AMZN - Amazon.com Inc.

[Cardboard]

"You had Amazon.com last week missing on quarterly earnings, sales and Q4 forecasted sales. I should not say missing earnings because they generated losses. The stock went down briefly after hours then up huge the next day. If it had been Chipotle or any other momo stock it would have been down 20%. Incomprehensible. They had to find some excuse for the move so they talked about some mysterious beat on operating margins. I guess it had to be NA adjusted operating margins!

 

I actually think that Amazon is a fraud. If the stock market did not keep it high, they would have to show profits like Target, Walmart, BestBuy or any other retailer. Retailing is still their main business. Now, that the stock market keeps rewarding them just for showing sales growth, they can keep selling product at cost or below cost. Isn't illegal? With the sales tax advantage disappearing and them building warehouses everywhere to shorten delivery times, there is really no difference anymore in their retailing business with other brick and mortar retailers. There are also other issues, but that is for another discussion or thread."

 

Well, here is the thread! This company should be shorted into oblivion by Einhorn, Chanos and all others if they had balls. The stock market allowing this company to sell its products at a loss is creating huge issues for honest companies such as Wal-Mart, Target, Best Buy and many others who have to sell their goods at a profit to offer a return to their shareholders. Even Overstock.com has to show a profit. Apple is also suffering from this scheme since they have to sell their IPads at a profit to deliver to their shareholders. Apple's price to earnings ratio is around 11.5 now without even factoring in the very large cash pile and they are growing as fast as Amazon sales. Amazon on the other hand can sell its Kindles at a loss or near breakeven to generate sales growth and still enjoy an increasing stock price. The issue is that this goes for all their products. All of that is based on gaining market share and eventually generating massive free cash flows as claimed by Mr. Bezos.

 

The math simply does not add up. We are talking about a $100 billion market cap retailer with around $62 billion in sales. This is as big as Target now in terms of sales. Moreover, they are already worldwide. As we have seen recently, the rate of sales growth is coming down despite their large investments in more distribution centers and their venturing into more and more fields. If it was a conglomerate, people would trade it at a discount until management decided to re-focus in certain areas. Regarding growth, they will bump against the law of large numbers as Wal-Mart did once it reached such sales number. I think we are at the beginning of this process.

 

If it was a small tech company or one with a truly innovative offering, I could understand the stock to trade higher based on sales growth and the promise of future profits at high margins. However, here we are talking about a company with a market cap of $100 billion plus, generating losses and with very low operating margins, and that is when they are visible. It is retailing after all. Try finding a $100 billion market cap showing no profit on on-going basis. The disclosure on top of that is abysmal. I challenge you to tell me how much debt they had on their balance sheet as of Sept 30. While it may not be so important a number to know, for now anyway, this kind of opacity is everywhere in their disclosure. Analysts have complained about it, but they still put out very attractive targets for the stock. Why exactly remains a mystery to me.

 

Their cloud division is another joke. While it is used by many startups and others, it does not appear to be generating much profits either. The game is all about generating more and more revenues at break-even. It kills competition and is only possible because the stock market rewards them doing that.

 

The music will stop some day. Will it be due to the collection of sales taxes, retailers matching their prices, an inevitable slow down in sales growth, the stock market finally taking a show me approach or some force finally telling Amazon that enough is enough?

 

Cardboard   

 

[beerbaron]

Where does everybody go first when they want to buy something online? Amazon

 

Amazon has a near monopoly on the online retail world. I'd stay away from the bull and bear side if I were you.

 

BeerBaron

[compoundinglife]

Amazon Web Services is reason enough to not short this stock. You say its a joke, but its really not. They have a moat in cloud services that no one is currently anywhere near catching up on. It may only be a 1B business today but this a market that is just gaining momentum and they are currently poised to be the dominant public cloud provider for the for seeable future.

 

Even at todays valuation I would be shocked to see D.E. short Amazon. I think you raise some valid points in your post, but betting against AMZN and Bezos is IMO a very bad idea.

 

 

[Grenville]

Thanks for starting the thread. I'll offer these two quotes from the Amazon shareholder letters for now and add more color with time.

