AMZN - Amazon.com Inc.

[dwy000]

Sun rider - I think your point have been the crux of the discussion for the past few pages. IF they can make "normal" margins, yes they will make good profits.  But what is "normal" and the willingness and ability to do this is the question.  My view is that to improve margins would be to sacrifice growth (if it could be done at all).  And the fact that all of the margin metrics (operating margins not simply gross margins) have been moving in the other direction for 4-5 years would suggest this shift is not in the foreseeable future.  Just my view though.  I know others disagree.

[Palantir]

Sun rider- you don't think 20 PE is decent for a company as fast growing as AMZN?

[dwy000]

It's a 400 PE right now.  It's only 20 if they change the business model and can do it successfully without impacting sales - none of which appears in the cards for the near or medium term future.  Even if they can make that huge transition you need to discount the earnings/cash flow for the years between now and when that could happen (at least 5 years if not more).

[DTEJD1997]

I know what I asay is going to be very unpopular...but I'm going to do it anyway.

 

I don't see any way that AMZN does not end in tears for investors.

 

I also think this is a signal the market is getting frothy or near a top.  There are many people on this board discussing it as "value" investment.  I just can't do the mental acrobats to think this is a "value" investment.

 

I also think the market is giving AMZN a "pass" as they don't have to make any meaningful money on anything.  If AMZN had to make a 1,2,3% NET margin, their sales would probably be drastically lower.  I would also suggest that if they had to make a profit, their business model would be broken.

 

If the "no profits" model is such a great thing, why don't all companies do it?  AMZN is somehow different?  Or maybe, AMZN is a "special company" and "it is different this time"?

 

I would suggest it is very easy to build millions & billions in sales if you can sell items for a loss or breakeven.

 

Who is to say that some other competitor in the future doesn't get favorable attention or a dispensation from Wall Street to sell at breakeven or a loss and AMZN can NEVER make any money?

 

Why would anybody invest in AMZN when you can get GROWING, PROFITABLE, dividend paying companies with single digit P/E's?  AMZN is 40 EV/EBIDTA, 15X book value, 400 or 500 P/E?

 

AMZN also faces the problem that they have $75BB in sales.  This is not some startup company.  Are they going to be able to grow sales to $150BB, or $300BB?

 

I just don't see how this can end well for shareholders...

 

[PatientCheetah]

I know what I asay is going to be very unpopular...but I'm going to do it anyway.

 

I don't see any way that AMZN does not end in tears for investors.

 

I also think this is a signal the market is getting frothy or near a top.  There are many people on this board discussing it as "value" investment.  I just can't do the mental acrobats to think this is a "value" investment.

 

I also think the market is giving AMZN a "pass" as they don't have to make any meaningful money on anything.  If AMZN had to make a 1,2,3% NET margin, their sales would probably be drastically lower.  I would also suggest that if they had to make a profit, their business model would be broken.

 

If the "no profits" model is such a great thing, why don't all companies do it?  AMZN is somehow different?  Or maybe, AMZN is a "special company" and "it is different this time"?

 

I would suggest it is very easy to build millions & billions in sales if you can sell items for a loss or breakeven.

 

Who is to say that some other competitor in the future doesn't get favorable attention or a dispensation from Wall Street to sell at breakeven or a loss and AMZN can NEVER make any money?

 

Why would anybody invest in AMZN when you can get GROWING, PROFITABLE, dividend paying companies with single digit P/E's?  AMZN is 40 EV/EBIDTA, 15X book value, 400 or 500 P/E?

 

AMZN also faces the problem that they have $75BB in sales.  This is not some startup company.  Are they going to be able to grow sales to $150BB, or $300BB?

 

I just don't see how this can end well for shareholders...

 

There is an article talking about why there has not been any other billion dollar e-commerce. Valuation concern aside, Amazon's competitive position is close to as unassailable as Visa or Mastercard. Anything resembled competitors, Zappos and Diapers.com, are all part of Amazon now. Don't underestimate the value of a high stock price, Amazon is in the position to either play the game of attrition and bleed its competitors out or buy them out with its stocks. I am not where near as smart as Munger. I wouldn't go against his opinion.

