AMZN - Amazon.com Inc.

[LC]

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.

 

I completely agree with you. I don't know enough about the organization to know whether these expense investments are maintenance or growth. And I don't see convincing evidence one way or the other. This is what the investment hinges on, therefore if I don't know then I don't invest.

[DTEJD1997]

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

 

No, I can't honestly say that I've opened my mind to the possibility that a company the size of AMZN is INTENTIONALLY choosing not to make any profit.  They certainly don't pay most of their employees very much.  There have been numerous articles on poor working conditions in AMZN warehouses...But profit is the name of the game.  Why can't AMZN do both?  Perhaps it is a poor business that they are in?

 

Have you opened your mind to the possibility that this is a very foolish thing to do?  Or maybe opened it to the possibility that the CAN'T make a profit, thus they "CHOOSE" to forego it?

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.

 

Investing in infrastructure is all fine & good, but it still comes back to an economic return.

 

I would posit this...if AMZN is a good buy at $325, is it still a buy at $400?  $600?  $1,000?  At what price is it fairly valued?

 

As for it being difficult, why not invest in AWLCF with solid cash flow, earnings and dividends?  It also has a strong chance to increase the aforementioned in the short term too.  Or what about precious metal miners with zero debt, solid earnings, cash flow and DIVIDENDS?  There are numerous stocks where the investment is "plain on it's face".

 

I wish you luck with AMZN, but I can't see how it does not end in a train wreck for investors.

[Palantir]

^You are not reading the thread. Amazon IS profitable, but they are doing what they can to minimize what shows up on the Income statements in order to reduce taxation.

[ItsAValueTrap]

^You are not reading the thread. Amazon IS profitable, but they are doing what they can to minimize what shows up on the Income statements in order to reduce taxation.

 

All companies keep one set of books for taxes and another set for their financial statements (for investors).  In rare cases, the financial statements have to use the same methodology as taxes, e.g. LIFO/FIFO inventory.  But otherwise, Amazon can reduce taxes without reducing their GAAP profitability.

[dwy000]

Palantir - can you put some more clarity on that?  People keep mentioning that they are stuffing growth expenses for tax purposes but without specifics.

 

The distribution centers are all capitalized as are the payments to HBO and others for content.  Stock based comp is front end weighted but that actually hurts as an investor (unless the stock is dropping) because you are expensing shares at say $300 and then issuing them at $400.  What expenses are being stuffed or are inflated?

 

I'd also note as others have that most of these are not really one time growth expenses but actually ongoing expenses with the business.  They actually comment in the 10Q on the increased capex with "we expect this trend to continue over time".  They make the same comment on the technology and content expense which has risen much much faster than revenues or grow margins.  By the way, to the previous comments on the expansion of gross margins I'd note they specifically state "We believe that income from operations is a more meaningful measure than gross profit and gross margin due to the diversity of our product categories and services."

[prevalou]

A other way to frame the question: what "technology and content" consists of exactly ?

[JAllen]

Palantir - can you put some more clarity on that?  People keep mentioning that they are stuffing growth expenses for tax purposes but without specifics.

 

The distribution centers are all capitalized as are the payments to HBO and others for content.  Stock based comp is front end weighted but that actually hurts as an investor (unless the stock is dropping) because you are expensing shares at say $300 and then issuing them at $400.  What expenses are being stuffed or are inflated?

 

I'd also note as others have that most of these are not really one time growth expenses but actually ongoing expenses with the business.  They actually comment in the 10Q on the increased capex with "we expect this trend to continue over time".  They make the same comment on the technology and content expense which has risen much much faster than revenues or grow margins.  By the way, to the previous comments on the expansion of gross margins I'd note they specifically state "We believe that income from operations is a more meaningful measure than gross profit and gross margin due to the diversity of our product categories and services."

 

 

If they pay a billion dollars in cash to the studios in a year for the right to display content to their users, they expense that much even if they capitalized it initially.  They can't show video to Prime subs without expensing something for that year.  I guess that the capitalized content is probably only self-produced content.