 

As the famed investor Benjamin Graham said, ‘‘In the short term, the stock market is a voting machine; in the long term, it’s a weighing machine.’’ Clearly there was a lot of voting going on in the boom year of ’99—and much less weighing. We’re a company that wants to be weighed, and over time, we will be—over the long term, all companies are. In the meantime, we have our heads down working to build a heavier and heavier company. → 2000 letter

 

If you could know for certain just two things--a company’s future cash flows and its future number of shares outstanding--you would have an excellent idea of the fair value of a share of that company’s stock today. (You’d also need to know appropriate discount rates, but if you knew the future cash flows for certain, it would also be reasonably easy to know which discount rates to use.) It’s not easy, but you can make an informed forecast of future cash flows by examining a company’s performance in the past and by looking at factors such as the leverage points and scalability in that company’s model. Estimating the number of shares outstanding in the future requires you to forecast items such as option grants to employees or other potential capital transactions. Ultimately, your determination of cash flow per share will be a strong indicator of the price you might be willing to pay for a share of ownership in any company. → 2001 letter

[Guest rimm_never_sleeps]

I remember 5 years ago somebody I knew was shorting amazon for the exact same reasons listed in the op. I told him he was nuts.

[Hoodlum]

Amazon reminds me of CRM.  You know it can't go on forever but the stock price still keeps chugging along.  I have decided to avoid these type of stocks from both sides.

[ItsAValueTrap]

Well there are a lot of people out there (myself included) that think that online shopping will be much bigger than it is today. 

 

Amazon may dominate with its economies of scale.  Its IT development costs are mostly fixed.  Its costs of dealing with regulations is mostly fixed.  I live in Canada... buying from Amazon US (not the Canadian Amazon) is cool because they have a huge selection and you don't have to pay brokerage fees (in the past, brokerage fees inhibited a lot of cross-border online shopping... so what you would do is go to eBay and have the seller mark things as gifts under $20; eBay's selection is limited).  If economies of scale were the only thing that mattered, then one might expect Amazon to dominate online shopping not just in books.  I recently bought a kettle and 2 other non-book items off Amazon.ca.

 

*No position.  The valuation is high I agree.

[LC]

Two points I want to make:

 

1. How difficult is it to setup and operate as a cloud provider? Where is their advantage versus Google/Microsoft/Oracle? (I honestly have no knowledge in this area, it is a genuine question)

 

2. I agree regarding taking a short (or long) position. It seems overvalued but as Cardboard mentions when will the correction happen and how drastic will it be? It is a very risky position to enter and maintain.

 

My stance is the same as Hoodlum's.

 

Amazon Web Services is reason enough to not short this stock. You say its a joke, but its really not. They have a moat in cloud services that no one is currently anywhere near catching up on. It may only be a 1B business today but this a market that is just gaining momentum and they are currently poised to be the dominant public cloud provider for the for seeable future.

 

Even at todays valuation I would be shocked to see D.E. short Amazon. I think you raise some valid points in your post, but betting against AMZN and Bezos is IMO a very bad idea.

[compoundinglife]

Two points I want to make:

 

1. How difficult is it to setup and operate as a cloud provider? Where is their advantage versus Google/Microsoft/Oracle? (I honestly have no knowledge in this area, it is a genuine question)

 

To operate at the scale that AMZN operates at its very hard. I think this is illustrated by the fact that no one offers the same breadth of features that they provide and they are constantly launching new services and features creating a huge gap between AWS and its competitors. 

 

To get an idea of their size:

 

http://gigaom.com/cloud/just-how-big-is-the-amazon-cloud-anyway/

 

 

2. I agree regarding taking a short (or long) position. It seems overvalued but as Cardboard mentions when will the correction happen and how drastic will it be? It is a very risky position to enter and maintain.

 

My stance is the same as Hoodlum's.

 

Amazon Web Services is reason enough to not short this stock. You say its a joke, but its really not. They have a moat in cloud services that no one is currently anywhere near catching up on. It may only be a 1B business today but this a market that is just gaining momentum and they are currently poised to be the dominant public cloud provider for the for seeable future.

 

Even at todays valuation I would be shocked to see D.E. short Amazon. I think you raise some valid points in your post, but betting against AMZN and Bezos is IMO a very bad idea.

[bargainman]

I don't understand the point about "The stock market allowing this company to sell its products at a loss is creating huge issues for honest companies such as Wal-Mart, Target, Best Buy".  The stock market at this stage is probably irrelevant to the company.  They don't use the market to raise equity or debt at this stage I don't think (correct me if I'm wrong, I guess I can't say that definitively).

