AMZN - Amazon.com Inc.

[frommi]

Why are you using such a high capX figure? Did you just use CapX = D&A?

 

I used the numbers out of the last annual report. What numbers do you use?

 

Capital expenditures were $3.4 billion, $3.8 billion, and $1.8 billion during 2013, 2012, and 2011.

[LC]

What the heck did they spend 2b on? (Sorry I just follow Amzn for the entertainment)

[Palantir]

^ Hookers and blow?

[dwy000]

^ Hookers and blow?

 

And the rest was just wasted.  (old joke but a good one)

[dwy000]

It was building out data centers and distribution centers (and capitalizing software and content etc).

 

Interesting that Microsoft indicated they expected to spend $5bn in capex building out infrastructure for their cloud platform this year - and they are a far distant second to AMZN in terms of size.

[dolce far niente]

First post :D

 

http://gigaom.com/2014/08/09/3-areas-where-amazon-web-services-might-be-vulnerable-if-the-competition-can-exploit-them/

 

[Palantir]

 

How Amazon Intends to Crush Square in Mobile Payments

 

http://www.thestreet.com/story/12843173/2/how-amazon-intends-to-crush-square-in-mobile-payments.html

 

This reader + Kindle would be a great combo. Just went to two Gyro places where the only checkout counter ran a Square reader + iPad. This will do the same thing and and likely be cheaper.

[dwy000]

I was in Half Moon Bay, CA this weekend and every single store we went in - every one - was using Square.  It was like they were giving them away!

 

Apparently Square is struggling because they continue to lose money despite the volume growth.  It will be interesting to see how Amazon plans to make money at it with lower fees (although one could argue that big revenue dollars with no profits is right up Amazon's area of expertise).

[ni-co]

Thats 2 billion $ or 1.4% owner earnings?  So it takes 5 years of 30% growth to come to something more reasonable like 4-5%?

 

This is exactly what I'm thinking, too. At the end I put it into the "to hard" pile, not because it's difficult to understand – quite the opposite. My problem with AMZN is that its growth potential is obvious, its strategy to achieve that growth makes complete sense and I don't see why they shouldn't succeed. My problem is that everybody knows this. I have to come up with far better growth estimates than the consensus does to make money with AMZN – and I don't think I'm able to do that.

[dolce far niente]

http://www.bloomberg.com/news/2014-08-13/amazon-helps-mom-and-pop-store-in-barcelona-reach-global-village.html

 

"The company offers two separate services. Marketplace allows retailers to list their products on Amazon.com where they are picked up alongside Amazon’s own offerings in client searches. The logistics service goes a step further, handling the delivery as well. Amazon even stores products for some clients in its own warehouses to reduce delivery times. Retailers pay a monthly fee of 39 euros plus a commission starting at 7 percent.

 

Spanish third-party sales on Amazon’s websites have risen 300 percent over the past year while the logistics business grew 200 percent, Alvira said."

[muscleman]

http://www.oakmark.com/Commentary/Commentary-Archives/2Q14--Bill-Nygren.htm?rf=dr

 

"You bought what?

That brings me to our newest position, which will no doubt make some question our credentials as value investors: Amazon.

 

Consensus forward earnings for Amazon are a little over a dollar. At the median forward P/E multiple, Amazon would be priced in the low $20s. So, even though the stock fell $124 from its January high of $408 to a May low of $284, its P/E ratio remained in nosebleed territory. But we have never believed the P/E ratio was the be-all and end-all for valuation. Amazon is a retailer – a very efficient retailer. When we compare stocks in the same industry, we often compare their market caps to their sales rather than their earnings.  Since 2001, Amazon has generally traded at a cap-to-sales ratio of two to four times that of the average bricks-and-mortar retailer.  Having fallen to just under two recently, one might say that, as an advantaged retailer, Amazon looks somewhat attractive.

 

But that metric misses an important change in Amazon’s business.  Third-party sales (sales on amazon.com where the seller is not Amazon) have grown more rapidly than Amazon’s direct business.  And on those transactions, accounting rules credit only Amazon's commission as revenue.  So if you buy a $100 item on amazon.com from a third party, Amazon is only allowed to show about $13 of revenue, nearly all of which is gross profit.  For third-party sales, Amazon is effectively functioning as the mall owner, collecting a percentage of sales as rent.  Amazon earns less gross profit on that sale than an average retailer would, but it is also a much lower risk endeavor.  For that reason, we think a dollar of third-party sales should be worth about the same as a dollar that Amazon sells directly.