 

 

 

 

[JAllen]

 

 

Stock based comp is front end weighted but that actually hurts as an investor (unless the stock is dropping) because you are expensing shares at say $300 and then issuing them at $400.  What expenses are being stuffed or are inflated?

 

 

 

This ignores the fact that AMZN has one of the highest turnovers in the industry causing much of the granted stock to be forfeited since the median employee leaves after one year and the first year vesting is 5%.

 

 

Also you can assume that their share count continues growing at 1% a year like it consistently has.

 

 

The fact that AMZN chooses to accelerate their stock-comp. expense prove that they do things to minimize income.  When you consider everything they're doing, like building smartphones, drones, Fresh, China etc. these are all growth expenses, most of these ventures are developer salaries expensed in the current year, there's not much capital equipment.  For instance, the Fresh trucks are owned by Ryder...

[JAllen]

I'd also note as others have that most of these are not really one time growth expenses but actually ongoing expenses with the business.  They actually comment in the 10Q on the increased capex with "we expect this trend to continue over time".  They make the same comment on the technology and content expense which has risen much much faster than revenues or grow margins.  By the way, to the previous comments on the expansion of gross margins I'd note they specifically state "We believe that income from operations is a more meaningful measure than gross profit and gross margin due to the diversity of our product categories and services."

How are Fresh, smartphone, making TV shows, massively investing in China AWS etc. to grow, drones, increasing the rate at which they expand FC space and all of the other stuff they're doing NOT growth expenses? 

To assume that ongoing, run-rate expenses have gone up, there's something that must have happened, and that's that one or more of AMZN's major expenses must have skyrocketed over the last four years or either their competitive position eroded/changed drastically in 2010 and all of a sudden they needed way more FC space.  Which do you think happened and which expenses do you think went up? Do you agree with the above statement?

AMZN's FCs are way more automated now, FCs and construction costs have not skyrocketed with continued low interest rates.  Developer salaries are higher, but not twice as much or anything like that by any means.  Computing equipment and bandwidth have decreased 20% per year.  So which of their individual expenses have gone up?  Or has AMZN, become way more inefficient and capital intensive over the last four years?

Something that should really stand out, and this would be easy to tell if someone had read only a few of the annuals or made a spreadsheet with just the historical capex is that capex went up 10X in just three years, from an average of 2% of sales or only a few hundred million dollars in 2009(on tens of billions of sales) to $3.78B in 2012 $4.3B in 2013.  So AMZN became that much more capital intensive in 2010?  What happened?  Did they have to increase their spending by this much or did they choose to put FCs closer to population centers?

They've more rapidly expanded since 2010 before they had to to widen their moat and for other reasons (state taxes etc.), but it appears at a cursory glance that these are maintenance expenses.  They're throwing money at consumers so as not to pay taxes and to increase their first-mover advantage, but people think they have to do this - that they have to do Prime Video and the book lending library and Fresh etc. - but this is ALL to widen the moat by increasing selection and lowering costs.

[JAllen]

They actually comment in the 10Q on the increased capex with "we expect this trend to continue over time".

 

The idea is to have a larger business in ten years and to widen the moat.  Isn't it a good thing to have ideas worth investing in and wanting to have a larger business in 10-20 years?  I'm not trying to get dividends in retirement here.

 

Does anyone fault Buffett for increasing capital expenditures every year? Bezos actually wants to go to Mars and everything he does with AMZN is designed to enable him to do that in a few decades.  Maybe I've just read more about the whole AMZN story and get what he's doing and how special it is.  This guy is literally operating in a different universe than every other executive except for Musk.  When you're thinking about twenty years from now you are thinking VERY differently from 99.8% of every other executive and this alone is a massive advantage and something to hitch a ride on.

[DTEJD1997]

^You are not reading the thread. Amazon IS profitable, but they are doing what they can to minimize what shows up on the Income statements in order to reduce taxation.