 

I would think long and hard about shorting these guys.  I'm not saying they aren't overvalued by almost every standard metric, but Jeff Bezos is not the same as the CRM CEO.  He used to work for a hedge fund, and he understands the capital markets very very well.  Take a read through some of these articles and interviews:

 

http://www.zurb.com/article/831/jeff-bezoss-10000-year-clock-and-thinking

 

It does fit into my view. Our first shareholder letter, in 1997, was entitled, 'It's all about the long term.' If everything you do needs to work on a three-year time horizon, then you're competing against a lot of people. But if you're willing to invest on a seven-year time horizon, you're now competing against a fraction of those people, because very few companies are willing to do that. Just by lengthening the time horizon, you can engage in endeavors that you could never otherwise pursue. At Amazon we like things to work in five to seven years. We're willing to plant seeds, let them grow'and we're very stubborn. We say we're stubborn on vision and flexible on details.

 

http://www.wired.com/magazine/2011/11/ff_bezos/all/1

 

They are very disruptive in tech, and a big threat to MSFT, Google, and Apple for this simple reason:

 

Bezos: We think it’s a unique approach in the marketplace—premium products at nonpremium prices. We’re a company very accustomed to operating at low margins. We grew up that way. We’ve never had the luxury of high margins, there’s no reason to get used to it now.

 

The low margins and the combination of many different businesses give them immense power.  One simple example is their servers.  Being in retail they have massive spikes in usage in December, but the rest of the year they have a lot of free bandwidth. So they have opened up all their servers to outside users.  Before they did that all those cycles were sitting idle during the off time.  But since it's essentially unused capacity they can sell that server time incredibly cheap.  There is massive stuff going on in their cloud these days.  I was at a presentation where they talked about a large biotech firm which needed to run a massive 2 month simulation using over 10,000 CPU cores.  Well they set it up one afternoon, paid Amazon a few thousand per hour or day (can't remember the price), and had 10,000 computers running on the simulation in a matter of hours.  Then when it was done, they stopped and that was that!  Imagine in the past what that would have taken?  They would have had to set up their own data center, buy and set up 10,000 computers + all the software required, and then at the end of it they would have 10,000 idle computers till the next big project.  Now, this is becoming more common practice, but the thing that gives amazon and advantage is their price.  Also their infrastructure is very interesting.  There was a famous post by a googler about this:

 

http://www.pcmag.com/article2/0,2817,2394561,00.asp

 

The post is huge and worth reading if you're a techie, but the article above summarizes it.

 

http://online.wsj.com/article/SB10001424052702304543904577395164138218638.html

 

This guy is building a clock to last 10,000 years.  He's very long term oriented.  But he's no dummy when it comes to the stock market.

[turar]

Bezos doesn't care much about what Mr. Market thinks. I used to work there, and one thing he would always repeat during every quarterly "All hands" meetings is somewhat along the lines of "The stock price is going up, but it's not because we're so smart. And when it dives down, it won't be because we suddenly became dumb."  He's very long term oriented. Kindle took 5 years of development before it went public.

 

I would not recommend shorting AMZN at any point.

[JRH]

The two questions armchair analysts seem to miss with Amazon:

 

1. What is the owner earnings yield?

2. What return is the owner getting on all that growth capex?

[AZ_Value]

I will echo what my friends above have said and give my 2 cents: Shorting AMZN is a very risky endeavor. Tread carefully.

[DCG]

For anyone who thinks Amazon doesn't have a huge moat, try to start an online retail store and compete with them and report back in a couple years.

[Cardboard]

Shorting Amazon is dangerous because very few are critical of it. There is a fear of it because every short got burnt and the business is mysterious in some ways. It is amazing to me how much slack they are given and yes, it looks like CRM.

 

I find it funny. The guy was working for a hedge fund, knows how to value companies using free cash flow, talks about Ben Graham. Actually, he knows exactly what to do to ensure that Wall Street is never able to value it properly: fast sales growth, no earnings.

