AMZN - Amazon.com Inc.

[DTEJD1997]

^You are not reading the thread. Amazon IS profitable, but they are doing what they can to minimize what shows up on the Income statements in order to reduce taxation.

I am reading the thread, but I don't buy it.  A lot of these accelerated expenses are truly expenses...I also suspect a lot of them will wind up being "stranded" investments also...

If you think AMZN is going to be a great investment, at what point is it fairly valued or overvalued?

[Spekulatius]

A good business can grow while showing profits and FCF. There are enough examples of companies who have done just that in the past or who are doing it right now, like MSFT, GOOG etc.

I don't really see a reason to pay a rich multiple for a stock, where I need to go through mental hoops to determine that they may be profitable in the the future. I can see doing this for a real cheap stock, but I would not pay a high multiple for stock.

[dwy000]

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.

[dwy000]

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...

They indicate that they cancel and reverse the expense for people who resign and forfeit options/stock.  So that gets evened out. 

The 1% dilution doesn't seem like much but it's $1.4bn of value.  And when you only generate $2.5bn of free cash flow it becomes pretty significant.

The development expenses (including developers etc) would typically be capitalized not expensed.  They would then get expensed as the related revenues are earned. 

I would also say that for Amazon, those are the cost of doing business. If you expect them to stop developing new products like phones or Fresh then yes, the cash costs will decline but then you would have to expect growth from all those new initiatives stop too.

[dwy000]

Isn't the whole concept supposed to be the size and volume beget efficiencies and therefore getting bigger should make you more profitable?  Amazon revenues have what, tripled over the past 5 years, but as you rightly point out, their operating margins have declined substantially.  That flies in the face of logic and the drive for growth.

The company has been in business for 20 years now and hasn't really generated any profit.  If they are now investing for the next 10-20 years, at what point does "long term" actually happen.  At some point you have to show the ability to be profitable.

Curious - if you are basing you investment thesis on the idea that they can turn profitable when they stop all the growth spending, when do you see that happening?  The company acknowledges that the cost basis and capex will continue into the future.   At some point the time it takes to get there more than offsets any level of profitability that they could even theoretically achieve.

[JAllen]

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.

[JAllen]

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/

[dwy000]

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.

[JAllen]

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

But they're growing and building new things: phone; audio streaming; Fresh; FCs.  These all require additional developers to grow.

[dwy000]

 

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?  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).