 

The biggest lesson that I learned in the last few years is to never dismiss anything that's strongly positioned based on valuation concern alone. In order for me to become bearish, I need to see disruptive technology or competitor that is clearly taking shares away from the incumbent. Through the error of omission, I missed out wonderful companies like Priceline, Amazon, and Chipotle. I take solace in that I could've done much worse if I have shorted them based on high valuations.

[JAllen]

Guys

 

Apologies if this is (a) overly simplistic, (b) has been discussed and I'm just not aware of it.

 

In fact I'm sure this has been discussed but I thought I'd throw it out there to get some views. I've held a small position in AMZN for ages and recently added to it with LEAPS. The recent Economist and FT articles got me thinking though ... I'm a fan of toy models and the following is a rough calc, please bear with me:

 

AMZN is doing about 75bn sales a year (more this year but some article I saw said about 74bn in its own sales). So assuming that eventually they choose to make "normal" margins on this and stop investing - what would it mean? Well, WMT has about a 5.9% operating margin. Let's say AMZN can do much better (because the cloud stuff may be higher margin, they killed competitions, whatever). Say it's 10%, so 7.4bn in Earnings. So at today's market cap of 149bn that would put us at a 20 P/E. Not cheap, not outrageous either.

 

Of course the margin assumptions are key here - but just for discussion purposes - does this make AMZN a good buy because you expect them to keep growing in excess of what one would discount back from the point that they choose to make profits?

 

... not trying to start a possible war-of-words here. I think AMZN has growth ahead of it but I also believe that eventually fundamental laws of economics assert themselves. Just curious how others here see it?

 

Thanks - C.

 

 

Remember that gross profit is growing almost 50% faster than sales: 33% versus 23% sales growth.

 

 

If you owned a restaurant which would you rather increase faster, sales or gross profit?

[Sportgamma]

Guys

 

Apologies if this is (a) overly simplistic, (b) has been discussed and I'm just not aware of it.

 

In fact I'm sure this has been discussed but I thought I'd throw it out there to get some views. I've held a small position in AMZN for ages and recently added to it with LEAPS. The recent Economist and FT articles got me thinking though ... I'm a fan of toy models and the following is a rough calc, please bear with me:

 

AMZN is doing about 75bn sales a year (more this year but some article I saw said about 74bn in its own sales). So assuming that eventually they choose to make "normal" margins on this and stop investing - what would it mean? Well, WMT has about a 5.9% operating margin. Let's say AMZN can do much better (because the cloud stuff may be higher margin, they killed competitions, whatever). Say it's 10%, so 7.4bn in Earnings. So at today's market cap of 149bn that would put us at a 20 P/E. Not cheap, not outrageous either.

 

Of course the margin assumptions are key here - but just for discussion purposes - does this make AMZN a good buy because you expect them to keep growing in excess of what one would discount back from the point that they choose to make profits?

 

... not trying to start a possible war-of-words here. I think AMZN has growth ahead of it but I also believe that eventually fundamental laws of economics assert themselves. Just curious how others here see it?

 

Thanks - C.

 

 

Remember that gross profit is growing almost 50% faster than sales: 33% versus 23% sales growth.

 

 

If you owned a restaurant which would you rather increase faster, sales or gross profit?

 

So if we extrapolate that, GM should exceed revenues by about 33% in 20 years time.

 

Full disclosure: I´m joking

[JAllen]

I know what I asay is going to be very unpopular...but I'm going to do it anyway.

 

I don't see any way that AMZN does not end in tears for investors.

 

I also think this is a signal the market is getting frothy or near a top.  There are many people on this board discussing it as "value" investment.  I just can't do the mental acrobats to think this is a "value" investment.

 

I also think the market is giving AMZN a "pass" as they don't have to make any meaningful money on anything.  If AMZN had to make a 1,2,3% NET margin, their sales would probably be drastically lower.  I would also suggest that if they had to make a profit, their business model would be broken.

 

If the "no profits" model is such a great thing, why don't all companies do it?  AMZN is somehow different?  Or maybe, AMZN is a "special company" and "it is different this time"?

 

I would suggest it is very easy to build millions & billions in sales if you can sell items for a loss or breakeven.

 

Who is to say that some other competitor in the future doesn't get favorable attention or a dispensation from Wall Street to sell at breakeven or a loss and AMZN can NEVER make any money?