 

What they are doing is domestic dumping. It is illegal to sell goods into another country below cost. Since they are not a country, they get away with it. Now, when I am saying that they can do it because the stock market allows them to do it, it's because no one complains about a growing stock price and especially not employees who are compensated with it. This form of compensation also reduces their operating cash cost if you don't factor in dilution. They also love to exclude these charges from show cased operating cash flow. Ask yourself this question. If Wal-Mart decided to sell at cost tomorrow and to stop its dividend, what would happen to the stock price and what would the Department of Justice do?

 

So what is the business model here guys? Exterminate your competitors selling your products at cost, then raise prices once they are all gone? Then once you raise prices, another joker will go public, sell at cost forever until the first one is forced to compete?

 

I think that soon enough, its size will bring its own undoing. It gets more complex to manage, number of users growth declines. Like any other, they will try every trick to keep growth going and that is when they will make bad investments. Already, we are seeing the cash pile declining along with sales growth.

 

While I agree fully that this is not an easy short, there is something fundamentally wrong with this company and some day it will unravel.

 

Cardboard

[DCG]

I agree that the current valuation is tough to justify - especially if you compare them to Walmart.

 

Amazon's market cap - $105B. Sales were $48B last year. Net income has averaged around $1B annually for the last 3 years.

Walmart's market cap - $244B. Sales were around $447B last year. Net income has averaged around $16B annually for the last 3 years.

 

The thought is that Amazon will eventually be able to stop spending to much and greatly increase their profits. Bezos is definitely looking to build Amazon for the next 100 years, not the next few years.

 

 

[bargainman]

Shorting Amazon is dangerous because very few are critical of it. There is a fear of it because every short got burnt and the business is mysterious in some ways. It is amazing to me how much slack they are given and yes, it looks like CRM.

 

I find it funny. The guy was working for a hedge fund, knows how to value companies using free cash flow, talks about Ben Graham. Actually, he knows exactly what to do to ensure that Wall Street is never able to value it properly: fast sales growth, no earnings.

 

What they are doing is domestic dumping. It is illegal to sell goods into another country below cost. Since they are not a country, they get away with it. Now, when I am saying that they can do it because the stock market allows them to do it, it's because no one complains about a growing stock price and especially not employees who are compensated with it. This form of compensation also reduces their operating cash cost if you don't factor in dilution. They also love to exclude these charges from show cased operating cash flow. Ask yourself this question. If Wal-Mart decided to sell at cost tomorrow and to stop its dividend, what would happen to the stock price and what would the Department of Justice do?

 

So what is the business model here guys? Exterminate your competitors selling your products at cost, then raise prices once they are all gone? Then once you raise prices, another joker will go public, sell at cost forever until the first one is forced to compete?

 

I think that soon enough, its size will bring its own undoing. It gets more complex to manage, number of users growth declines. Like any other, they will try every trick to keep growth going and that is when they will make bad investments. Already, we are seeing the cash pile declining along with sales growth.

 

While I agree fully that this is not an easy short, there is something fundamentally wrong with this company and some day it will unravel.

 

Cardboard

 

Have you read much about Bezos?  I'm really curious, it's an honest question.

 

You know this is exactly what Walton was accused of doing with Walmart back when they were growing.  He was selling for the lowest possible margins, and making it up in volume.  If you look here:

 

http://finance.yahoo.com/q/cf?s=AMZN

 

for 3 of the last 4 quarters, their cap ex has been higher than depreciation and both have been significantly higher than earnings.  So they are definitely putting all their cash resources into growth and being uber efficient.

 

Now with regards to the 'race to the bottom', this is really their competitive advantage.  I'm really surprised by their hiring.  To be honest I've heard it's a horrible, horrible place to work.  Not just in their warehouses but for their tech people too.  But somehow they seem to have some good people, so I'm not sure how they attract them.  Maybe you're right that the stock is one attraction, so wallstreet does give them an unfair advantage there.  The other thing is that good tech people will often work in horrible conditions because they want to have an impact.

 

Back to Bezos.. he's no dummy.  I'm pretty sure he will do the right thing and adjust.  If he doesn't see a growth opportunity any longer he will start to generate cash flow and allocate appropriately.  It's just that he sees a massive opportunity still and I agree they still have a massive opportunity.

[LC]

For anyone who thinks Amazon doesn't have a huge moat, try to start an online retail store and compete with them and report back in a couple years.