 

It gets interesting when we adjust our cap-to-sales ratio comparison to include estimated gross third-party sales.  Instead of selling at twice the ratio to sales of the average bricks–and-mortar retailer, Amazon is selling at only 80%.  So, relative to gross sales, Amazon's stock would have to increase 25% to be priced consistent with the very companies whose survival Amazon is threatening.  On that metric, Amazon has never been cheaper.

 

Should Amazon sell at a discount on sales? The answer largely rests on what Amazon could earn if it wasn’t investing so heavily for future growth.  For most asset heavy businesses, growth investment is primarily on the balance sheet, and is slowly expensed on the income statement as depreciation throughout its useful life.  In an asset–lite business like Amazon, however, most growth spending gets directly expensed to the income statement, creating a much larger immediate reduction in income.  We believe that if Amazon sharply curtailed its growth spending so that it only grew at the rate other retailers grow, it could produce similar operating margins.  But we don't want them to do that.  We believe that management is maximizing value by investing heavily for super-normal organic growth.  So, yes, Amazon is a rapidly growing business.  But at this price, we believe it is also a value stock."

 

 

 

=============================================================

This is a new perspective that I've never seen from other value investors. I flipped through the 10-Q and 10-K but didn't find anything about the breakdown of their service revenue, which consists of third-party commissions and AWS. Do you have any thoughts?

[muscleman]

After reading Buffet and Pabrai both mention Amazon as a very nice business, i am scratching my head around what the right price may be.

At 10xEV/EBITDA its probably really cheap, 15-20x EV/EBITDA can be a fair price when i look at KO or GOOG. For me at the current price its too expensive, even if it grows EBITDA by 30%. What are you using to value Amazon?

 

Where did you see Buffet saying that? Could you share with us a link?

[JAllen]

Muscleman: the FBA business is the reason I harp on the fact that gross profit is growing at 33% while sales are 'only' growing at 23%. 

 

 

The third-party business is why I believe that gross profit growth is a more accurate measure of how fast AMZN's total retail business is growing.  AWS accounts for some of this gross profit growth, or at least it did until last quarter.

 

 

The FBA business is another reason why AMZN will eventually settle with FCF margins greater than 10%, especially if AWS and FBA continue to grow like they have.

 

 

http://www.bidnessetc.com/24122-amazon-rises-ebay-falters-after-channeladvisor-reports-july-comps-sales/

 

 

"Amazon was the pick of the lot last month with a 40.4% jump in same-store sales from the same month last year. That was up considerably from the 34.4% year-over-year (YoY) growth it posted in June, and its highest gain in over 12 months. Amazon’s comp sales growth has in fact risen consistently every month over the course of the year. That confirmed what many on Wall Street know already – Amazon’s might in the online retail space has not lost its luster.Meanwhile, same-store sales at the company’s rival eBay, Inc. (EBAY) rose only 9.7%, down from the 12.3% growth in June, showing a slight weakness of late. Auction sales declined 8.2% at eBay, while comp sales of fixed price items rose 12.8%. Auto sales at eBay rose 8% for the month."

[link01]

Muscleman: the FBA business is the reason I harp on the fact that gross profit is growing at 33% while sales are 'only' growing at 23%. 

 

 

The third-party business is why I believe that gross profit growth is a more accurate measure of how fast AMZN's total retail business is growing.  AWS accounts for some of this gross profit growth, or at least it did until last quarter.

 

 

The FBA business is another reason why AMZN will eventually settle with FCF margins greater than 10%, especially if AWS and FBA continue to grow like they have.

 

 

http://www.bidnessetc.com/24122-amazon-rises-ebay-falters-after-channeladvisor-reports-july-comps-sales/

 

 

"Amazon was the pick of the lot last month with a 40.4% jump in same-store sales from the same month last year. That was up considerably from the 34.4% year-over-year (YoY) growth it posted in June, and its highest gain in over 12 months. Amazon’s comp sales growth has in fact risen consistently every month over the course of the year. That confirmed what many on Wall Street know already – Amazon’s might in the online retail space has not lost its luster.Meanwhile, same-store sales at the company’s rival eBay, Inc. (EBAY) rose only 9.7%, down from the 12.3% growth in June, showing a slight weakness of late. Auction sales declined 8.2% at eBay, while comp sales of fixed price items rose 12.8%. Auto sales at eBay rose 8% for the month."