 

Why would anybody invest in AMZN when you can get GROWING, PROFITABLE, dividend paying companies with single digit P/E's?  AMZN is 40 EV/EBIDTA, 15X book value, 400 or 500 P/E?

 

AMZN also faces the problem that they have $75BB in sales.  This is not some startup company.  Are they going to be able to grow sales to $150BB, or $300BB?

 

I just don't see how this can end well for shareholders...

 

 

Any specific points you want to debate?  What in particular is a sign that the market is at a top?  What if

 

 

Also, which growing, single digit companies are you referring to?  I know of two, but they're unlisted...

 

 

AMZN also faces the problem that they have $75BB in sales.  This is not some startup company.  Are they going to be able to grow sales to $150BB, or $300BB?

 

It should be $90B this year.

 

Why do you think they won't be able to keep growing?  AMZN sales continue to grow faster than e-commerce as a whole and are just 10% of WMT's sales as a percentage of the American economy - ~1% versus ~10%.  E-commerce sales are still small relative to all consumer spending in the U.S.  Why won't AMZN eventually have greater than WMT sales because they sell two orders of magnitude more individual SKUs and aren't constrained by social class and geographical proximity to only two-thirds of the U.S. population like WMT is for most of its sales?  AMZN also isn't consumer-physical product limited as well; they're also B2B, digital, computing, product exchange, etc.

 

Are you an Amazon customer?  Have you reviewed AMZN's long-term FCF history?  Do you believe AMZN is incapable of making any income or FCF at all?

[Palantir]

I know what I asay is going to be very unpopular...but I'm going to do it anyway.

 

I don't see any way that AMZN does not end in tears for investors.

 

I also think this is a signal the market is getting frothy or near a top.  There are many people on this board discussing it as "value" investment.  I just can't do the mental acrobats to think this is a "value" investment.

 

I also think the market is giving AMZN a "pass" as they don't have to make any meaningful money on anything.  If AMZN had to make a 1,2,3% NET margin, their sales would probably be drastically lower.  I would also suggest that if they had to make a profit, their business model would be broken.

 

If the "no profits" model is such a great thing, why don't all companies do it?  AMZN is somehow different?  Or maybe, AMZN is a "special company" and "it is different this time"?

 

I would suggest it is very easy to build millions & billions in sales if you can sell items for a loss or breakeven.

 

Who is to say that some other competitor in the future doesn't get favorable attention or a dispensation from Wall Street to sell at breakeven or a loss and AMZN can NEVER make any money?

 

Why would anybody invest in AMZN when you can get GROWING, PROFITABLE, dividend paying companies with single digit P/E's?  AMZN is 40 EV/EBIDTA, 15X book value, 400 or 500 P/E?

 

AMZN also faces the problem that they have $75BB in sales.  This is not some startup company.  Are they going to be able to grow sales to $150BB, or $300BB?

 

I just don't see how this can end well for shareholders...

 

Have you read this thread from the start (especially JAllen's posts)? You will see why some find the bull case for AMZN to be quite persuasive. I think the fact that people keep bringing the 400 PE, something that has been discussed many times here, shows that people are not trying to see the other side of the case.

 

This is not a "value investment" at all, this is something that is not obviously cheap, but I think there is reason to believe that this can be a great investment.

 

 

[dwy000]

Patient cheetah - those competitors were internet only models.  Now the company is up against competitors that they won't be able win a war of attrition against. Walmart's internet sales grew faster than Amazons last year.  Target, best buy, Home Depot etc are all growing internet sales as an adjunct to their bricks and mortar.  And in AWS, Microsoft and IBM have matched pride drops dollar for dollar (or even initiated them).  The low hanging fruit is gone.  There's no way amazon can both continue its growth trajectory AND double or triple bottom line margins.

 

To the point about if you owned a restaurant would you rather grow sales or gross margin, I'd say that I would rather grow NET margins. Gross margin growth is only impressive if you can do it off flat or declining cost base - Amazons operating margin has been shrinking for years. And this new phone is unlikely to help that.

