AMZN - Amazon.com Inc.

[shoeless]

In a recent interview on 60 minutes Amazon revealed they were working on drone delivery for packages up to 5 pounds.  Thought it would be possible to implement in about 5 years.  Earliest that it could be done is 3 years due to Needing FAA approval. 

 

I believe this is the interview (see the drones around minute 11)

http://www.youtube.com/watch?v=6in-MZeeeGk

 

[bargainman]

I never understood why people need their stuff so quickly. The stuff I buy there is never urgent. If it comes in couple of days that's cool but if it comes next week that's okay too... Maybe I'm just weird...

 

I guess I am not their target for Prime (or Prime Air)...

 

You and me both.  Had a discussion with a friend the other day and he was literally about to flip out b/c his package wasn't going to be delivered Friday (UPS was closed) over a shirt.  People are losing the whole concept of patience these days or maybe its their expectations are way to high.  Wish I could figure out a way to accomodate these types of people b/c even though they are high maintence, I would charge them an arm and a leg to accomodate those demands (cause lets face it if your a pain in the ass I'm going to charge extra putting up with all the bs).

 

Could be a function of age and what you grew up with. Take smartphones for example or even just the internet. I can remember growing up and to find out the sports scores we would sit around and wait until the sports came on the 11 pm news. If for some reason you missed that or it was a late game you had to wait until you got the newspaper the next day. Sometimes when we really wanted to know we would call up the sports desk at the local paper and ask them but if we did it too often they got irritated. Now, if you want to know a score and for whatever reason the app on your phone doesn't connect immediately everyone freaks out.

 

Everything is amazing and nobody is happy!!! :-)

 

http://www.liveleak.com/view?i=aba_1332656862

 

"wasted on the crappiest generation of spoiled idiots..."  really funny ..

 

Love his description of flying :-)

[LC]

Amazon to launch 'Pantry': http://www.usatoday.com/story/tech/2013/12/12/amazon-pantry/4001707/

 

The service will be targeted at existing members of Amazon's Prime shipping program. It will launch with about 2,000 products typically found in the center of grocery stores, such as cleaning supplies, kitchen paper rolls, canned goods like pet food, dry grocery items like cereal and some beverages.

 

Amazon will let Prime shoppers put as many of these items into a set sized box, up to a specific weight limit. If the products fit and they don't exceed the maximum weight, Amazon will ship the box for a small fee.

 

Wonder if it will actually generate profits or just keep Fedex/UPS busy? :)

[Guest valueInv]

Amazon to launch 'Pantry': http://www.usatoday.com/story/tech/2013/12/12/amazon-pantry/4001707/

 

The service will be targeted at existing members of Amazon's Prime shipping program. It will launch with about 2,000 products typically found in the center of grocery stores, such as cleaning supplies, kitchen paper rolls, canned goods like pet food, dry grocery items like cereal and some beverages.

 

Amazon will let Prime shoppers put as many of these items into a set sized box, up to a specific weight limit. If the products fit and they don't exceed the maximum weight, Amazon will ship the box for a small fee.

 

Wonder if it will actually generate profits or just keep Fedex/UPS busy? :)

 

When you're Amazon, you don't need profits. ;)

[Grenville]

Just finished the Everything Store by Brad Stone. I highly recommend the book to anyone invested in Amazon or other's wanting to get a more inside look at the company. Really interesting stories both about internal operation along with their acquisitions. I know Mackenzie Bezos had a less than sparkling review, but I agree with others that its a valuable story/view on the workings of growing/sprawling business.

 

I think there is a thread in the book category, but I wanted to leave my review in the investment thread because it adds value understanding the company.

[fareastwarriors]

http://www.businessweek.com/articles/2013-12-17/amazon-may-get-its-first-labor-union-in-the-u-dot-s

 

Amazon May Get Its First Labor Union in the U.S.

[Guest ajc]

When you're Amazon, you don't need profits. ;)

 

I don't think that's a very useful way of looking at Amazon's approach to business, in fact their 'unprofitability' is probably one of their most important strengths.

 

Still, it's always a joke I appreciate reading because you're right that for most companies it would be just as bad as it sounds.

 

[Guest valueInv]

When you're Amazon, you don't need profits. ;)

 

I don't think that's a very useful way of looking at Amazon's approach to business, in fact their 'unprofitability' is probably one of their most important strengths.

 

Still, it's always a joke I appreciate reading because you're right that for most companies it would be just as bad as it sounds.

 

Amazons greatest strength is the lack of people willing to do a financial analysis.

