Author Topic: AMZN - Amazon.com Inc.  (Read 651038 times)

Palantir

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Re: AMZN - Amazon.com Inc.
« Reply #420 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.
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JAllen

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Re: AMZN - Amazon.com Inc.
« Reply #421 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.

Palantir

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Re: AMZN - Amazon.com Inc.
« Reply #422 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.
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JAllen

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Re: AMZN - Amazon.com Inc.
« Reply #423 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.

Palantir

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Re: AMZN - Amazon.com Inc.
« Reply #424 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.
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frith2012

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Re: AMZN - Amazon.com Inc.
« Reply #425 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.

JAllen

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Re: AMZN - Amazon.com Inc.
« Reply #426 on: May 30, 2014, 01:02:45 PM »
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.

JAllen

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Re: AMZN - Amazon.com Inc.
« Reply #427 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.

Spekulatius

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Re: AMZN - Amazon.com Inc.
« Reply #428 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.
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Palantir

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Re: AMZN - Amazon.com Inc.
« Reply #429 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.
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