 

I doubt amzn is targeting FCF or any other kind of margin close to 10%. their whole modus operandi has been to trade margin or profitability for profit dollars. their predominantly digital retail assets give them a cost advantage over retailers with physical stores, allowing them to price goods lower at higher profit dollars. along with size, scale, network effect, its part of their secret sauce. my guess is that they are targeting operating margins somewhere between Costco's & walmart's 3 & 6%. and considering amzn's continued 20-30% growth I'd say they can price most things lower at their margin---whatever it really is underneath all those massive growth expenses- and steal share from everybody else.as Bezos has said: "your margin is our opportunity."

[muscleman]

Muscleman: the FBA business is the reason I harp on the fact that gross profit is growing at 33% while sales are 'only' growing at 23%. 

 

 

The third-party business is why I believe that gross profit growth is a more accurate measure of how fast AMZN's total retail business is growing.  AWS accounts for some of this gross profit growth, or at least it did until last quarter.

 

 

The FBA business is another reason why AMZN will eventually settle with FCF margins greater than 10%, especially if AWS and FBA continue to grow like they have.

 

 

http://www.bidnessetc.com/24122-amazon-rises-ebay-falters-after-channeladvisor-reports-july-comps-sales/

 

 

"Amazon was the pick of the lot last month with a 40.4% jump in same-store sales from the same month last year. That was up considerably from the 34.4% year-over-year (YoY) growth it posted in June, and its highest gain in over 12 months. Amazon’s comp sales growth has in fact risen consistently every month over the course of the year. That confirmed what many on Wall Street know already – Amazon’s might in the online retail space has not lost its luster.Meanwhile, same-store sales at the company’s rival eBay, Inc. (EBAY) rose only 9.7%, down from the 12.3% growth in June, showing a slight weakness of late. Auction sales declined 8.2% at eBay, while comp sales of fixed price items rose 12.8%. Auto sales at eBay rose 8% for the month."

 

Could you please tell me where you get the revenue number for FBA? In the 10-Q and 10-K, I don't find the breakdown of their services revenue.

[JAllen]

No one knows FBA revenue.  We do know third-party units sold are 41% of total units which Amazon makes just commissions on.  This is the biggest contributor to gross profit and gross margin growth.

 

I don't think AMZN is targeting any FCF margin, agreed; that's just what I think the very long-term base of what AMZN will earn.  I'm thinking 10+ years so we might not be on the same page with with the time horizon...

[muscleman]

No one knows FBA revenue.  We do know third-party units sold are 41% of total units which Amazon makes just commissions on.  This is the biggest contributor to gross profit and gross margin growth.

 

I don't think AMZN is targeting any FCF margin, agreed; that's just what I think the very long-term base of what AMZN will earn.  I'm thinking 10+ years so we might not be on the same page with with the time horizon...

 

so it is pretty much a guess. I don't mean FBA revenue along. I meant third party revenue. Some third party choose FBA but some don't.

The over $4bn services revenue is from third party commissions + AWS + a few other things, so it is hard to find out what exactly is the third party revenue.

[muscleman]

I read through these comments again but still can't understand it.

 

"It gets interesting when we adjust our cap-to-sales ratio comparison to include estimated gross third-party sales.  Instead of selling at twice the ratio to sales of the average bricks–and-mortar retailer, Amazon is selling at only 80%."

http://www.oakmark.com/Commentary/Commentary-Archives/2Q14--Bill-Nygren.htm?rf=dr

 

 

Right now Costco and Walmart has price/sales ratio of 0.5, so Nygren is saying that AMZN's adjusted price/sales is 0.4 right now.

AMZN's market cap is 154 B. So Nygren's estimated adjusted sales is 385 B.

 

http://google.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=9739502-812-328695&type=sect&TabIndex=2&companyid=7235&ppu=%252fdefault.aspx%253fsym%253dAMZN

I am not sure how to get to this 385 B number. According to 2013 10-K, product sales revenue is 60 B and services revenue is 13 B, which includes third party fees, AWS etc.

Even if we assume the 13 B is entirely third party fees, and we assume AMZN charges 13% commision, then the third party sales is merely 100 B, which makes the total annual adjusted sales to be 160 B.

 

How does he get the 385 B number? ::)

 

[handycap5]

My guess at GMV (excl. AWS) is ~$140B in 2014. I use the 40% 3P units (given by company), $3.8B guess for AWS revenue, 1P and 3P having same ASP, and 10% 3P take rate (Nygren seems to imply 13% take rate).