[txlaw]

Economist on Amazon:

 

http://www.economist.com/news/briefing/21604559-20-amazon-bulking-up-it-notyetslowing-down-relentlesscom

[DTEJD1997]

 

Have you read this thread from the start (especially JAllen's posts)? You will see why some find the bull case for AMZN to be quite persuasive. I think the fact that people keep bringing the 400 PE, something that has been discussed many times here, shows that people are not trying to see the other side of the case.

 

This is not a "value investment" at all, this is something that is not obviously cheap, but I think there is reason to believe that this can be a great investment.

 

I will admit that I have not read EVERY single post in the thread, but I've read maybe 2/3 of them.  The thread is rather long.

 

It is not simply the 400 P/E, but that is certainly a part of it.

 

Sales that are not profitable, or are only barely profitable, are not very valuable sales at all.  What is the point if at the end of the day you do not get to keep anything?  This goes for me, or for anyone else.

 

Customer loyalty is fine, but it is easy to buy loyalty with cheap prices.  AMZN or anyone else will find that customer loyalty based on low prices is as fleeting as the wind.

 

The other side of the case is that AMZN is foregoing profitability to grow sales, to gather customers...Profitability is also masked by spending on infrastructure & technology.  If AMZN were in a good field they would be able to DO BOTH.  Grow & invest in the business AND have profits left over.

 

I've purchased a few things from AMZN in the past.  Their prices are good, but I can frequently find lower prices elsewhere.  A good percentage of items I purchase I need right now...gasoline, vegetables & consumables, precious metals, computer components, etc.  Some items I purchase such as clothes I need to see in person.  I suppose some clothes (socks, underwear, belts) could be bought online, but a lot I want to see in person.

 

I can remember during the internet bubble of the 90's, there were similar arguments made...that profit was a secondary or tertiary concern.  We all know how that ended.

 

I would also suggest that if a company, ANY COMPANY, can't/won't achieve profitability after $75BB in sales, they never will...

[dwy000]

Good economist article. I thought the quote summed it up well:

 

"A charitable organization run by elements of the investment community for the benefit of consumers."

 

Great company.  Not a great investment.

[Sunrider]

Thanks everyone - I suppose the best summary question I can ask in response is that: Yes it's a 20 per fast growing company but only if it stops growing?  Coming back to what I said, this seems to make sense only if you believe in the normal margin thesis AND that the gains until that time will be at a higher rate than what you discount it back by.

[jouni1]

is it REALLY worth 20 times better-than-walmart-margins earnings of the future? (at that point i imagine the growth is pretty much done, and amazon will grow at general retail rates)

 

i mean, what if while doing this and never making any money, a new disruptor comes along? or what if it takes 15 years to get profitable?

 

would be easier to wait if it was earning something.

[Palantir]

Sigh...

[PatientCheetah]

Sigh...

 

Think of this way, we always need someone to sell us the shares.

[Patmo]

Personally I'll just stay on the sidelines and eat my popcorn. Good luck to everyone who takes action, it'll be interesting to see how this plays out.

[wachtwoord]

Sigh...

 

Think of this way, we always need someone to sell us the shares.

 

I don't own any but this one is certainly on my too difficult pile.

[DTEJD1997]

 

I don't own any but this one is certainly on my too difficult pile.

 

You bring up a good point that I should have made...If a thesis takes a substantial amount of explaining logic leaps is there not some risk in that? 

 

If the company can do X, and keep growing for Y periods of time, enter these other Z markets, then they raise profitability in the distant future...BAMMO! PROFIT!

 

If an investment idea has arguments going back & forth for 50 pages maybe that should go in the "too difficult pile".

 

Wasn't it WEB that said something like this?

[Myth465]

Aw but we have threads on =

 

Sandridge Energy (Im a big part of this one  :)) )

Sears Holding

Level 3

Altius

Blackberry

 

and about 3 other threads which goes against that....

[txlaw]

http://recode.net/2014/06/20/bezos-amazon-fire-phone-was-a-long-time-coming/

[JAllen]

 

Have you read this thread from the start (especially JAllen's posts)? You will see why some find the bull case for AMZN to be quite persuasive. I think the fact that people keep bringing the 400 PE, something that has been discussed many times here, shows that people are not trying to see the other side of the case.

 

This is not a "value investment" at all, this is something that is not obviously cheap, but I think there is reason to believe that this can be a great investment.

 

I will admit that I have not read EVERY single post in the thread, but I've read maybe 2/3 of them.  The thread is rather long.