 

I am reading the thread, but I don't buy it.  A lot of these accelerated expenses are truly expenses...I also suspect a lot of them will wind up being "stranded" investments also...

 

If you think AMZN is going to be a great investment, at what point is it fairly valued or overvalued?

[Spekulatius]

A good business can grow while showing profits and FCF. There are enough examples of companies who have done just that in the past or who are doing it right now, like MSFT, GOOG etc.

 

I don't really see a reason to pay a rich multiple for a stock, where I need to go through mental hoops to determine that they may be profitable in the the future. I can see doing this for a real cheap stock, but I would not pay a high multiple for stock.

[dwy000]

If they pay a billion dollars in cash to the studios in a year for the right to display content to their users, they expense that much even if they capitalized it initially.  They can't show video to Prime subs without expensing something for that year.  I guess that the capitalized content is probably only self-produced content.

 

I don't think that's accurate.  From the 10K they indicate they recognize an asset for the content and a corresponding liability and then amortize the asset into cost of goods sold over the life of the contract's window of availability.  So if they pay $300M for years of rights that is capitalized and amortized into COGS over the 5 year window.  It's not all expensed upfront, only the proportional amount related to the expected revenues earned off it.

[dwy000]

 

This ignores the fact that AMZN has one of the highest turnovers in the industry causing much of the granted stock to be forfeited since the median employee leaves after one year and the first year vesting is 5%.

 

 

Also you can assume that their share count continues growing at 1% a year like it consistently has.

 

 

The fact that AMZN chooses to accelerate their stock-comp. expense prove that they do things to minimize income.  When you consider everything they're doing, like building smartphones, drones, Fresh, China etc. these are all growth expenses, most of these ventures are developer salaries expensed in the current year, there's not much capital equipment.  For instance, the Fresh trucks are owned by Ryder...

 

They indicate that they cancel and reverse the expense for people who resign and forfeit options/stock.  So that gets evened out. 

 

The 1% dilution doesn't seem like much but it's $1.4bn of value.  And when you only generate $2.5bn of free cash flow it becomes pretty significant.

 

The development expenses (including developers etc) would typically be capitalized not expensed.  They would then get expensed as the related revenues are earned. 

 

I would also say that for Amazon, those are the cost of doing business. If you expect them to stop developing new products like phones or Fresh then yes, the cash costs will decline but then you would have to expect growth from all those new initiatives stop too.

[dwy000]

Isn't the whole concept supposed to be the size and volume beget efficiencies and therefore getting bigger should make you more profitable?  Amazon revenues have what, tripled over the past 5 years, but as you rightly point out, their operating margins have declined substantially.  That flies in the face of logic and the drive for growth.

 

The company has been in business for 20 years now and hasn't really generated any profit.  If they are now investing for the next 10-20 years, at what point does "long term" actually happen.  At some point you have to show the ability to be profitable.

 

Curious - if you are basing you investment thesis on the idea that they can turn profitable when they stop all the growth spending, when do you see that happening?  The company acknowledges that the cost basis and capex will continue into the future.  At some point the time it takes to get there more than offsets any level of profitability that they could even theoretically achieve.

[JAllen]

 

This ignores the fact that AMZN has one of the highest turnovers in the industry causing much of the granted stock to be forfeited since the median employee leaves after one year and the first year vesting is 5%.

 

 

Also you can assume that their share count continues growing at 1% a year like it consistently has.

 

 

The fact that AMZN chooses to accelerate their stock-comp. expense prove that they do things to minimize income.  When you consider everything they're doing, like building smartphones, drones, Fresh, China etc. these are all growth expenses, most of these ventures are developer salaries expensed in the current year, there's not much capital equipment.  For instance, the Fresh trucks are owned by Ryder...

 

The development expenses (including developers etc) would typically be capitalized not expensed.  They would then get expensed as the related revenues are earned. 

