AMZN - Amazon.com Inc.

[Spekulatius]

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.

[saltybit]

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.

[Laxputs]

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.

[dwy000]

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.

[Laxputs]

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.

[dwy000]

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.

[Laxputs]

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.

[txlaw]

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

[Palantir]

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.

[JAllen]

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.