[JAllen]

When you're Amazon, you don't need profits. ;)

 

I don't think that's a very useful way of looking at Amazon's approach to business, in fact their 'unprofitability' is probably one of their most important strengths.

 

Still, it's always a joke I appreciate reading because you're right that for most companies it would be just as bad as it sounds.

 

Amazons greatest strength is the lack of people willing to do a financial analysis.

 

 

What are your conclusions performing your financial analysis? 

 

 

Some of mine are:

• Amazon generates consistent operating cash flows despite cash operating cash flow expenses that reduce them (e.g. digital video licensing fees).  For us, cash flows matter more than GAAP income.  The company emphasizes that this is how it views its finances as well.
  
• Amazon intentionally overstates many expenses.  Some are spelled out in the 10-Ks, others require thought
  
• The company averaged a high single-digit free cash flow margin in the three years prior to its greater-than-sales growth rate fulfillment center expansion
  
• During the years in which Amazon had high single digit free cash flow margins, its gross margins were considerably below where they currently are. (~22% versus ~28%)
  
• All four of Amazon's businesses are leaders and are tiny in relation to their potential eventual size (e.g. Amazon's total U.S retail sales are ~1% of addressable sales; WMT's are ~10% despite much fewer SKUs)
  

 

 

[Guest valueInv]

[

 

So think about this:  all of these guys are buying from ODMs.  DELL and HPQ are ODM buyers as well -- it's just that they make a retail profit on servers at this time.  They're actually in a better position than FB, AMZN, and GOOG in terms of buying power.  That means they can be low cost providers for non-public cloud solutions (think about verticals like healthcare or energy), and they can also provide their own public clouds.  Because of projects like OpenStack and OpenCompute.   

 

In order for these guys to totally lose out, you must assume that none of them will provide public cloud solutions on par with the current public cloud big dogs and that everyone will outsource to the public cloud -- or at a higher level, to SaaS providers.  I contend that because of projects like Open Compute and OpenStack, the public cloud playing field will be leveled over time, with resources, scale, and enterprise relationships starting to matter more and more in terms of competitiveness in the market.  I also think that there will always be enterprises who will go with managed or unmanaged private/hybrid cloud solutions.  Because these guys want control over their data, they want to outsource cloud infrastructure management to vendors with expertise, and because it actually costs less to buy than to rent in most cases.

 

In other words, "retail" server sales to third parties may shrink, but that doesn't mean that the big guys don't profit from their position in the long run, particularly when you see value shifting to the software and services bundled with the cloud hardware (again, I agree with the notion of commoditization).  That's exactly the approach that the big three are taking.

 

And here is Openstack in the real world:

http://blogs.gartner.com/alessandro-perilli/why-vendors-cant-sell-openstack-to-enterprises/

 

Re:Invent was a message to the ecosystem:

http://gigaom.com/2013/11/20/aws-gets-respect-but-also-fear-and-loathing-in-las-vegas/

 

More on Openstack:

 

http://gigaom.com/2013/12/20/backbreaking-openstack-migrations-hinder-enterprise-upgrades/

[Guest ajc]

Amazons greatest strength is the lack of people willing to do a financial analysis.

 

Unfortunately valueInv, I think you're confusing the stock price with the roughly definable intrinsic value of the underlying business.

 

How many people do or don't do a financial analysis of the business really has very little to do with its various internal strengths as a company (of which its emphasis on tax-efficiency is one).

I'm not sure if that's a fact which you're at all aware of.

 

Anyway, I just thought it might be helpful for me to point it out since you seem to be mixing up the extrinsic with the intrinsic in terms of business value there.

[Guest valueInv]

Amazons greatest strength is the lack of people willing to do a financial analysis.

 

Unfortunately valueInv, I think you're confusing the stock price with the roughly definable intrinsic value of the underlying business.

 

How many people do or don't do a financial analysis of the business really has very little to do with its various internal strengths as a company (of which its emphasis on tax-efficiency is one).

I'm not sure if that's a fact which you're at all aware of.

 

Anyway, I just thought it might be helpful for me to point it out since you seem to be mixing up the extrinsic with the intrinsic in terms of business value there.

 

Oh, I'm aware of it all right. If people started asking the right questions, Bezos wouldn't be able to do all the things he is doing right now. That would impact what happens internally and the intrinsic value.

[Palantir]

JAllen, do you believe AMZN is undervalued or misunderstood? Given their stock performance, I have a hard time believing that the mainstream investment community (note: not value investors) is skeptical of their business model rather rate it very highly.

[jschembs]

I am a big fan of AMZN the company, and my wife works in recruiting right there in South Lake Union, but I shudder when I hear people gush about how this company needs to be valued differently because of its investment decisions focused on growth and the future, which somehow render EBIT and other P&L based measures meaningless.

