AMZN - Amazon.com Inc.

[Liberty]

PS: NASDAQ is hitting all time highs after 15 years, cut them some slack, its not been a pretty ride. hitting those levels again doesn't mean its automatically over valued.

 

The "all time highs" noise that I keep hearing doesn't make much sense. Over any significant enough period of time, you should expect to be constantly hitting new all time highs because the economy is growing, population is growing, inflation is making the nominal figures bigger, the world is globalizing and poor countries are becoming richer, etc.

 

Look at a chart of the DOW going back a 100 years and tell me how many all time highs have been hit...

 

Some stats about that here

 

https://twitter.com/gregorysshea/status/592000272571846656

 

[constructive]

O.K., any examples of a market that collapsed 50% where the general public was disinterested before the collapse? (No magazine covers, no commentary on news programs, no mention in late-night comedy chat show routines, etc.)

 

3% of Americans owned shares of stock in 1929. Low ownership and public interest did not prevent a 50% collapse - if anything the opposite, volatility was higher in the 19th and early 20th century than in the later 20th century.

 

Now almost 50% of people own stock (most through mutual funds). The level of public interest in financial news has increased in line with that. If you look for magazine covers with Bezos on them or news discussing Tesla's share price you will certainly find them.

[BargainValueHunter]

O.K., any examples of a market that collapsed 50% where the general public was disinterested before the collapse? (No magazine covers, no commentary on news programs, no mention in late-night comedy chat show routines, etc.)

 

3% of Americans owned shares of stock in 1929. Low ownership and public interest did not prevent a 50% collapse - if anything the opposite, volatility was higher in the 19th and early 20th century than in the later 20th century.

 

Now almost 50% of people own stock (most through mutual funds). The level of public interest in financial news has increased in line with that. If you look for magazine covers with Bezos on them or news discussing Tesla's share price you will certainly find them.

I don't think "public interest" or even ownership rates determine the cause of a market collapse. And, as I recall, CNBC's ratings have been in the cellar for some time.

 

http://money.cnn.com/2015/01/06/media/cnbc-ditches-nielsen/

 

I only have my personal point of view but I just don't see the interest in tech stocks today (as opposed to tech products) that I saw 16 years ago or nearly the interest in residential real estate investing as I did 10 years ago.

 

One frothy sector that could collapse without current public fascination or mainstream media attention would be biotech stocks.

 

I suppose the closest thing we currently have to general, non-financial news junkie interest in a current economic situation is the collapse of oil prices and the turmoil in Greece.

 

I'm not saying that oil is going to spike higher or greek bond yields are about to collapse but if my dentist or Starbucks barista wishes to include such topics in a small talk situation I'll certainly be watching to see what happens next.

[Palantir]

I am shocked to see how profitable AWS is. I thought it would be a very bad margins, money draining business. Makes you wonder.....more space for cutting prices then? :D

[rpadebet]

I am shocked to see how profitable AWS is. I thought it would be a very bad margins, money draining business. Makes you wonder.....more space for cutting prices then? :D

 

Yes, they can. They should and I am sure they will. This is setting up to be a winner take all business. Better to kill the competition in its infancy.

[Aurelius]

http://www.thestreet.com/story/13128887/1/amazon-goes-after-staples-tapping-into-a-trillion-dollar-market.html?puc=yahoo&cm_ven=YAHOO

 

[tengen]

I am shocked to see how profitable AWS is. I thought it would be a very bad margins, money draining business. Makes you wonder.....more space for cutting prices then? :D

 

AWS is quite impressive as a service offering. I've used it for two different projects and I'm amazed at the breadth and depth that just keep expanding while prices drop. I'd love to see Amazon spin it off.

 

This is setting up to be a winner take all business. Better to kill the competition in its infancy.

 

It's going to be difficult to compete head to head with AWS but I would expect various authorities to step in if Amazon is seen to be "killing the competition".

[frommi]

I am shocked to see how profitable AWS is. I thought it would be a very bad margins, money draining business. Makes you wonder.....more space for cutting prices then? :D

 

Don`t they use the same hardware/data centers they use for the Amazon site for AWS? Where are the expenses of that booked?

[rpadebet]

It's going to be difficult to compete head to head with AWS but I would expect various authorities to step in if Amazon is seen to be "killing the competition".

 

Its a good problem to have when you get there.... it means you won! (don't remember who said that)

Standard Oil, Microsoft, Ma Bell, John Malone (TCI), GOOG (in europe) etc...the list is a good one to follow.

[constructive]

This is setting up to be a winner take all business.

 

Don't really agree with this. AWS has a scale advantage but there is currently room for multiple companies to grow very rapidly. Microsoft, Google, IBM, etc aren't really cash constrained. If they have good technology and they want to grow cloud services they can grow without worrying too much about current margins, which negates a fair amount of Amazon's scale advantage.

