AMZN - Amazon.com Inc.

[Jurgis]

https://www.bloomberg.com/news/articles/2017-06-22/amazon-s-bezos-disrupts-another-frontier-with-just-one-tweet

 

I'd say buy Whole Foods...

 

 

 

... oh, wait.

 

8)

[Jurgis]

Anecdotal reports from the trenches: was just ordering my granola and coffee from Walmart.com. Double checked Amazon. It appears that Amazon now sells granola at supermarket/Walmart prices, but only through Pantry or Fresh. Still likely not worth for me to try either of these. Amazon is now selling the coffee I buy at below supermarket/Walmart prices and it's Amazon-proper, not third parties. So clear push for groceries it seems.

 

Also, I've started seeing products on Amazon that say "Prime customers only". Not sure if this is really just for Amazon Prime customers - did not try to logout and search for the same item. Also not sure if this is a good idea or bad idea. I'm sure Amazon gonna data mine though.

 

8)

[SlowAppreciation]

http://minesafetydisclosures.com/blog/2017/7/3/whats-amazons-plan-for-whole-foods

[rkbabang]

Amazon Is Preparing to Take Over the Healthcare Space

 

Amazon Could Buy Walgreens, Rite Aid, Express Scripts

 

[KCLarkin]

Amazon Is Preparing to Take Over the Healthcare Space

 

Amazon Could Buy Walgreens, Rite Aid, Express Scripts

 

For those aware of the conglomerates from the Go Go Era, there is an interesting arbitrage opportunity here. Express Scripts had $4.5B in FCF last year. It's enterprise value is approximately $50B. It is trading for approximately 8.5x FCF. It has $100B in "revenue".

 

Amazon is trading at something like 50x trailing FCF. It has ~ $150B in revenue. It has market cap of $500B.

 

So Amazon could buy Express scripts for about 10% of it's market cap, but increase revenue by 66%. And increase FCF by 45%.

 

--

Actually, this seems to be the best growth strategy for Amazon. Instead of taking on cash machines like AZO, Grainger, and CVS straight on, it should make loud noises about entering an industry. Wait until multiples get cut in half, and then buy one of the main players. Amazon could easily boost revenue growth to 40-50% per year.

 

The strange thing with their current "your margin is my opportunity" approach, is that they are destroying significant profit pools. Why not just acquire the profit pools with their high priced stock? Surely this would maximize the present value of free cash flows?

[SlowAppreciation]

Amazon Is Preparing to Take Over the Healthcare Space

 

Amazon Could Buy Walgreens, Rite Aid, Express Scripts

 

For those aware of the conglomerates from the Go Go Era, there is an interesting arbitrage opportunity here. Express Scripts had $4.5B in FCF last year. It's enterprise value is approximately $50B. It is trading for approximately 8.5x FCF. It has $100B in "revenue".

 

Amazon is trading at something like 50x trailing FCF. It has ~ $150B in revenue. It has market cap of $500B.

 

So Amazon could buy Express scripts for about 10% of it's market cap, but increase revenue by 66%. And increase FCF by 45%.

 

--

Actually, this seems to be the best growth strategy for Amazon. Instead of taking on cash machines like AZO, Grainger, and CVS straight on, it should make loud noises about entering an industry. Wait until multiples get cut in half, and then buy one of the main players. Amazon could easily boost revenue growth to 40-50% per year.

 

The strange thing with their current "your margin is my opportunity" approach, is that they are destroying significant profit pools. Why not just acquire the profit pools with their high priced stock? Surely this would maximize the present value of free cash flows?

 

Interesting thought., and one I hadn't considered. Thank you

[Jurgis]

Amazon Is Preparing to Take Over the Healthcare Space

 

Amazon Could Buy Walgreens, Rite Aid, Express Scripts

 

For those aware of the conglomerates from the Go Go Era, there is an interesting arbitrage opportunity here. Express Scripts had $4.5B in FCF last year. It's enterprise value is approximately $50B. It is trading for approximately 8.5x FCF. It has $100B in "revenue".