 

I have no position in the stock (save for minor long exposure via my wife's stock option plan), so I have no axe to grind. Further, I always begin my review of a business at the cash flow statement, so I appreciate the value of a company's ability to generate sustainable cash flow for shareholders. However, stating that "operating cash flow is superior to net income" without focusing on the components of that cash flow, their persistence, and ancillary impacts on shareholders is important.

 

From CapIQ, AMZN generated $4.98 billion of OCF for LTM ending 9/30. Of this, $132 MM was good old "net income." $2.5 BN (or more than 50% of OCF) represent addbacks for non-cash depreciation and amortization. I think there's a misconception that AMZN, RAX, GOOG, and other folks heavily involved in the cloud are somehow asset light, but the equipment to provide those services is very expensive and wears out rapidly. Thus, I would be shocked to begin seeing AMZN's capex requirements moderate significantly. Given the company had capex of $4.6 BN during the same period, it is very hard to argue D&A won't need ongoing replacement, and thus those non-cash adjustments to net income may not really accrue to shareholders over the long term as free cash.

 

Another $1 BN of AMZN's OCF relates to more non-cash addbacks for stock compensation. I presume no one on this board is naive enough to think that expense doesn't have a far less visible but deleterious effect on shareholder value via dilution.

 

Lastly, AMZN's ability to run its operations with negative working capital generated an incremental $1 BN (approx) in OCF. This, however, is a transitory source of cash that can easily become a use of cash if/when growth slows.

 

So we have a business generating nearly $5 BN in operating cash flow. $4.6 BN of that is consumed via capex. The lion's share of their OCF comes from three sources (D&A, stock comp expenses, and working capital) that do not provide a shareholder with reasonable assurance they can capture their proportionate share of those cash flows over the long term.

[Guest valueInv]

I am a big fan of AMZN the company, and my wife works in recruiting right there in South Lake Union, but I shudder when I hear people gush about how this company needs to be valued differently because of its investment decisions focused on growth and the future, which somehow render EBIT and other P&L based measures meaningless.

 

I have no position in the stock (save for minor long exposure via my wife's stock option plan), so I have no axe to grind. Further, I always begin my review of a business at the cash flow statement, so I appreciate the value of a company's ability to generate sustainable cash flow for shareholders. However, stating that "operating cash flow is superior to net income" without focusing on the components of that cash flow, their persistence, and ancillary impacts on shareholders is important.

 

From CapIQ, AMZN generated $4.98 billion of OCF for LTM ending 9/30. Of this, $132 MM was good old "net income." $2.5 BN (or more than 50% of OCF) represent addbacks for non-cash depreciation and amortization. I think there's a misconception that AMZN, RAX, GOOG, and other folks heavily involved in the cloud are somehow asset light, but the equipment to provide those services is very expensive and wears out rapidly. Thus, I would be shocked to begin seeing AMZN's capex requirements moderate significantly. Given the company had capex of $4.6 BN during the same period, it is very hard to argue D&A won't need ongoing replacement, and thus those non-cash adjustments to net income may not really accrue to shareholders over the long term as free cash.

 

Another $1 BN of AMZN's OCF relates to more non-cash addbacks for stock compensation. I presume no one on this board is naive enough to think that expense doesn't have a far less visible but deleterious effect on shareholder value via dilution.

 

Lastly, AMZN's ability to run its operations with negative working capital generated an incremental $1 BN (approx) in OCF. This, however, is a transitory source of cash that can easily become a use of cash if/when growth slows.

 

So we have a business generating nearly $5 BN in operating cash flow. $4.6 BN of that is consumed via capex. The lion's share of their OCF comes from three sources (D&A, stock comp expenses, and working capital) that do not provide a shareholder with reasonable assurance they can capture their proportionate share of those cash flows over the long term.

Thank you, good post.

[Guest ajc]

Amazons greatest strength is the lack of people willing to do a financial analysis.

 

Unfortunately valueInv, I think you're confusing the stock price with the roughly definable intrinsic value of the underlying business.

 

How many people do or don't do a financial analysis of the business really has very little to do with its various internal strengths as a company (of which its emphasis on tax-efficiency is one).

I'm not sure if that's a fact which you're at all aware of.

 

Anyway, I just thought it might be helpful for me to point it out since you seem to be mixing up the extrinsic with the intrinsic in terms of business value there.

 

Oh, I'm aware of it all right. If people started asking the right questions, Bezos wouldn't be able to do all the things he is doing right now. That would impact what happens internally and the intrinsic value.