 

 

I'm not sure all software development is capitalized, but that would be fine if so.  Regardless, the capitalized amount is then amortized over three years.  This is an expense, isn't it?  All things that are capitalized are later expensed, correct?  So you can increase spending in one year, and then have higher amortization expense the following three years.

[JAllen]

Arguably the guy that knows the most about how much digital video content costs said that AMZN was 'losing' $500M-$1B per year two years ago. 

 

Do we agree that this is an expense regardless of any amount capitalized?

 

"Hastings says he generated those numbers based on the value of the content deals that Amazon won when the two companies competed head to head. "

 

 

Did AMZN have to do this or was it designed to make Prime and AMZN more desirable for customers in the future?

 

http://allthingsd.com/20121116/netflix-ceo-amazon-losing-up-to-1-billion-a-year-on-streaming-video/

[dwy000]

 

This ignores the fact that AMZN has one of the highest turnovers in the industry causing much of the granted stock to be forfeited since the median employee leaves after one year and the first year vesting is 5%.

 

 

Also you can assume that their share count continues growing at 1% a year like it consistently has.

 

 

The fact that AMZN chooses to accelerate their stock-comp. expense prove that they do things to minimize income.  When you consider everything they're doing, like building smartphones, drones, Fresh, China etc. these are all growth expenses, most of these ventures are developer salaries expensed in the current year, there's not much capital equipment.  For instance, the Fresh trucks are owned by Ryder...

 

The development expenses (including developers etc) would typically be capitalized not expensed.  They would then get expensed as the related revenues are earned. 

 

 

I'm not sure all software development is capitalized, but that would be fine if so.  Regardless, the capitalized amount is then amortized over three years.  This is an expense, isn't it?  All things that are capitalized are later expensed, correct?  So you can increase spending in one year, and then have higher amortization expense the following three years.

 

True.  But then that would suggest that it's not a growth expense, that's just the cost of providing a product and cannot be removed down the road to achieve profitability.  To your point, if all the expense is eventually amortized it's not really a tax reduction angle.

[JAllen]

 

This ignores the fact that AMZN has one of the highest turnovers in the industry causing much of the granted stock to be forfeited since the median employee leaves after one year and the first year vesting is 5%.

 

 

Also you can assume that their share count continues growing at 1% a year like it consistently has.

 

 

The fact that AMZN chooses to accelerate their stock-comp. expense prove that they do things to minimize income.  When you consider everything they're doing, like building smartphones, drones, Fresh, China etc. these are all growth expenses, most of these ventures are developer salaries expensed in the current year, there's not much capital equipment.  For instance, the Fresh trucks are owned by Ryder...

 

The development expenses (including developers etc) would typically be capitalized not expensed.  They would then get expensed as the related revenues are earned. 

 

 

I'm not sure all software development is capitalized, but that would be fine if so.  Regardless, the capitalized amount is then amortized over three years.  This is an expense, isn't it?  All things that are capitalized are later expensed, correct?  So you can increase spending in one year, and then have higher amortization expense the following three years.

 

True.  But then that would suggest that it's not a growth expense

 

 

But they're growing and building new things: phone; audio streaming; Fresh; FCs.  These all require additional developers to grow.

[dwy000]

:D

Arguably the guy that knows the most about how much digital video content costs said that AMZN was 'losing' $500M-$1B per year two years ago. 

 

Do we agree that this is an expense regardless of any amount capitalized?

 

"Hastings says he generated those numbers based on the value of the content deals that Amazon won when the two companies competed head to head. "

 

 

Did AMZN have to do this or was it designed to make Prime and AMZN more desirable for customers in the future?

 

http://allthingsd.com/20121116/netflix-ceo-amazon-losing-up-to-1-billion-a-year-on-streaming-video/

 

But then shouldn't two years later the company be MORE profitable if the argument was that they were growing into the expense?  Two years ago they were losing up to $1bn on this product and they have grown since then so they should be at least $500-$1bn more profitable today (or at least a good portion of that they as they grow into it).