[dwy000]

I read through these comments again but still can't understand it.

 

"It gets interesting when we adjust our cap-to-sales ratio comparison to include estimated gross third-party sales.  Instead of selling at twice the ratio to sales of the average bricks–and-mortar retailer, Amazon is selling at only 80%."

http://www.oakmark.com/Commentary/Commentary-Archives/2Q14--Bill-Nygren.htm?rf=dr

 

 

Right now Costco and Walmart has price/sales ratio of 0.5, so Nygren is saying that AMZN's adjusted price/sales is 0.4 right now.

AMZN's market cap is 154 B. So Nygren's estimated adjusted sales is 385 B.

 

http://google.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=9739502-812-328695&type=sect&TabIndex=2&companyid=7235&ppu=%252fdefault.aspx%253fsym%253dAMZN

I am not sure how to get to this 385 B number. According to 2013 10-K, product sales revenue is 60 B and services revenue is 13 B, which includes third party fees, AWS etc.

Even if we assume the 13 B is entirely third party fees, and we assume AMZN charges 13% commision, then the third party sales is merely 100 B, which makes the total annual adjusted sales to be 160 B.

 

How does he get the 385 B number? ::)

 

My guess is two things:  a) that he's not using WalMart or Costco as the typical bricks and mortar stores.  If he says they're trading at double the typical bricks store he must be using 1x sales as his typical figure (since Amazon trades at 2x 2013 sales).  b) if you take 80% of the "typical" sales/cap multiple he's saying Amazon is trading at 0.80 of grossed up revenues.  That would imply total revenues of about $190bn if you grossed up the 3rd party sales.  That still implies third party sales of $115bn which can't be right (and that's starting with total revenues not product revenues which would balloon the third party sales even more).

[muscleman]

I read through these comments again but still can't understand it.

 

"It gets interesting when we adjust our cap-to-sales ratio comparison to include estimated gross third-party sales.  Instead of selling at twice the ratio to sales of the average bricks–and-mortar retailer, Amazon is selling at only 80%."

http://www.oakmark.com/Commentary/Commentary-Archives/2Q14--Bill-Nygren.htm?rf=dr

 

 

Right now Costco and Walmart has price/sales ratio of 0.5, so Nygren is saying that AMZN's adjusted price/sales is 0.4 right now.

AMZN's market cap is 154 B. So Nygren's estimated adjusted sales is 385 B.

 

http://google.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=9739502-812-328695&type=sect&TabIndex=2&companyid=7235&ppu=%252fdefault.aspx%253fsym%253dAMZN

I am not sure how to get to this 385 B number. According to 2013 10-K, product sales revenue is 60 B and services revenue is 13 B, which includes third party fees, AWS etc.

Even if we assume the 13 B is entirely third party fees, and we assume AMZN charges 13% commision, then the third party sales is merely 100 B, which makes the total annual adjusted sales to be 160 B.

 

How does he get the 385 B number? ::)

 

My guess is two things:  a) that he's not using WalMart or Costco as the typical bricks and mortar stores.  If he says they're trading at double the typical bricks store he must be using 1x sales as his typical figure (since Amazon trades at 2x 2013 sales).  b) if you take 80% of the "typical" sales/cap multiple he's saying Amazon is trading at 0.80 of grossed up revenues.  That would imply total revenues of about $190bn if you grossed up the 3rd party sales.  That still implies third party sales of $115bn which can't be right (and that's starting with total revenues not product revenues which would balloon the third party sales even more).

 

I am not a fan of relative valuation. In addition, I think AMZN is more comparable to WMT and Costco instead of the department stores. WMT and Costco sell at razor thin margins and gain the advantage from scale and efficiency. Department stores sell things at a premium but they can because their location is good and people want to spend time there.

 

So if we use $140 B adjusted sales, AMZN is trading at 1.1x P/S, which is much more expensive than WMT and Costco.

[Laxputs]

Been reading this piece of capital allocation:  http://www.valuewalk.com/wp-content/uploads/2014/08/document-1036635381.pdf

 

Just thought it was interesting how R&D is expensed on the income statement because its future is thought of as too uncertain to quantify. Given the ridiculous amount of new products at Amazon, the amount of R&D expenditures must be huge and eventually that will get drastically reduced. This has been mentioned a few times though I know.