 

Amazon is trading at something like 50x trailing FCF. It has ~ $150B in revenue. It has market cap of $500B.

 

So Amazon could buy Express scripts for about 10% of it's market cap, but increase revenue by 66%. And increase FCF by 45%.

 

--

Actually, this seems to be the best growth strategy for Amazon. Instead of taking on cash machines like AZO, Grainger, and CVS straight on, it should make loud noises about entering an industry. Wait until multiples get cut in half, and then buy one of the main players. Amazon could easily boost revenue growth to 40-50% per year.

 

The strange thing with their current "your margin is my opportunity" approach, is that they are destroying significant profit pools. Why not just acquire the profit pools with their high priced stock? Surely this would maximize the present value of free cash flows?

 

The risk of this strategy to Amazon is that it leads to collapse of the stock price because investors see "new" company buying "old and tired" cos. Or great company becoming average through acquisitions and possibly not easy integration.

 

Whole Foods acquisition didn't hurt Amazon image, but more acquisitions might.

 

Even though I partially agree with you that it would provide AMZN with "cheap" cash flow.

[KCLarkin]

The risk of this strategy to Amazon is that it leads to collapse of the stock price because investors see "new" company buying "old and tired" cos. Or great company becoming average through acquisitions and possibly not easy integration.

 

Bezos cares about maximizing NPV not share price. I used ESRX as an example because of the Investopedia article (even though I think it is not a great option since it is far outside of the core). But something like MSC direct would be much easier to digest. If they bought MSC for $6B, I bet they would add $10-20B to market cap. And this is not really di-worsifying. The profit pools they are attacking are phenomenal businesses (or at least would be without the Amazon threat). And MSC or AZO seem much more aligned to Amazon than WFM.

 

This conglomerate valuation arbitrage gets a bad wrap (deservedly) but it was also the initial source of Singleton's value creation at Teledyne.

 

Edit: One valid criticsm of this approach is that it would dilute ROIC. This would generally be true but Amazon's current ROIC is relatively modest anyway. And its cost of capital is super super low. Actually, this reminds me a bit of BRK.A. Why wouldn't Bezos use his cheap float to buy great companies?

[Jurgis]

Yeah, I think we mostly agree. Although it could be argued that conglomerate is not Bezos modus operandi. And yet he bought Whole Foods, so ./shrug

 

 

[SlowAppreciation]

The risk of this strategy to Amazon is that it leads to collapse of the stock price because investors see "new" company buying "old and tired" cos. Or great company becoming average through acquisitions and possibly not easy integration.

 

Bezos cares about maximizing NPV not share price. I used ESRX as an example because of the Investopedia article (even though I think it is not a great option since it is far outside of the core). But something like MSC direct would be much easier to digest. If they bought MSC for $6B, I bet they would add $10-20B to market cap. And this is not really di-worsifying. The profit pools they are attacking are phenomenal businesses (or at least would be without the Amazon threat). And MSC or AZO seem much more aligned to Amazon than WFM.

 

This conglomerate valuation arbitrage gets a bad wrap (deservedly) but it was also the initial source of Singleton's value creation at Teledyne.

 

Edit: One valid criticsm of this approach is that it would dilute ROIC. This would generally be true but Amazon's current ROIC is relatively modest anyway. And its cost of capital is super super low. Actually, this reminds me a bit of BRK.A. Why wouldn't Bezos use his cheap float to buy great companies?

 

I'm not sure it's as low as it appears. FCF/E is like 30%-35%, which is pretty great in my book.

[KCLarkin]

conglomerate is not Bezos modus operandi.

 

But that's what he is building anyway. It's just a question of whether it is better to build or buy.

[Jurgis]

conglomerate is not Bezos modus operandi.