[JAllen]

 

This ignores the fact that AMZN has one of the highest turnovers in the industry causing much of the granted stock to be forfeited since the median employee leaves after one year and the first year vesting is 5%.

 

 

Also you can assume that their share count continues growing at 1% a year like it consistently has.

 

 

The fact that AMZN chooses to accelerate their stock-comp. expense prove that they do things to minimize income.  When you consider everything they're doing, like building smartphones, drones, Fresh, China etc. these are all growth expenses, most of these ventures are developer salaries expensed in the current year, there's not much capital equipment.  For instance, the Fresh trucks are owned by Ryder...

 

The development expenses (including developers etc) would typically be capitalized not expensed.  They would then get expensed as the related revenues are earned. 

 

 

I'm not sure all software development is capitalized, but that would be fine if so.  Regardless, the capitalized amount is then amortized over three years.  This is an expense, isn't it?  All things that are capitalized are later expensed, correct?  So you can increase spending in one year, and then have higher amortization expense the following three years.

 

True.  But then that would suggest that it's not a growth expense, that's just the cost of providing a product and cannot be removed down the road to achieve profitability.  To your point, if all the expense is eventually amortized it's not really a tax reduction angle.

 

 

They have zero plans to remove anything.  Every action is designed to have a larger business in ten years.  If investors don't also have the same mindset, they won't view AMZN as attractively as I do and I think that's the crux of our differences.  You're concerned about current income and I want them to have a larger piece of the pie down the road.  I'm trying to maximize my wealth over the next few decades, not this year or next, so I appreciate spending that is designed to result in the largest possible business then.  I would rather them not pay taxes now and would rather them spend instead of doing so, and I'm certain they're doing that.

 

 

Eventually they will grow to a point where they won't be able to invest as much as their cash flow and they will start showing more income which I guess will happen in a handful of years.

[JAllen]

:D

Arguably the guy that knows the most about how much digital video content costs said that AMZN was 'losing' $500M-$1B per year two years ago. 

 

Do we agree that this is an expense regardless of any amount capitalized?

 

"Hastings says he generated those numbers based on the value of the content deals that Amazon won when the two companies competed head to head. "

 

 

Did AMZN have to do this or was it designed to make Prime and AMZN more desirable for customers in the future?

 

http://allthingsd.com/20121116/netflix-ceo-amazon-losing-up-to-1-billion-a-year-on-streaming-video/

 

But then shouldn't two years later the company be MORE profitable if the argument was that they were growing into the expense? 

 

 

No, they continue to INCREASE this number to make it more attractive!  It's not necessarily a one or two year investment - they are twenty year investments.

 

 

Two years ago they were losing up to $1bn on this product and they have grown since then so they should be at least $500-$1bn more profitable today (or at least a good portion of that they as they grow into it).

 

Remember that they're not necessarily charging for access to the Prime video content, or at least not as much as it costs them.  The digital video is bundled with Prime.  AMZN was getting $79 for access to this content AND a whole bunch of other stuff with non-trivial expenses that are also growing, like unlimited free shipping.  I ordered from AMZN 42 times in 2012 and if other peoples' estimates of order delivery cost of $5-$10 in shipping are correct AMZN had something like $300 of shipping costs attributable to me.  They only got $79 from me that year.  Some people get FREE books every month which cost AMZN more than they charge normal users for - like $15-$20  per book to the publishers from AMZN (this is a very interesting subject in itself, how they sell most or all Kindle books for less than they cost and also I don't know how much AMZN must pay the publishers for a monthly rental, but it's greater than zero), so AMZN gets $79 but for users that consume a book each month they very well may have lost money on that Prime sub from books alone, not to mention how much in shipping that sub might have cost AMZN that year.

 

I think that until one understands the extent AMZN of customer friendliness and how it gives tons of benefits away, you won't understand why they're not making a ton of money now.  And when you fully understand this customer-friendly approach, how unique it is and how they've managed to create something that no one else comes close to, it becomes easier to see what AMZN could turn into over a number of years.