 

Here's another issue I see with Amazon, taken from the Western Union discussion:

 

Warren is somewhat obsessed with companies that can raise their prices on their customers.  e.g. if Moody's raised its prices, Berkshire would still pay the higher price for bond ratings.

 

If Western Union is lowering its prices due to its competition then maybe its moat/advantage is not that big at all.

 

Can Amazon raise their prices? I'm not so sure. Does that mean they don't have a moat? Not quite, if they are going to maintain themselves as the low cost/most reliable online retailer.

 

I think it's important to realize what type of company Amazon is trying to stabilize themselves as: the low-cost online retailer with amazing shipping service. Can they execute on this is the real story.

[DCG]

For anyone who thinks Amazon doesn't have a huge moat, try to start an online retail store and compete with them and report back in a couple years.

 

Here's another issue I see with Amazon, taken from the Western Union discussion:

 

Warren is somewhat obsessed with companies that can raise their prices on their customers.  e.g. if Moody's raised its prices, Berkshire would still pay the higher price for bond ratings.

 

If Western Union is lowering its prices due to its competition then maybe its moat/advantage is not that big at all.

 

Can Amazon raise their prices? I'm not so sure. Does that mean they don't have a moat? Not quite, if they are going to maintain themselves as the low cost/most reliable online retailer.

 

I think it's important to realize what type of company Amazon is trying to stabilize themselves as: the low-cost online retailer with amazing shipping service. Can they execute on this is the real story.

 

They make up for low margins with scale. It's the Walmart business model, but online.

[Guest rimm_never_sleeps]

amazon will be able to raise prices. the prime membership is an annuity stream that will rise with inflation. amazon also gets a % of sales that they help initiate through their reseller community (much of the fee tied to the cost of shipping). This will rise with inflation. In other ways they have already raised prices, even if it's in penny increments on stuff they sell. people pay a premium to deal with no hassle service of amazon. I do for sure. it may be $1 on a $25 item, but they pay a premium. Amazon is working on being the world's largest and most efficient distributor of goods. That's going to be a great business in an inflationary world.

 

Amazon has me in many ways. I am a prime member. I buy most of my stuff from them. I buy some stuff through reseller network. And I sell stuff I bought back to other customers on their seller's market. Amazon take a cut on each of these interactions as the fulfillment agent for some of their resellers and those who sell into the Amazon customer base.

[Grenville]

 

http://www.wired.com/magazine/2011/11/ff_bezos/all/1

 

 

Nice article, thanks for posting.

[ItsAValueTrap]

Walmart is a little different because it used to generate huge returns on equity.  If you look on Google Finance, Walmart has outperformed many high-flying tech companies like Intel.

 

It is possible that online retailing is more cut-throat since consumers generally shop around based on price.  With bricks & mortar stores / before online retailing, consumers would shop based on price and convenience (distance to the store).  Consumers are also affected by things like how goods are presented and could be upsold on impulse purchases like candy and things like that.  There is more value-add in B&M than in online, so maybe you would expect that it is possible to generate higher ROE for B&M than online.

 

*I know that Amazon is doing some value-added things like book/production suggestions, they spam you with special deals on stuff (it worked on me... I bought Max Payne 2 because they emailed me saying it was on sale), etc.

 

Ultimately I see online retailing having very low margins due to cutthroat competition... online retailers have to try to make it up by turning over their inventory very quickly.  It could eventually look like what's happening to Dell once the landscape becomes more competitive.

 

2- Of course Amazon has other lines of business.  They are the eBay for used books.  And they are doing something very similar to eBay stores (allowing small merchants/manufacturers to sell online and have exposure to people searching for things).

 

3- Why would you short this?  Haha.  There are a lot of overpriced companies out there with little chance of making a profit.  Look at the Dot-Bomb 2.0 stocks (I wouldn't short those since the borrow is ridiculous).

