Author Topic: AMZN - Amazon.com Inc.  (Read 619944 times)

saltybit

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Re: AMZN - Amazon.com Inc.
« Reply #400 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)


JAllen

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Re: AMZN - Amazon.com Inc.
« Reply #401 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.

dwy000

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Re: AMZN - Amazon.com Inc.
« Reply #402 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.

JAllen

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Re: AMZN - Amazon.com Inc.
« Reply #403 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

JAllen

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Re: AMZN - Amazon.com Inc.
« Reply #404 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%.

Laxputs

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Re: AMZN - Amazon.com Inc.
« Reply #405 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.





dwy000

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Re: AMZN - Amazon.com Inc.
« Reply #406 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).

dwy000

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Re: AMZN - Amazon.com Inc.
« Reply #407 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)?

txlaw

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Re: AMZN - Amazon.com Inc.
« Reply #408 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.)

link01

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Re: AMZN - Amazon.com Inc.
« Reply #409 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...