[dwy000]

 

This ignores the fact that AMZN has one of the highest turnovers in the industry causing much of the granted stock to be forfeited since the median employee leaves after one year and the first year vesting is 5%.

 

 

Also you can assume that their share count continues growing at 1% a year like it consistently has.

 

 

The fact that AMZN chooses to accelerate their stock-comp. expense prove that they do things to minimize income.  When you consider everything they're doing, like building smartphones, drones, Fresh, China etc. these are all growth expenses, most of these ventures are developer salaries expensed in the current year, there's not much capital equipment.  For instance, the Fresh trucks are owned by Ryder...

 

The development expenses (including developers etc) would typically be capitalized not expensed.  They would then get expensed as the related revenues are earned. 

 

 

I'm not sure all software development is capitalized, but that would be fine if so.  Regardless, the capitalized amount is then amortized over three years.  This is an expense, isn't it?  All things that are capitalized are later expensed, correct?  So you can increase spending in one year, and then have higher amortization expense the following three years.

 

True.  But then that would suggest that it's not a growth expense, that's just the cost of providing a product and cannot be removed down the road to achieve profitability.  To your point, if all the expense is eventually amortized it's not really a tax reduction angle.

 

 

They have zero plans to remove anything.  Every action is designed to have a larger business in ten years.  If investors don't also have the same mindset, they won't view AMZN as attractively as I do and I think that's the crux of our differences.  You're concerned about current income and I want them to have a larger piece of the pie down the road.  I'm trying to maximize my wealth over the next few decades, not this year or next, so I appreciate spending that is designed to result in the largest possible business then.  I would rather them not pay taxes now and would rather them spend instead of doing so, and I'm certain they're doing that.

 

 

Eventually they will grow to a point where they won't be able to invest as much as their cash flow and they will start showing more income which I guess will happen in a handful of years.

 

Fair enough.  I'm not really concerned about current income (or the lack thereof) I'm concerned about the ability to generate income at any point in the future.

 

But again, how do you value this as an investment today if the shift to profitability May not happen for 5 yrs, 10 yrs, or even another 20 yrs.  ten or 20 yrs is a long time to hold an investment based upon an unproven thesis.  (Sorry about typos, I'm on an iPad which is impossible to type on)

[dwy000]

:D

Arguably the guy that knows the most about how much digital video content costs said that AMZN was 'losing' $500M-$1B per year two years ago. 

 

Do we agree that this is an expense regardless of any amount capitalized?

 

"Hastings says he generated those numbers based on the value of the content deals that Amazon won when the two companies competed head to head. "

 

 

Did AMZN have to do this or was it designed to make Prime and AMZN more desirable for customers in the future?

 

http://allthingsd.com/20121116/netflix-ceo-amazon-losing-up-to-1-billion-a-year-on-streaming-video/

 

But then shouldn't two years later the company be MORE profitable if the argument was that they were growing into the expense? 

 

 

No, they continue to INCREASE this number to make it more attractive!  It's not necessarily a one or two year investment - they are twenty year investments.

 

 

Two years ago they were losing up to $1bn on this product and they have grown since then so they should be at least $500-$1bn more profitable today (or at least a good portion of that they as they grow into it).

 

Remember that they're not necessarily charging for access to the Prime video content, or at least not as much as it costs them.  The digital video is bundled with Prime.  AMZN was getting $79 for access to this content AND a whole bunch of other stuff with non-trivial expenses that are also growing, like unlimited free shipping.  I ordered from AMZN 42 times in 2012 and if other peoples' estimates of order delivery cost of $5-$10 in shipping are correct AMZN had something like $300 of shipping costs attributable to me.  They only got $79 from me that year.  Some people get FREE books every month which cost AMZN more than they charge normal users for - like $15-$20  per book to the publishers from AMZN (this is a very interesting subject in itself, how they sell most or all Kindle books for less than they cost and also I don't know how much AMZN must pay the publishers for a monthly rental, but it's greater than zero), so AMZN gets $79 but for users that consume a book each month they very well may have lost money on that Prime sub from books alone, not to mention how much in shipping that sub might have cost AMZN that year.