[Eric50]

Waou…. Lots of misconceptions and inaccuracies in this thread. I’ve worked at amazon in several finance positions for 7 years before I started my fund.  I left 4 years ago but I still follow the business pretty closely. I feel like I need to clarify/explain a few things:

 

- Re the fraud issue (Cardboard). You have to substantiate why you think it’s a fraud. In the 7 years I’ve worked there I’ve never seen any fraud. The culture there is very aggressive but people are honest. I think you are making a very strong accusation and should substantiate it;

 

- I don’t see why selling at a loss in order to gain market share would be a fraud…. This is a competitive market with thin margins… Competitors want to gain market share. Sometimes one has to be aggressive and there will be some payback later. I’ve seen price wars with Walmart when I worked there. Sometimes Walmart won, sometimes Amazon won. This is just the way the market works. But this is no fraud;

 

- Q3 was the first unprofitable quarter for amazon in years. Rereading the thread it feels like early 2000, when amazon had never made a profit…. It is now a very different business with years of growth and profit. Back when I joined in 2001 revenue was about $2.5bn with no profit, it will be above $60bn this year and profitable. Do you know any other companies that have grown that much over the past 12 years?

 

- Profitability has decreased recently because they are investing heavily in tech (kindle, pads, etc…) and in new fulfillment centers. FCs are the backbone of the business, a huge moat because it’s super difficult to replicate and amazon has developed over the years a huge expertise at it. It’s a significant cost now but it will pay back very nicely in the future: they’ll have the infrastructure and the competition won’t;

 

- I agree it’s a very expensive stock now but I would not bet against it. Growth reaccelerated 4-5 years ago and it’s still growing very nicely. It might slowdown a little bit in the future but growth will still be above average. I suspect it will be the size of walmart in 10-15 years. I have no position right now but if I had a gun against my head and was forced to take a position I’d be bearish short term but bullish long term;

 

- Comparing amazon to CRM is a huge error in my opinion. You should do your homework, amazon is a much better business and much less overvalued. There are much better short ideas available in the market these days (SPLK, BV, LULU, CRM, etc);

 

- Re cloud computing, talk to the people in that field or the small entrepreneurs who use AWS and you’ll see how they respect what amzn does;

 

- I think amazon’s moat keeps growing all the time: millions of people buys stuff there systematically because they they know they’ll get a good deal. The warehouse infrastructure is little talked about but is a huge moat. Kindle is locking in the digital book market;

 

- Bezos is a super smart guy and he’s been leading all the key innovations: free shipping under $25, prime, kindle, etc… He is long oriented and betting against him is hardly a good idea;

 

- Re “domestic dumping” you’d have to substantiate what you mean…

 

- Re “stock compensation”, please check your premises. There are no stock options issued to employees. They get stocks awards that are included in the cost;

 

- Re the people there, it’s a very competitive place with long hours and lots, lots of very smart people. You either like it or not. People who don’t typically don’t stay long… But it’s an exciting and challenging place. Would you rather work 9 to 5 at IBM that grows 2% a year?

 

The reality is that the stock is quite expensive because there aren’t so many businesses that are growing that fast, that are changing the rules of the game so much and with such a quality management.

 

[Grenville]

Waou…. Lots of misconceptions and inaccuracies in this thread. I’ve worked at amazon in several finance positions for 7 years before I started my fund.  I left 4 years ago but I still follow the business pretty closely. I feel like I need to clarify/explain a few things:

....

 

I appreciate the post and the insight. I enjoy learning more about the company.

 

Amazon is becoming an enabler for other businesses through AWS, FBA (Fulfillment by Amazon), Third party Sellers on product pages and KDP (Kindle Direct publishing).

[ItsAValueTrap]

- Profitability has decreased recently because they are investing heavily in tech (kindle, pads, etc…) and in new fulfillment centers. FCs are the backbone of the business, a huge moat because it’s super difficult to replicate and amazon has developed over the years a huge expertise at it. It’s a significant cost now but it will pay back very nicely in the future: they’ll have the infrastructure and the competition won’t;

I feel like people make this argument for Walmart.  Yet when I looked at Tractor Supply Company, it seems that there are new scrappy little retailers out there that are beating Walmart.  Tractor Supply is opening smaller stores in former Walmart locations.  And they aren't even the best in their niche.

 

Here's what the CEO of Rural King has to say:

“We compete directly against Walmart, Home Depot, Lowe’s and Tractor Supply,” Melvin explained. He said he continues to be impressed with Menard’s, which he believes is the preeminent competitor in his space.

http://www.monmouthcollege.edu/information/newsEvents/newsDetails.aspx?Channel=%2FChannels%2FCampus+Wide&WorkflowItemID=93c05545-822c-4656-9584-8363d926e7e2