 

It is not simply the 400 P/E, but that is certainly a part of it.

 

Sales that are not profitable, or are only barely profitable, are not very valuable sales at all.  What is the point if at the end of the day you do not get to keep anything?  This goes for me, or for anyone else.

 

Customer loyalty is fine, but it is easy to buy loyalty with cheap prices.  AMZN or anyone else will find that customer loyalty based on low prices is as fleeting as the wind.

 

The other side of the case is that AMZN is foregoing profitability to grow sales, to gather customers...Profitability is also masked by spending on infrastructure & technology.  If AMZN were in a good field they would be able to DO BOTH.  Grow & invest in the business AND have profits left over.

 

I've purchased a few things from AMZN in the past.  Their prices are good, but I can frequently find lower prices elsewhere.  A good percentage of items I purchase I need right now...gasoline, vegetables & consumables, precious metals, computer components, etc.  Some items I purchase such as clothes I need to see in person.  I suppose some clothes (socks, underwear, belts) could be bought online, but a lot I want to see in person.

 

I can remember during the internet bubble of the 90's, there were similar arguments made...that profit was a secondary or tertiary concern.  We all know how that ended.

 

I would also suggest that if a company, ANY COMPANY, can't/won't achieve profitability after $75BB in sales, they never will...

 

 

But what if they intentionally choose not to?  Have you opened your mind to this possibility?

 

 

How is waiting to be and choosing not to be profitable by investing so heavily and with expenses not possible even with a company with $90B in sales?  The two don't directly follow actually.  It seems like lots of looking at the past and not enough being curious about the future.

 

 

With this thread, the AMZN proponents have mostly written in the last ten or fifteen pages I believe, so it's not necessary to review the whole thread by any means.  Have you seen my charts with eight years of historical close to double-digit FCF margins and the chart with the rate at which they've expanded their warehouses compared with 2002-2009?  That is a 57% FC square footage increase versus a 20% FC square footage increase.  There's also the many other programs they're developing that have non-trivial expenses.

[JAllen]

 

I don't own any but this one is certainly on my too difficult pile.

 

You bring up a good point that I should have made...If a thesis takes a substantial amount of explaining logic leaps is there not some risk in that? 

 

If the company can do X, and keep growing for Y periods of time, enter these other Z markets, then they raise profitability in the distant future...BAMMO! PROFIT!

 

If an investment idea has arguments going back & forth for 50 pages maybe that should go in the "too difficult pile".

 

Wasn't it WEB that said something like this?

 

 

Couldn't one also argue that the longer the thesis, potentially the more evidence has been provided and/or the less obvious it is?  Would either of these things be bad?  Weschler claims to spend 500 hours researching each investment - are his investments mistakes because of this?

 

 

I could also have stated my thesis succinctly and not backed it up with evidence, like this:

 

 

• Young, ablest CEO in America according to Warren Buffett
  
• Rapidly increased investment spending in last four years obscures historical double digit FCF margins
  
• 90% smaller than WMT as % of American economy leaves massive growth runway
  
• Leader in four large industries: retail; retail exchange; books; cloud-computing
  
• Amazon makes decisions that intentionally reduce income
  
• Gross profit margins increasing faster obscure still massive growth rates
  

But this wouldn't have provided any evidence for why I believe these various items and I believe would clearly have been less productive for the forum.

 

 

 

 

Also, I have only been posting much for a few pages here and the actual consideration of AMZN as an investment has only really occurred in the past few as well, I believe.

 

 

This statement also continues to not really argue against anything I've said - it just attacks the thesis for what I'll call meta-reasons that aren't actually part of the thesis.

[dwy000]

JAllen - you have summarized where the two theses differ.

 

Your view is that they CHOOSE not to be profitable by reinvesting all profits back in the business but they will be highly profitable when they stop.

 

My thesis (or more accurately the opposing thesis) is that they have built up a business and cost structure whereby they cannot make that transition without killing the factors that have made them successful to date.  And importantly, they show no desire to make that transition - so even if true it's hard to base an investment thesis on something the company isn't supporting for the foreseeable future.

 

There is no way to prove either theory right or wrong except through time and experience.  I personally am not comfortable making a value investment without knowing those key factors.