AMZN - Amazon.com Inc.

[dwy000]

I'm not (or not intending to). I much prefer free cash flow as a measure of earnings power (after adding back stock based comp).  Not sure it changes the argument much here though, especially over time as all capitalized expenses get amortized over time. 

[dwy000]

J - sounds like you think intrinsic value is somewhere between today's price and $400? 

Where are you getting EV/FCF of 50x??  FCF is about $2-$2.5bn (and that's without the $1.4bn of stock dilution) and EV is closer to $150 bn.  Are you using your theoretical FCF if and when they shift the business model?  Because you the further adjust that 50x to 30x for the same reason.

[JAllen]

J - sounds like you think intrinsic value is somewhere between today's price and $400? 

I don't think that.  What discount rate are you using?  Intrinsic value is different for each investor.  I think that at $400, the investor's return will be lower than someone that bought it at $300, that's about it - it's more desirable now - that's why I'm writing here now.  I'm not expressing an opinion on what the intrinsic value is, and I don't on basically all of our stocks - I just believe each of their intrinsic values are higher.  In other words I believe the returns from holding them will be way higher than the market returns and should fare well next to the historical super-investors long-term returns (i.e. > 20%).


To me it would be a mistake to assume all of the various things one would have to assume.  I just believe the stock will go way higher over the next decade.  What was the intrinsic value of WMT in 1984 or MSFT in 1992 - it didn't matter - you just bought and held on.  What was the intrinsic value of BRK in 1985?  Did it matter at what price you bought that year?  Maybe you wanted to not buy it after it ran up tons in the last six months - just like now for AMZN.  You could just slowly add more over time.


What I do believe are the following:

• AMZN's EV/FCF is <30X (assumes minimum $5B current FCF or only 4.5% FCF margin, lower than WMT's; 8% FCF margin, lower than AMZN's historic FCF margin would result in less than 20X EV/FCF multiple)
• AMZN has a top-five-in-the-world-management-team at the helm
• AMZN's N. American retail business has a reasonable chance of plateauing 15X larger
• Other businesses that AMZN has first-mover advantage in are very large (books, media, cloud-computing)
• FBA/exchange business is one of the best businesses in America with very high returns on capital
• Perfectly rational capital allocation (large share buybacks during distressed times) and ultra-long-term perspective are VERY unique, valuable and are themselves competitive advantages
• AMZN's rapid expansion obscures much FCF and GAAP profit

[JAllen]

Here is the final AWS versus U.S./IBM opinion cross-posted from the IBM thread:

http://regmedia.co.uk/2013/11/08/amazon_v_ibm_cia_2013.pdf

Anyways, it's surprisingly accessible for a large legal document.

Some of my favorite parts are:

• "Amazon had a higher price, but the agency determined that Amazon’s technical proposal was sufficiently superior to IBM’s proposal to warrant a significant price premium."
• "IBM’s Scenario 5 ... was mis-priced. . . . Instead of following the directions which stated “Assume 100% duty cycle on all virtual machines associated with this scenario,” IBM calculated and proposed a cost for a single run through of a single 100TB data set. This resulted in a grossly under-priced dollar figure for scenario 5 of IBM’s proposal"
• "In sum, AWS’s offer was superior in virtually every way but price, and IBM’s advantage in that area was likely not as great as IBM attempted to make it appear."
• "AWS’s offer was superior, and the outcome of the competition was not even close."

[dwy000]

J - sorry but that doesn't  make sense.  You feel the return is justified at $300 and too low at $400 but you don't calculate an intrinsic value?  Sounds like you have an intrinsic value in mind and $400 is close to it.  If you believe it's just rocket growth at any price then even $400 is a steal.  To get as precise to say that the returns at $400 are too low then you must have a value in mind, right? 

Sounds like you follow more of a growth investor strategy than value (which is buying $'s for less than a $). 

The EV/FCF isn't 30 today. EV is about $150bn and FCf is $2.5bn (before subtracting stock based comp).  The 4.5% FCf margin doesn't exist today except in theory. The company even calculates FCf in the 10K

[JAllen]

J - sorry but that doesn't  make sense.  You feel the return is justified at $300 and too low at $400 but you don't calculate an intrinsic value?

Returns at $400 will be "lower" than at $320, not "too low".  I'm confident that returns from this price range will be way higher than the market over the next decade.  Of course a lower price is better and $320 is lower than $400. 


One would need a discount rate to discount any future price back to estimate a current intrinsic value and to make lots of assumptions about all of the moving parts - yours maybe different than mine.  I stated my beliefs that are sometimes implicitly assumptions above.

[JAllen]

Does anyone disagree with any of the following assertions?

• AMZN purchases digital video rights from studios
• AMZN pays the studios cash each year for these rights (regardless of any intangible asset on BS that is created upfront)
• AMZN's very large content library costs somewhere in the range of $1-$3B, probably in the middle of this range this year because it is comparable in size to NFLX's library, which is $3.5B
• The amount AMZN pays to studios in any given year is an accounting expense
• Because this amount is an expense and not an investment in a tangible asset such as a FC, this outgoing cash flow is an operating cash flow.  This payment is just like any other purchase from other suppliers
• Because the amount paid to content studios is a current year expense, operating income is reduced by the amount paid to the studios + any revenue allocated to digital video
• AMZN doesn't charge directly for access to this content - it gives access to it away to Prime subscribers and allocates some portion of total Prime revenue to these digital video costs

[Palantir]

It's all about how you phrase it.

Amazon is a tax-efficient compounder, run by an owner-operator with his entire net worth invested in the firm, who has a very long-term view. It has a well known brand, a defensible franchise and an economic moat, whose operations create float.

[Liberty]

http://www.peridotcapital.com/2014/06/profitless-amazon-myth-lives-on-thanks-to-lazy-financial-media.html

[dwy000]

Does anyone disagree with any of the following assertions?

• AMZN purchases digital video rights from studios
• AMZN pays the studios cash each year for these rights (regardless of any intangible asset on BS that is created upfront)
• AMZN's very large content library costs somewhere in the range of $1-$3B, probably in the middle of this range this year because it is comparable in size to NFLX's library, which is $3.5B
• The amount AMZN pays to studios in any given year is an accounting expense
• Because this amount is an expense and not an investment in a tangible asset such as a FC, this outgoing cash flow is an operating cash flow.  This payment is just like any other purchase from other suppliers
• Because the amount paid to content studios is a current year expense, operating income is reduced by the amount paid to the studios + any revenue allocated to digital video
• AMZN doesn't charge directly for access to this content - it gives access to it away to Prime subscribers and allocates some portion of total Prime revenue to these digital video costs

I'd disagree with a couple of technical points (all based on 10k).
- the amount paid to the studios is not an accounting expense.  The amount is capitalized and then amortized into expense based upon the anticipated related revenue stream related to those rights.  The expense is the amortization.  Any excess paid in cash in a given year vs the amortized amount is put on the balance sheet.  So cash flow doesn't necessarily match expense.
- the expense is amortized into COGS so goes to gross margin not operating expense
 - Amazon doesn't charge Prime members for the access.  They do charge non
Prime customers for access.  A portion of Prime income is allocated to this and a portion to delivery revenue.