[Laxputs]

Funny, Bezos is quoted in the report as I keep reading:

 

Finally, recognize that the debate about the short term versus the long term is an empty one. Instead,

acknowledge that the goal is to maximize long-term value per share. This applies to activities that

management expects to pay off quickly or in the distant future. Amazon.com is a company that appears

comfortable taking a long-term view. The company’s CEO, Jeff Bezos, argues that there is less competition

for long-term initiatives. He says, “If everything you do needs to work on a three-year time horizon, then you’re

competing against a lot of people. But if you’re willing to invest on a seven-year time horizon, you’re now

competing against a fraction of those people, because very few companies are willing to do that. Just by

lengthening the time horizon, you can engage in endeavors that you could never otherwise pursue. At Amazon

we like things to work in five to seven years.” 109

[muscleman]

I read through these comments again but still can't understand it.

 

"It gets interesting when we adjust our cap-to-sales ratio comparison to include estimated gross third-party sales.  Instead of selling at twice the ratio to sales of the average bricks–and-mortar retailer, Amazon is selling at only 80%."

http://www.oakmark.com/Commentary/Commentary-Archives/2Q14--Bill-Nygren.htm?rf=dr

 

 

Right now Costco and Walmart has price/sales ratio of 0.5, so Nygren is saying that AMZN's adjusted price/sales is 0.4 right now.

AMZN's market cap is 154 B. So Nygren's estimated adjusted sales is 385 B.

 

http://google.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=9739502-812-328695&type=sect&TabIndex=2&companyid=7235&ppu=%252fdefault.aspx%253fsym%253dAMZN

I am not sure how to get to this 385 B number. According to 2013 10-K, product sales revenue is 60 B and services revenue is 13 B, which includes third party fees, AWS etc.

Even if we assume the 13 B is entirely third party fees, and we assume AMZN charges 13% commision, then the third party sales is merely 100 B, which makes the total annual adjusted sales to be 160 B.

 

How does he get the 385 B number? ::)

 

My guess is two things:  a) that he's not using WalMart or Costco as the typical bricks and mortar stores.  If he says they're trading at double the typical bricks store he must be using 1x sales as his typical figure (since Amazon trades at 2x 2013 sales).  b) if you take 80% of the "typical" sales/cap multiple he's saying Amazon is trading at 0.80 of grossed up revenues.  That would imply total revenues of about $190bn if you grossed up the 3rd party sales.  That still implies third party sales of $115bn which can't be right (and that's starting with total revenues not product revenues which would balloon the third party sales even more).

 

I am not a fan of relative valuation. In addition, I think AMZN is more comparable to WMT and Costco instead of the department stores. WMT and Costco sell at razor thin margins and gain the advantage from scale and efficiency. Department stores sell things at a premium but they can because their location is good and people want to spend time there.

 

So if we use $140 B adjusted sales, AMZN is trading at 1.1x P/S, which is much more expensive than WMT and Costco.

 

JAllen, do you have any thoughts on that? The numbers don't seem to match Nygren's conclusion. :-\

[JAllen]

I've never really thought about AMZN in a relative-value way.  I think relative value is one of the less reliable valuation methods except for when there's a structural reason one stock is trading lower than comps., like tiny illiquid stocks trading cheaper than SEC-registered counterparts. 

 

 

I also think that AMZN isn't directly comparable to these other companies: AMZN is in many, much different, arguably better businesses than WMT/TGT/COST. AMZN's FBA revenue, however much it is, should be priced similarly to eBay's commission revenue (FBA is more capital intensive than eBay's pure commission model but is growing way faster).

 

 

But anyways, I've always thought about AMZN in an absolute way: how much will our sales and FCF be in 5-10-20 years.  I do think about AMZN's sales relative to WMT's current/peak sales and how much bigger they could be because AMZN is operating in more parts of the economy and sells orders of magnitude more SKUs.  But AMZN is structurally very different than WMT.

 

 

Chad from Peridot Capital rightfully pointed out that AMZN already has operating cash flow margins higher than the big B&M retailers which would make AMZN's sales worth more than theirs.  We know that not ever having to purchase sub-urban real estate, more automation and software driven makes AMZN less capital intensive so every dollar of sales should be worth more. 

 

 

Last thing: AMZN's gross margin this past quarter, 30.7%, just matched TGT's and is still expanding, so now it has gross margins that are higher than WMT/TGT/COST too.