Amazon.com Inc.
Post by: txlaw on August 25, 2014, 06:54:46 PM
This Twitch acquisition is a big effing deal.  If AMZN can turn Twitch into a real YouTube competitor, it will easily have been worth $1 billion (or whatever they're paying for it).
Title: Re: AMZN - Amazon.com Inc.
Post by: Liberty on August 25, 2014, 06:56:31 PM
Interesting. Amazon and Google will keep clashing more and more. It's inevitable for businesses that have a horizontal business model and are so big that only the biggest markets can move the needle.
Title: Re: AMZN - Amazon.com Inc.
Post by: Palantir on August 25, 2014, 07:40:58 PM
I have always said that Google's biggest threat is a world where search isn't as relevant, and with that, they will seem far less impressive. Facebook knows who your friends are, Google knows what you search for, and Amazon knows what you buy....surely Amazon's data is going to be quite valuable.
Title: Re: AMZN - Amazon.com Inc.
Post by: JAllen on August 25, 2014, 07:48:36 PM
This Twitch acquisition is a big effing deal.  If AMZN can turn Twitch into a real YouTube competitor, it will easily have been worth $1 billion (or whatever they're paying for it).


I don't know exactly how they're thinking about Twitch.  If they could make half as successful as YouTube that would be amazing.


I wonder if they'll take it that direction - non-game stuff that is. Not sure why they wouldn't though...
Title: Re: AMZN - Amazon.com Inc.
Post by: txlaw on August 25, 2014, 09:15:29 PM
This Twitch acquisition is a big effing deal.  If AMZN can turn Twitch into a real YouTube competitor, it will easily have been worth $1 billion (or whatever they're paying for it).


I don't know exactly how they're thinking about Twitch.  If they could make half as successful as YouTube that would be amazing.


I wonder if they'll take it that direction - non-game stuff that is. Not sure why they wouldn't though...

I don't think Twitch itself will necessarily become another YouTube.com, per se.  It could go that route, but maybe AMZN will just keep it a gaming brand.   

However, the underlying technology and infrastructure could definitely support a YouTube-like product, among other things, from AMZN.  For one thing, Twitch has a presence in strategic data centers located in the US and Europe so that they can deliver real-time video with high quality of service.  I could see AMZN bolstering this service to also deliver stored video from those data centers.  It's important to note that YouTube is more than just YouTube.com.  A ton of embedded videos on the web use YouTube/Google infrastructure because Google makes it really easy for video content creators.  AMZN doesn't offer a similarly compelling service, but with Twitch infrastructure, who knows.

Additionally, as I understand the service, Twitch broadcasts mostly come from end users.  That's very interesting because broadcasting from the home is a lot harder than broadcasting from conventional venues that have content owner broadband connections.  AMZN's purchase of Twitch could be a game changer if they "democratize" broadcasting.  (Btw, Twitch is a spin-off of Justin.TV, http://en.wikipedia.org/wiki/Justin.tv, which originally aimed to make it easy for normal people to broadcast or "livecast.")  And beyond broadcasting, I could see the video infrastructure being used for other things like IoT (will AMZN offer a Dropcam like service at some point?).

The possibilities are mind boggling.  Bezos continues to be one of my favorite CEOs on the planet.

One more fun fact:  I do believe that LVLT is a major CDN provider for Twitch. ;D 
Title: Re: AMZN - Amazon.com Inc.
Post by: muscleman on August 25, 2014, 09:57:14 PM
I've never really thought about AMZN in a relative-value way.  I think relative value is one of the less reliable valuation methods except for when there's a structural reason one stock is trading lower than comps., like tiny illiquid stocks trading cheaper than SEC-registered counterparts. 


I also think that AMZN isn't directly comparable to these other companies: AMZN is in many, much different, arguably better businesses than WMT/TGT/COST. AMZN's FBA revenue, however much it is, should be priced similarly to eBay's commission revenue (FBA is more capital intensive than eBay's pure commission model but is growing way faster).


But anyways, I've always thought about AMZN in an absolute way: how much will our sales and FCF be in 5-10-20 years.  I do think about AMZN's sales relative to WMT's current/peak sales and how much bigger they could be because AMZN is operating in more parts of the economy and sells orders of magnitude more SKUs.  But AMZN is structurally very different than WMT.


Chad from Peridot Capital rightfully pointed out that AMZN already has operating cash flow margins higher than the big B&M retailers (http://www.peridotcapital.com/2014/06/profitless-amazon-myth-lives-on-thanks-to-lazy-financial-media.html) which would make AMZN's sales worth more than theirs.  We know that not ever having to purchase sub-urban real estate, more automation and software driven makes AMZN less capital intensive so every dollar of sales should be worth more. 


Last thing: AMZN's gross margin this past quarter, 30.7%, just matched TGT's and is still expanding, so now it has gross margins that are higher than WMT/TGT/COST too.

Hi JAllen,
    I do agree that relative valuation is the least useful and I don't use it myself.
    All I am trying to do is to validate Nygren's words, but the calculation seems to be way off. Am I missing something here? Or is Nygren so dumb that he writes publicly about a company's valuation without verifying the most basic numbers?


