Author Topic: AMZN - Amazon.com Inc.  (Read 630446 times)

rkbabang

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Re: AMZN - Amazon.com Inc.
« Reply #390 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.


saltybit

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Re: AMZN - Amazon.com Inc.
« Reply #391 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".

dwy000

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Re: AMZN - Amazon.com Inc.
« Reply #392 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.

Laxputs

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Re: AMZN - Amazon.com Inc.
« Reply #393 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.

dwy000

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Re: AMZN - Amazon.com Inc.
« Reply #394 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?

dwy000

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Re: AMZN - Amazon.com Inc.
« Reply #395 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?

PatientCheetah

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Re: AMZN - Amazon.com Inc.
« Reply #396 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.
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JAllen

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Re: AMZN - Amazon.com Inc.
« Reply #397 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:
  • 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.

Prior to the massive spending ramp 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.

dwy000

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Re: AMZN - Amazon.com Inc.
« Reply #398 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.

JAllen

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Re: AMZN - Amazon.com Inc.
« Reply #399 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.