 

Also as I understand it, AWS is not that sticky. It's not easy to transition cloud providers, but it's not horribly difficult either.

[Liberty]

Good stuff: https://stratechery.com/2015/the-aws-ipo/

[muscleman]

I wonder if anyone compared BABA with AMZN?

Based on the price/GMV ratio along, BABA seems way cheaper than AMZN.

[rpadebet]

I wonder if anyone compared BABA with AMZN?

Based on the price/GMV ratio along, BABA seems way cheaper than AMZN.

 

Yes BABA is cheaper than AMZN by that metric currently. I have a decent position in BABA built around 80$. BABA PE is stupid high, but their growth is even more ridiculous. One reason why BABA has low price/GMV ratio is because their take rates on mobile aren't very high and there is a concern that more and more shopping is done on mobile than PC, which is certainly true.(recent baba earnings proved that was indeed the case and that they are adapting well). I believe eventually BABA's take rate on mobile will rise to PC level and even surpass it. There is also a concern that crackdown on counterfeit goods and lottery etc will reduce the growth in GMV. I think that is just a short term concern and eventually other avenues of growth will replace it.

[merkhet]

Thanks to everyone for the Amazon discussion. It's been very interesting to read through this entire thread.

[JAllen]

Looking forward to your thoughts.

[jawn619]

Amazon is a nasty business. (in a good way). But let's not confuse a good business with a good investment.

[ScottHall]

Amazon is a nasty business. (in a good way). But let's not confuse a good business with a good investment.

 

It can be both. And in my opinion, probably is if you're looking at a long-term holding period.

[merkhet]

Looking forward to your thoughts.

 

Not sure that I have much insight to add here.

 

As far as I can tell, the conversation revolves around the fact that on $92 billion of TTM revenue, Amazon doesn't show much of a GAAP profit and whether this means that Amazon does not have an economic and/or owners earnings profit. The twist is, as you've pointed out, Amazon should theoretically have (and has historically shown) a benefit in margins given its less capital intensive business model (fulfillment centers vs. retail stores, semi-automated warehouses vs. retail employees, etc.) -- and this seems to create a significant amount of cognitive dissonance.

 

Clearly, there is some investment in the future that is flowing through the income statement in addition to capital expenditures, but it's difficult to figure out how much is "growth expenses" and how much is "maintenance expenses." This forms the crux of the discussion for the last twenty or so pages.

 

My own nascent guess at this stage is that Amazon probably has owners earnings above what is shown based on GAAP numbers, but it's currently difficult for me to figure out just how much higher their owner earnings are...

[merkhet]

As a side note, looks like the Amazon Echo just went public to everyone.

 

http://blogs.wsj.com/personal-technology/2015/06/23/you-can-finally-buy-amazons-always-listening-echo-speaker/

[TwoCitiesCapital]

As a side note, looks like the Amazon Echo just went public to everyone.

 

http://blogs.wsj.com/personal-technology/2015/06/23/you-can-finally-buy-amazons-always-listening-echo-speaker/

 

My brother has had one of these for a little bit now. It's pretty cool in that you can shout commands/search queries while you're busy, but I wasn't anymore or any less impressed with it than the Google Now functionality on smartphones that essentially does the same thing. And there are Android devices out there that are "always listening" too after the Moto X was awhile back.

[TheAiGuy]

Looking forward to your thoughts.

 

Not sure that I have much insight to add here.

 

As far as I can tell, the conversation revolves around the fact that on $92 billion of TTM revenue, Amazon doesn't show much of a GAAP profit and whether this means that Amazon does not have an economic and/or owners earnings profit. The twist is, as you've pointed out, Amazon should theoretically have (and has historically shown) a benefit in margins given its less capital intensive business model (fulfillment centers vs. retail stores, semi-automated warehouses vs. retail employees, etc.) -- and this seems to create a significant amount of cognitive dissonance.

 

Clearly, there is some investment in the future that is flowing through the income statement in addition to capital expenditures, but it's difficult to figure out how much is "growth expenses" and how much is "maintenance expenses." This forms the crux of the discussion for the last twenty or so pages.

 

My own nascent guess at this stage is that Amazon probably has owners earnings above what is shown based on GAAP numbers, but it's currently difficult for me to figure out just how much higher their owner earnings are...

 

Does it matter what the owner earnings are now? Even if we assume that there are some obfuscated owner earnings, all of the owner earnings are being plowed back into growth.