Title: Re: AMZN - Amazon.com Inc.
Post by: Liberty on August 26, 2014, 05:51:08 AM
http://www.theguardian.com/technology/2014/aug/26/amazon-fire-phone-sales-data

Estimate: 35,000 Fire phones sold. Looks like a flop so far.
Title: Re: AMZN - Amazon.com Inc.
Post by: rogermunibond on August 26, 2014, 06:23:40 AM
The tech site Re/Code has an interesting take on Amazon's push into payment systems and credit card readers.  Hint... global domination of retail.  Insert Dr. Evil laugh....

http://recode.net/2014/08/24/predicting-amazons-secret-plans-in-physical-retail/
Title: Re: AMZN - Amazon.com Inc.
Post by: Palantir on August 26, 2014, 06:55:54 AM
I don't see it as crazy that stores will start running their system on these Amazon payment products like card readers etc etc. Amazon will continue to want to know what you are buying.
Title: Re: AMZN - Amazon.com Inc.
Post by: saltybit on September 01, 2014, 10:28:36 PM
Does anyone know how Zappos is currently accounted for and how it's done post-acquistion?
Title: Re: AMZN - Amazon.com Inc.
Post by: redhots on September 05, 2014, 09:54:30 AM
Nice blog post from Benedict Evans.

Why Amazon Has No Profits (And Why It Works)

http://ben-evans.com/benedictevans/2014/9/4/why-amazon-has-no-profits-and-why-it-works
Title: Re: AMZN - Amazon.com Inc.
Post by: Liberty on September 05, 2014, 10:17:47 AM
Nice blog post from Benedict Evans.

Why Amazon Has No Profits (And Why It Works)

http://ben-evans.com/benedictevans/2014/9/4/why-amazon-has-no-profits-and-why-it-works

Good post. That seems to be the bullish thesis:

Quote
Amazon has perhaps 1% of the US retail market by value. Should it stop entering new categories and markets and instead take profit, and by extension leave those segments and markets for other companies? Or should it keep investing to sweep them into the platform? Jeff Bezos’s view is pretty clear: keep investing, because to take profit out of the business would be to waste the opportunity. He seems very happy to keep seizing new opportunities, creating new businesses, and using every last penny to do it.

AMZN is in the too hard pile for me as an investor, but I like them as a customer.
Title: Re: AMZN - Amazon.com Inc.
Post by: Liberty on September 06, 2014, 07:24:21 PM
For those who liked the recent Evans post, here he is in a podcast with VC Ben Horowitz about Amazon:

http://ben-evans.com/benedictevans/2014/9/5/podcast-amazon
Title: Re: AMZN - Amazon.com Inc.
Post by: muscleman on September 06, 2014, 07:34:56 PM
Nice blog post from Benedict Evans.

Why Amazon Has No Profits (And Why It Works)

http://ben-evans.com/benedictevans/2014/9/4/why-amazon-has-no-profits-and-why-it-works

Yeah, but the key question is still: What's the right price to buy?
Amazon is clearly a wonderful business. But what's the fair price?
If we assume Amazon's FCF + growth Capex is their actual earnings, which is around 6-7% of revenue, then Amazon's adjusted P/E is around 30. Would you buy it at 30 PE?
Buffet bought KO when it was 16 PE, right? That means AMZN's fair price to buy is $200-210.

From another measurement based on Nygren's letter, third party sales is 20% of revenue, and we assume Amazon takes 13% of fees for 3rd party sellers, then Amazon's adjusted gross revenue, including 3rd party revenue, should be around 170 Bn last year, giving a P/S of 0.93. Comparing that to WMT and COSTCO, they both have P/S of 0.5, but less growth prospects. So maybe I could say, AMZN's P/S of 0.75 is the fair value compared to WMT's P/S of 0.5? In that case, AMZN's fair price would be $279.

Note that as of today, I still cannot understand Nygren's statement here: (http://www.oakmark.com/Commentary/Commentary-Archives/2Q14--Bill-Nygren.htm?rf=dr)
Is he talking loud without checking his calculators?

"It gets interesting when we adjust our cap-to-sales ratio comparison to include estimated gross third-party sales.  Instead of selling at twice the ratio to sales of the average bricks–and-mortar retailer, Amazon is selling at only 80%.  So, relative to gross sales, Amazon's stock would have to increase 25% to be priced consistent with the very companies whose survival Amazon is threatening.  On that metric, Amazon has never been cheaper."

Title: Re: AMZN - Amazon.com Inc.
Post by: Palantir on September 06, 2014, 07:46:09 PM
I would buy them at 30 PE. I do not feel that is too high at all. I don't see why KO is a benchmark. KO was a good business, but AMZN is a different beast altogether.
Title: Re: AMZN - Amazon.com Inc.
Post by: muscleman on September 08, 2014, 08:01:38 AM
I would buy them at 30 PE. I do not feel that is too high at all. I don't see why KO is a benchmark. KO was a good business, but AMZN is a different beast altogether.

My point is that I am quite surprised that Nygren publicly talk about his "AMZN is currently cheap" thesis, which seems to be a simple calculation mistake.
Title: Re: AMZN - Amazon.com Inc.
Post by: dwy000 on September 08, 2014, 09:25:04 AM