 

Okay sure, but I'm still confused about how intrinsic value being lumpy over time explains your line that Amazon's greatest strength is an external factor.

 

That still makes as little sense to me now as when I first read it. It just doesn't sound believable.

[Guest valueInv]

Amazons greatest strength is the lack of people willing to do a financial analysis.

 

Unfortunately valueInv, I think you're confusing the stock price with the roughly definable intrinsic value of the underlying business.

 

How many people do or don't do a financial analysis of the business really has very little to do with its various internal strengths as a company (of which its emphasis on tax-efficiency is one).

I'm not sure if that's a fact which you're at all aware of.

 

Anyway, I just thought it might be helpful for me to point it out since you seem to be mixing up the extrinsic with the intrinsic in terms of business value there.

 

Oh, I'm aware of it all right. If people started asking the right questions, Bezos wouldn't be able to do all the things he is doing right now. That would impact what happens internally and the intrinsic value.

 

Okay sure, but I'm still confused about how intrinsic value being lumpy over time explains your line that Amazon's greatest strength is an external factor.

 

That still makes as little sense to me now as when I first read it. It just doesn't sound believable.

 

What is Amazon's intrinsic value and how did you arrive at it?

[Palantir]

^What is GOOG's intrinsic value and how did you arrive at it? While we're at it, tell us AAPL's intrinsic value too.

[Guest ajc]

What is Amazon's intrinsic value and how did you arrive at it?

 

Hey valueInv, I think I've got a better idea.

There's already an existing discussion going on about Amazon's intrinsic value and how it relates to what you said.

 

Instead of trying to skip ahead of the conversation, why not just just lay out the reasons why you said what you did?

We're all here to learn, I'm not sure why it has to be more complicated than that...

[Guest valueInv]

^What is GOOG's intrinsic value and how did you arrive at it? While we're at it, tell us AAPL's intrinsic value too.

 

Google - Around $500. What they are doing is unsustainable. However, they should be able to eke out average growth in most scenarios, so I would be willing to buy if they fell significantly below average price. Below $500, you have a margin of safety against management blunders.

 

Apple - Around $700. I am willing to pay an above average multiple due to combination of factors - growth in existing device product lines, introduction of

services above device product lines, new device product lines and capital return to shareholders under favorable terms.

[Guest valueInv]

What is Amazon's intrinsic value and how did you arrive at it?

 

Hey valueInv, I think I've got a better idea.

There's already an existing discussion going on about Amazon's intrinsic value and how it relates to what you said.

 

Instead of trying to skip ahead of the conversation, why not just just lay out the reasons why you said what you did?

We're all here to learn, I'm not sure why it has to be more complicated than that...

 

Tell me what it is and how you arrived at it, and I will demonstrate what I meant.

[Palantir]

How did you derive your numbers?

[Guest valueInv]

How did you derive your numbers?

 

By understanding the business inside out, assigning  probabilities and tracking every aspect of the companies and industry closely. What I know about Apple can easily fill a book.

[Palantir]

So in other words, no rationale. Great, may as well close these threads.

[link01]

.. Thus, I would be shocked to begin seeing AMZN's capex requirements moderate significantly. Given the company had capex of $4.6 BN during the same period, it is very hard to argue D&A won't need ongoing replacement, and thus those non-cash adjustments to net income may not really accrue to shareholders over the long term as free cash.with a fast growing co like amzn there should really be a distinction made between maintenance capex & growth capex. as well, a significant part of azmn's COGS today are for new businesses that wont achieve scale, profitability, or even cash flow break-even till 2016 or beyond

 

Another $1 BN of AMZN's OCF relates to more non-cash addbacks for stock compensation. I presume no one on this board is naive enough to think that expense doesn't have a far less visible but deleterious effect on shareholder value via dilution.amzn has been expensing their stock options since 2002, so that's a hit to their income statement. as far as dilution goes I think you'll find amzn is quite cognizant of the tradeoffs (just read thru his annual letters) & manages it in a thoughtful way. their share count growth has been quite tame in comparison with other hi growth or hi tech co's. Bezos has said he tries to cap it at no more than 3%

 

Lastly, AMZN's ability to run its operations with negative working capital generated an incremental $1 BN (approx) in OCF. This, however, is a transitory source of cash that can easily become a use of cash if/when growth slows. I don't see how slowing growth would affect its negative working capital, or how slowing would become a use of cash. if amzn suddenly suffered the reverse of growth, that's another story. and I don't think amzn's neg working capital is transitory at all. its shown persistence. that wont change until they lose their moat