 

But that's what he is building anyway. It's just a question of whether it is better to build or buy.

 

You are completely right.  8)

[rkbabang]

conglomerate is not Bezos modus operandi.

 

But that's what he is building anyway. It's just a question of whether it is better to build or buy.

 

Amazon has made quite a few acquisitions.  A few per year on average.  So it has been building and buying and building on what it buys.

The 3 options are build entirely on its own, buy something small and build from there, or just go whole hog and buy Express Scripts/Walgreens/etc..

 

 

EDIT:

 

[Liberty]

I think Bezos sees Amazon internally as a collection of businesses, P&Ls, and modules that interoperate. Some are mature, some are in the startup/investment phase, some are built, some are acquired, etc. It can be called a conglomerate, it's just not quite like the conglomerates of the 1960s.

[KCLarkin]

I'm not sure it's as low as it appears. FCF/E is like 30%-35%, which is pretty great in my book.

 

This assumes that FCF is a meaningful way to analyze Amazon. I don't think it is. Vilas Capital explains my thoughts pretty well (starting on Page 5): https://docs.wixstatic.com/ugd/411d80_656127b6bb964d97a74efa47b1ad1662.pdf

 

I know others disagree, so I won't rehash this argument.

[KCLarkin]

Amazon has made quite a few acquisitions.  A few per year on average.  So it has been building and buying and building on what it buys.

The 3 options are build entirely on its own, buy something small and build from there, or just go whole hog and buy Express Scripts/Walgreens/etc..

 

Yes, but with the possible exception of WFM, I don't think they've ever really bought a viable, profitable, FCF generating business. Their acquisitions seem to fall into 3 buckets:

- Technology acquisitions

- Competitor take-outs

- Venture Capital style investments

 

--

For example, they bought smallparts.com and used this to launch their Amazon Supply business. But SmallParts.com is no more. Zappos.com still exists but it wasn't a profitable or viable business when it was purchased. In other words, they have always purchased "challenger" businesses rather than purchasing incumbents. For their core business, this made sense since Bricks & Mortar retail is a horrible business. But as they branch out into better businesses, I think there is an opportunity to create value by purchasing incumbents.

[SlowAppreciation]

I'm not sure it's as low as it appears. FCF/E is like 30%-35%, which is pretty great in my book.

 

This assumes that FCF is a meaningful way to analyze Amazon. I don't think it is. Vilas Capital explains my thoughts pretty well (starting on Page 5): https://docs.wixstatic.com/ugd/411d80_656127b6bb964d97a74efa47b1ad1662.pdf

 

I know others disagree, so I won't rehash this argument.

 

Thanks for sharing, looking forward to reading it. I'm guessing it argues most of AMZN's FCF is from changes to WC?

[KCLarkin]

I'm not sure it's as low as it appears. FCF/E is like 30%-35%, which is pretty great in my book.

 

This assumes that FCF is a meaningful way to analyze Amazon. I don't think it is. Vilas Capital explains my thoughts pretty well (starting on Page 5): https://docs.wixstatic.com/ugd/411d80_656127b6bb964d97a74efa47b1ad1662.pdf

 

I know others disagree, so I won't rehash this argument.

 

Thanks for sharing, looking forward to reading it. I'm guessing it argues most of AMZN's FCF is from changes to WC?

 

There are four main categories that separate Amazon’s GAAP earnings of $2.37 billion and its cash flow of $16.4 billion: increases in payables, increases in unearned revenue from Prime memberships, stock based compensation, and lease accounting for capital expenditures.

[Guest longinvestor]

I'm not sure it's as low as it appears. FCF/E is like 30%-35%, which is pretty great in my book.

 

This assumes that FCF is a meaningful way to analyze Amazon. I don't think it is. Vilas Capital explains my thoughts pretty well (starting on Page 5): https://docs.wixstatic.com/ugd/411d80_656127b6bb964d97a74efa47b1ad1662.pdf

 

I know others disagree, so I won't rehash this argument.

