AMZN - Amazon.com Inc.

[rkbabang]

That's a great point Txlaw.  The Firefly aspect is really the only differentiating factor of this phone (3d seems gimmicky). Why go to the expense of building and marketing your own phone when you could put this (even free) in other peoples phones.  And to have it for the same price as all the better, more established phones with much broader Eco-systems seems odd. Who is the target market here?

I feel that with all the work they've done and hype they've generated I must be missing some angle to it - but for the life of me I can't figure it out!

+1  I would understand that strategy 100%.  It seems to me the way to go.  Why concentrate on the few people who will buy a Fire phone when you could get to every Amazon customer with a smartphone?

[muscleman]

That's a great point Txlaw.  The Firefly aspect is really the only differentiating factor of this phone (3d seems gimmicky). Why go to the expense of building and marketing your own phone when you could put this (even free) in other peoples phones.  And to have it for the same price as all the better, more established phones with much broader Eco-systems seems odd. Who is the target market here?

I feel that with all the work they've done and hype they've generated I must be missing some angle to it - but for the life of me I can't figure it out!

+1  I would understand that strategy 100%.  It seems to me the way to go.  Why concentrate on the few people who will buy a Fire phone when you could get to every Amazon customer with a smartphone?

I don't agree because I think the main profit source will be from the app store. I know for Apple's app store, whenever some app developer tries to charge a customer, he has to give 30% of that to Apple. So this is a capital light investment that has lots of growth potential.

[rkbabang]

That's a great point Txlaw.  The Firefly aspect is really the only differentiating factor of this phone (3d seems gimmicky). Why go to the expense of building and marketing your own phone when you could put this (even free) in other peoples phones.  And to have it for the same price as all the better, more established phones with much broader Eco-systems seems odd. Who is the target market here?

I feel that with all the work they've done and hype they've generated I must be missing some angle to it - but for the life of me I can't figure it out!

+1  I would understand that strategy 100%.  It seems to me the way to go.  Why concentrate on the few people who will buy a Fire phone when you could get to every Amazon customer with a smartphone?

I don't agree because I think the main profit source will be from the app store. I know for Apple's app store, whenever some app developer tries to charge a customer, he has to give 30% of that to Apple. So this is a capital light investment that has lots of growth potential.

That would be the case if the main idea was to sell phones or apps, but if it is to get people to shop at Amazon.com (which is what this phone looks like it was specifically designed to do) then creating Firefly android/iphone apps and giving them away for free would be a better strategy.

[Liberty]

http://stratechery.com/2014/amazons-whale-strategy/

[Sunrider]

Guys

Apologies if this is (a) overly simplistic, (b) has been discussed and I'm just not aware of it.

In fact I'm sure this has been discussed but I thought I'd throw it out there to get some views. I've held a small position in AMZN for ages and recently added to it with LEAPS. The recent Economist and FT articles got me thinking though ... I'm a fan of toy models and the following is a rough calc, please bear with me:

AMZN is doing about 75bn sales a year (more this year but some article I saw said about 74bn in its own sales). So assuming that eventually they choose to make "normal" margins on this and stop investing - what would it mean? Well, WMT has about a 5.9% operating margin. Let's say AMZN can do much better (because the cloud stuff may be higher margin, they killed competitions, whatever). Say it's 10%, so 7.4bn in Earnings. So at today's market cap of 149bn that would put us at a 20 P/E. Not cheap, not outrageous either.

Of course the margin assumptions are key here - but just for discussion purposes - does this make AMZN a good buy because you expect them to keep growing in excess of what one would discount back from the point that they choose to make profits?

... not trying to start a possible war-of-words here. I think AMZN has growth ahead of it but I also believe that eventually fundamental laws of economics assert themselves. Just curious how others here see it?

Thanks - C.

[dwy000]

Sun rider - I think your point have been the crux of the discussion for the past few pages. IF they can make "normal" margins, yes they will make good profits.  But what is "normal" and the willingness and ability to do this is the question.  My view is that to improve margins would be to sacrifice growth (if it could be done at all).  And the fact that all of the margin metrics (operating margins not simply gross margins) have been moving in the other direction for 4-5 years would suggest this shift is not in the foreseeable future.  Just my view though.  I know others disagree.