 

To me, what's important is knowing 1) how much runway AMZN has to grow and 2) what the end-state margins will look like.  Both are hard to know, though knowing "owner's earnings" could tell us how much 1) costs and give us an idea what 2) will look like (though the margins will change over time as the mix of businesses changes).

 

Supposedly, AMZN is a long term play, so you can do a valuation by projecting out the earnings ~15 years from now. That valuation is going to vary wildly based on your assumptions. For example, if AMZN grows revenue between 10-15% a year for the next 15 and net margins settle at ~3%, the stock has a good chance of loosing money from these prices. On the other hand if revenues grow 20% a year and margins settle in at around ~4%, the stock should be any where from a pretty good investment (7-8%/year) to a fantastic one (12-14%/year).

 

I don't know how you would reduce the uncertainty of that -- even if you knew owners earnings, what multiple would you pay? Say it's 50x owners earnings, what happens if AMZN becomes the most profitable company in the world (i.e. something like "walmart for the rich" + "ibm")?

 

 

[valueinvestor82]

What you're saying makes logical sense to me, which leads me to ask, is 8-14% annual return worth the massive risk of AMZN based strictly on execution? Zero margin of safety in my view.

[merkhet]

Looking forward to your thoughts.

 

Not sure that I have much insight to add here.

 

As far as I can tell, the conversation revolves around the fact that on $92 billion of TTM revenue, Amazon doesn't show much of a GAAP profit and whether this means that Amazon does not have an economic and/or owners earnings profit. The twist is, as you've pointed out, Amazon should theoretically have (and has historically shown) a benefit in margins given its less capital intensive business model (fulfillment centers vs. retail stores, semi-automated warehouses vs. retail employees, etc.) -- and this seems to create a significant amount of cognitive dissonance.

 

Clearly, there is some investment in the future that is flowing through the income statement in addition to capital expenditures, but it's difficult to figure out how much is "growth expenses" and how much is "maintenance expenses." This forms the crux of the discussion for the last twenty or so pages.

 

My own nascent guess at this stage is that Amazon probably has owners earnings above what is shown based on GAAP numbers, but it's currently difficult for me to figure out just how much higher their owner earnings are...

 

Does it matter what the owner earnings are now? Even if we assume that there are some obfuscated owner earnings, all of the owner earnings are being plowed back into growth.

 

To me, what's important is knowing 1) how much runway AMZN has to grow and 2) what the end-state margins will look like.  Both are hard to know, though knowing "owner's earnings" could tell us how much 1) costs and give us an idea what 2) will look like (though the margins will change over time as the mix of businesses changes).

 

Supposedly, AMZN is a long term play, so you can do a valuation by projecting out the earnings ~15 years from now. That valuation is going to vary wildly based on your assumptions. For example, if AMZN grows revenue between 10-15% a year for the next 15 and net margins settle at ~3%, the stock has a good chance of loosing money from these prices. On the other hand if revenues grow 20% a year and margins settle in at around ~4%, the stock should be any where from a pretty good investment (7-8%/year) to a fantastic one (12-14%/year).

 

I don't know how you would reduce the uncertainty of that -- even if you knew owners earnings, what multiple would you pay? Say it's 50x owners earnings, what happens if AMZN becomes the most profitable company in the world (i.e. something like "walmart for the rich" + "ibm")?

 

I think starting points matter. Let's say I think that Amazon's worth 25x owner's earnings eventually, and it will have a CAGR of 20% over two decades.

 

My CAGR over two decades will be different based on my starting point.

 

@25x, I've got a 20% CAGR.

@50x, I've got a 15.9% CAGR.

@100x, I've got a 12.0% CAGR.

 

If it's 100x, maybe I should be looking at whether I think I can get that from Markel vs. Amazon. Maybe Markel is more predictable to me over time than Amazon, etc. Note that I am very intentionally using the phrase "more predicable to me" rather than an objective phrase of "more predictable."

[TheAiGuy]

 

I think starting points matter. Let's say I think that Amazon's worth 25x owner's earnings eventually, and it will have a CAGR of 20% over two decades.

 

My CAGR over two decades will be different based on my starting point.

 

@25x, I've got a 20% CAGR.

@50x, I've got a 15.9% CAGR.

@100x, I've got a 12.0% CAGR.

 

If it's 100x, maybe I should be looking at whether I think I can get that from Markel vs. Amazon. Maybe Markel is more predictable to me over time than Amazon, etc. Note that I am very intentionally using the phrase "more predicable to me" rather than an objective phrase of "more predictable."

 

Yeah, that's a fair point. You're certainly not going to get as good of a return at 100x. But given those assumptions, 100x for a company that grows value at 20% a year for 20 years is a good price, you know, assuming it actually grows like that.

[Palantir]

We are still discussing lack of GAAP profits as a salient point for AMZN?