 

Thanks for sharing, looking forward to reading it. I'm guessing it argues most of AMZN's FCF is from changes to WC?

 

There are four main categories that separate Amazon’s GAAP earnings of $2.37 billion and its cash flow of $16.4 billion: increases in payables, increases in unearned revenue from Prime memberships, stock based compensation, and lease accounting for capital expenditures.

 

Thanks for posting. I agree with you that Vilas captures the phony side of Amazon well.

 

BTW, It is a nice & short read. About 5 minutes to read the short case on AMZN. Less time than to type a reply on the message board. You are being extra nice to provide a summary as you just did.

 

 

[Liberty]

I think the bear case on Amazon is usually thinking wrong about growth vs maintenance capex, and about the operating leverage that can be wrought out of fixed assets which might be very expensive up front. On retail, they also tend to miss the changing mix from 1PL to 3PL (+FBA), which lowers revenue per sale but has better margins/ROIC.

[Liberty]

http://www.cnbc.com/2017/07/26/amazon-1492-secret-health-tech-project.html

 

Amazon has a secret skunkworks lab called 1492, dedicated to health care tech.

Areas of exploration include a platform for electronic medical record data, telemedicine and health apps for existing devices like the Amazon Echo.

[Guest Cameron]

Amazon has done a good job at financing the growth of AWS through capital leases so it doesn't show up under Capex and then point to their free cash flow as the metric to value them rather than earnings. When you add back the capital leases being paid for just to maintain and grow AWS free cash flow looks just a little bit different.

[SlowAppreciation]

I'm not sure it's as low as it appears. FCF/E is like 30%-35%, which is pretty great in my book.

 

This assumes that FCF is a meaningful way to analyze Amazon. I don't think it is. Vilas Capital explains my thoughts pretty well (starting on Page 5): https://docs.wixstatic.com/ugd/411d80_656127b6bb964d97a74efa47b1ad1662.pdf

 

I know others disagree, so I won't rehash this argument.

 

Thanks for sharing, looking forward to reading it. I'm guessing it argues most of AMZN's FCF is from changes to WC?

 

There are four main categories that separate Amazon’s GAAP earnings of $2.37 billion and its cash flow of $16.4 billion: increases in payables, increases in unearned revenue from Prime memberships, stock based compensation, and lease accounting for capital expenditures.

 

Thanks for posting. I agree with you that Vilas captures the phony side of Amazon well.

 

BTW, It is a nice & short read. About 5 minutes to read the short case on AMZN. Less time than to type a reply on the message board. You are being extra nice to provide a summary as you just did.

 

Tough crowd...

[DooDiligence]

I'm not sure it's as low as it appears. FCF/E is like 30%-35%, which is pretty great in my book.

 

This assumes that FCF is a meaningful way to analyze Amazon. I don't think it is. Vilas Capital explains my thoughts pretty well (starting on Page 5): https://docs.wixstatic.com/ugd/411d80_656127b6bb964d97a74efa47b1ad1662.pdf

 

I know others disagree, so I won't rehash this argument.

 

Thanks for sharing, looking forward to reading it. I'm guessing it argues most of AMZN's FCF is from changes to WC?

 

There are four main categories that separate Amazon’s GAAP earnings of $2.37 billion and its cash flow of $16.4 billion: increases in payables, increases in unearned revenue from Prime memberships, stock based compensation, and lease accounting for capital expenditures.

 

Thanks for posting. I agree with you that Vilas captures the phony side of Amazon well.

 

BTW, It is a nice & short read. About 5 minutes to read the short case on AMZN. Less time than to type a reply on the message board. You are being extra nice to provide a summary as you just did.

 

Tough crowd...

 

Not much heckling though...

[Liberty]

Q2:

 

http://phx.corporate-ir.net/phoenix.zhtml?c=176060&p=irol-newsArticle&ID=2289567