 

I think that until one understands the extent AMZN of customer friendliness and how it gives tons of benefits away, you won't understand why they're not making a ton of money now.  And when you fully understand this customer-friendly approach, how unique it is and how they've managed to create something that no one else comes close to, it becomes easier to see what AMZN could turn into over a number of years.

 

But J, that's exactly my point!  All these things are going into the customer experience.  You can't stop spending on them without reducing the customer experience - so how do you shift to profits? 

 

It's great all these freebies for Prime and as you point out they are losing a lot of money shipping free to you.  How do you stop these losses without losing your competitive advantage?  The minute they start charging enuf for Prime to make money for these costs people will stop paying for it.  I'd love to see how many people cancelled Prime when they upped the price.  I know I did and now just order everything thru my wife's account (and boy are they losing money on that one now)

[JAllen]

 

This ignores the fact that AMZN has one of the highest turnovers in the industry causing much of the granted stock to be forfeited since the median employee leaves after one year and the first year vesting is 5%.

 

 

Also you can assume that their share count continues growing at 1% a year like it consistently has.

 

 

The fact that AMZN chooses to accelerate their stock-comp. expense prove that they do things to minimize income.  When you consider everything they're doing, like building smartphones, drones, Fresh, China etc. these are all growth expenses, most of these ventures are developer salaries expensed in the current year, there's not much capital equipment.  For instance, the Fresh trucks are owned by Ryder...

 

The development expenses (including developers etc) would typically be capitalized not expensed.  They would then get expensed as the related revenues are earned. 

 

 

I'm not sure all software development is capitalized, but that would be fine if so.  Regardless, the capitalized amount is then amortized over three years.  This is an expense, isn't it?  All things that are capitalized are later expensed, correct?  So you can increase spending in one year, and then have higher amortization expense the following three years.

 

True.  But then that would suggest that it's not a growth expense, that's just the cost of providing a product and cannot be removed down the road to achieve profitability.  To your point, if all the expense is eventually amortized it's not really a tax reduction angle.

 

 

They have zero plans to remove anything.  Every action is designed to have a larger business in ten years.  If investors don't also have the same mindset, they won't view AMZN as attractively as I do and I think that's the crux of our differences.  You're concerned about current income and I want them to have a larger piece of the pie down the road.  I'm trying to maximize my wealth over the next few decades, not this year or next, so I appreciate spending that is designed to result in the largest possible business then.  I would rather them not pay taxes now and would rather them spend instead of doing so, and I'm certain they're doing that.

 

 

Eventually they will grow to a point where they won't be able to invest as much as their cash flow and they will start showing more income which I guess will happen in a handful of years.

 

Fair enough.  I'm not really concerned about current income (or the lack thereof) I'm concerned about the ability to generate income at any point in the future.

 

 

There's been a lot of concern about eventual profitability and suggestions that they will have to do something different or raise prices. 

 

 

I don't believe they will have to really change anything or raise prices. 

 

 

They are already have a higher average price relationship across their businesses with their customers than WMT: AMZN has 28% and expanding gross margins versus WMT's 24% stagnant gross margins.  They just need to continue executing, improving the service, adding benefits and they will continue to grow and like I said, they won't always be able to invest as much as their operating cash flow is.  They also won't need to; there's a critical mass of benefits that will become a no-brainer at least to American consumers.  Why would you be a NFLX, Costco and WMT shopper when you can get Prime for the cost of one of these loyalty programs and get the books and audio subscriptions, free shipping and everything else they will add for free?

 

 

Only if there's a better service with a greater selection, lower prices, more benefits included in Prime, and faster shipping ability will AMZN not continue to grow, and to my knowledge this isn't close to happening.  eBay is stopping their same-day shipping business and Google does have Shopping Express, but it doesn't come anywhere near the selection and other benefits AMZN offers.