Author Topic: AMZN - Amazon.com Inc.  (Read 623652 times)

JAllen

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Re: AMZN - Amazon.com Inc.
« Reply #520 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 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.


JAllen

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Re: AMZN - Amazon.com Inc.
« Reply #521 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/

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.

dwy000

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Re: AMZN - Amazon.com Inc.
« Reply #522 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 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)

dwy000

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Re: AMZN - Amazon.com Inc.
« Reply #523 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/

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)

JAllen

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Re: AMZN - Amazon.com Inc.
« Reply #524 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 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, but it doesn't come anywhere near the selection and other benefits AMZN offers.

JAllen

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Re: AMZN - Amazon.com Inc.
« Reply #525 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/

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.

dwy000

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Re: AMZN - Amazon.com Inc.
« Reply #526 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?

JAllen

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Re: AMZN - Amazon.com Inc.
« Reply #527 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.

JAllen

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Re: AMZN - Amazon.com Inc.
« Reply #528 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.

Palantir

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Re: AMZN - Amazon.com Inc.
« Reply #529 on: June 28, 2014, 02:02:13 PM »
Dwy, why are you using net income to determine profitability and not cash flow?
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