[Palantir]

Sun rider- you don't think 20 PE is decent for a company as fast growing as AMZN?

[dwy000]

It's a 400 PE right now.  It's only 20 if they change the business model and can do it successfully without impacting sales - none of which appears in the cards for the near or medium term future.  Even if they can make that huge transition you need to discount the earnings/cash flow for the years between now and when that could happen (at least 5 years if not more).

[DTEJD1997]

I know what I asay is going to be very unpopular...but I'm going to do it anyway.

I don't see any way that AMZN does not end in tears for investors.

I also think this is a signal the market is getting frothy or near a top.  There are many people on this board discussing it as "value" investment.  I just can't do the mental acrobats to think this is a "value" investment.

I also think the market is giving AMZN a "pass" as they don't have to make any meaningful money on anything.  If AMZN had to make a 1,2,3% NET margin, their sales would probably be drastically lower.  I would also suggest that if they had to make a profit, their business model would be broken.

If the "no profits" model is such a great thing, why don't all companies do it?  AMZN is somehow different?  Or maybe, AMZN is a "special company" and "it is different this time"?

I would suggest it is very easy to build millions & billions in sales if you can sell items for a loss or breakeven.

Who is to say that some other competitor in the future doesn't get favorable attention or a dispensation from Wall Street to sell at breakeven or a loss and AMZN can NEVER make any money?

Why would anybody invest in AMZN when you can get GROWING, PROFITABLE, dividend paying companies with single digit P/E's?  AMZN is 40 EV/EBIDTA, 15X book value, 400 or 500 P/E?

AMZN also faces the problem that they have $75BB in sales.  This is not some startup company.  Are they going to be able to grow sales to $150BB, or $300BB?

I just don't see how this can end well for shareholders...

[PatientCheetah]

I know what I asay is going to be very unpopular...but I'm going to do it anyway.

I don't see any way that AMZN does not end in tears for investors.

I also think this is a signal the market is getting frothy or near a top.  There are many people on this board discussing it as "value" investment.  I just can't do the mental acrobats to think this is a "value" investment.

I also think the market is giving AMZN a "pass" as they don't have to make any meaningful money on anything.  If AMZN had to make a 1,2,3% NET margin, their sales would probably be drastically lower.  I would also suggest that if they had to make a profit, their business model would be broken.

If the "no profits" model is such a great thing, why don't all companies do it?  AMZN is somehow different?  Or maybe, AMZN is a "special company" and "it is different this time"?

I would suggest it is very easy to build millions & billions in sales if you can sell items for a loss or breakeven.

Who is to say that some other competitor in the future doesn't get favorable attention or a dispensation from Wall Street to sell at breakeven or a loss and AMZN can NEVER make any money?

Why would anybody invest in AMZN when you can get GROWING, PROFITABLE, dividend paying companies with single digit P/E's?  AMZN is 40 EV/EBIDTA, 15X book value, 400 or 500 P/E?

AMZN also faces the problem that they have $75BB in sales.  This is not some startup company.  Are they going to be able to grow sales to $150BB, or $300BB?

I just don't see how this can end well for shareholders...

There is an article talking about why there has not been any other billion dollar e-commerce. Valuation concern aside, Amazon's competitive position is close to as unassailable as Visa or Mastercard. Anything resembled competitors, Zappos and Diapers.com, are all part of Amazon now. Don't underestimate the value of a high stock price, Amazon is in the position to either play the game of attrition and bleed its competitors out or buy them out with its stocks. I am not where near as smart as Munger. I wouldn't go against his opinion.

The biggest lesson that I learned in the last few years is to never dismiss anything that's strongly positioned based on valuation concern alone. In order for me to become bearish, I need to see disruptive technology or competitor that is clearly taking shares away from the incumbent. Through the error of omission, I missed out wonderful companies like Priceline, Amazon, and Chipotle. I take solace in that I could've done much worse if I have shorted them based on high valuations.