Palantir Posted August 23, 2014 Share Posted August 23, 2014 Amazon Prepares Online Advertising Program http://online.wsj.com/articles/amazon-preps-a-challenge-to-googles-ad-business-1408747979 Amazon.com Inc. AMZN -0.40% is gearing up to more directly challenge Google Inc. GOOGL +0.02% 's dominance of the online advertising market, developing its own software for placing ads online that could leverage its knowledge of millions of Web shoppers. Initially, Amazon plans to replace those ads on its pages that Google chiefly supplies with a new in-house ad placement platform, said people familiar with the matter. In the future, that system could challenge Google's $50 billion-a-year advertising business and Microsoft Corp.'s MSFT -0.15% , they added. Link to comment Share on other sites More sharing options...
KCLarkin Posted August 23, 2014 Share Posted August 23, 2014 I've never really thought about AMZN in a relative-value way. It is useful as a sanity test, especially to avoid a story stock that is crazy over-valued. I think that is what Nygren's analysis is all about. He knows that he can't reliably predict future free cash flow for AMZN. By doing a back-of-the-envelope relative analysis, he is just making sure valuation is in a range of reasonableness. Then he can make a qualitative judgement about the stock. Link to comment Share on other sites More sharing options...
JAllen Posted August 23, 2014 Share Posted August 23, 2014 I don't disagree that relative valuations are useful, they're just the least useful, IMO. You never heard Buffett say 'Pepsi was trading at 20, Coke was trading at 13 so I bought it'. He got rich because he bought companies for 10X, but often much less (NFM was 4X, believe it or not!) or companies that had 20 years or more to grow. And also, because I'm concerned with how much AMZN will earn in 10 years, whether or not AMZN is priced perfectly relative to companies that aren't even directly comparable is not a major focus of mine. Relative value is a very now focused method, inherently. Regardless I think AMZN should trade at a large EV/sales premium to the companies mentioned, though that probably goes without saying. Link to comment Share on other sites More sharing options...
wbr Posted August 25, 2014 Share Posted August 25, 2014 Apparently Amazon, not Google, is going to buy Twitch.tv http://www.bloomberg.com/news/2014-08-25/amazon-said-to-buy-twitch-for-1-billion.html?cmpid=yhoo Link to comment Share on other sites More sharing options...
Palantir Posted August 25, 2014 Share Posted August 25, 2014 JAllen, you think AMZN should start investing its "float" in equities? Link to comment Share on other sites More sharing options...
JAllen Posted August 25, 2014 Share Posted August 25, 2014 No, I would save it to buy back stock every few years like they've done and continue to selectively make acquisitions to build and protect the moat. AMZN has relatively less cash than the other tech titans, so I think ~$10B is a good number for them to have. They've been quite selective with acquisitions, preferring to build their own products, which I think is a good approach. Acquire networks like Twitch or companies like Kiva with true hard-earned domain expertise, patents and hardware solutions - build the rest. Link to comment Share on other sites More sharing options...
txlaw Posted August 26, 2014 Share Posted August 26, 2014 This Twitch acquisition is a big effing deal. If AMZN can turn Twitch into a real YouTube competitor, it will easily have been worth $1 billion (or whatever they're paying for it). Link to comment Share on other sites More sharing options...
Liberty Posted August 26, 2014 Share Posted August 26, 2014 Interesting. Amazon and Google will keep clashing more and more. It's inevitable for businesses that have a horizontal business model and are so big that only the biggest markets can move the needle. Link to comment Share on other sites More sharing options...
Palantir Posted August 26, 2014 Share Posted August 26, 2014 I have always said that Google's biggest threat is a world where search isn't as relevant, and with that, they will seem far less impressive. Facebook knows who your friends are, Google knows what you search for, and Amazon knows what you buy....surely Amazon's data is going to be quite valuable. Link to comment Share on other sites More sharing options...
JAllen Posted August 26, 2014 Share Posted August 26, 2014 This Twitch acquisition is a big effing deal. If AMZN can turn Twitch into a real YouTube competitor, it will easily have been worth $1 billion (or whatever they're paying for it). I don't know exactly how they're thinking about Twitch. If they could make half as successful as YouTube that would be amazing. I wonder if they'll take it that direction - non-game stuff that is. Not sure why they wouldn't though... Link to comment Share on other sites More sharing options...
txlaw Posted August 26, 2014 Share Posted August 26, 2014 This Twitch acquisition is a big effing deal. If AMZN can turn Twitch into a real YouTube competitor, it will easily have been worth $1 billion (or whatever they're paying for it). I don't know exactly how they're thinking about Twitch. If they could make half as successful as YouTube that would be amazing. I wonder if they'll take it that direction - non-game stuff that is. Not sure why they wouldn't though... I don't think Twitch itself will necessarily become another YouTube.com, per se. It could go that route, but maybe AMZN will just keep it a gaming brand. However, the underlying technology and infrastructure could definitely support a YouTube-like product, among other things, from AMZN. For one thing, Twitch has a presence in strategic data centers located in the US and Europe so that they can deliver real-time video with high quality of service. I could see AMZN bolstering this service to also deliver stored video from those data centers. It's important to note that YouTube is more than just YouTube.com. A ton of embedded videos on the web use YouTube/Google infrastructure because Google makes it really easy for video content creators. AMZN doesn't offer a similarly compelling service, but with Twitch infrastructure, who knows. Additionally, as I understand the service, Twitch broadcasts mostly come from end users. That's very interesting because broadcasting from the home is a lot harder than broadcasting from conventional venues that have content owner broadband connections. AMZN's purchase of Twitch could be a game changer if they "democratize" broadcasting. (Btw, Twitch is a spin-off of Justin.TV, http://en.wikipedia.org/wiki/Justin.tv, which originally aimed to make it easy for normal people to broadcast or "livecast.") And beyond broadcasting, I could see the video infrastructure being used for other things like IoT (will AMZN offer a Dropcam like service at some point?). The possibilities are mind boggling. Bezos continues to be one of my favorite CEOs on the planet. One more fun fact: I do believe that LVLT is a major CDN provider for Twitch. ;D Link to comment Share on other sites More sharing options...
muscleman Posted August 26, 2014 Share Posted August 26, 2014 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. Hi JAllen, I do agree that relative valuation is the least useful and I don't use it myself. All I am trying to do is to validate Nygren's words, but the calculation seems to be way off. Am I missing something here? Or is Nygren so dumb that he writes publicly about a company's valuation without verifying the most basic numbers? Link to comment Share on other sites More sharing options...
Liberty Posted August 26, 2014 Share Posted August 26, 2014 http://www.theguardian.com/technology/2014/aug/26/amazon-fire-phone-sales-data Estimate: 35,000 Fire phones sold. Looks like a flop so far. Link to comment Share on other sites More sharing options...
rogermunibond Posted August 26, 2014 Share Posted August 26, 2014 The tech site Re/Code has an interesting take on Amazon's push into payment systems and credit card readers. Hint... global domination of retail. Insert Dr. Evil laugh.... http://recode.net/2014/08/24/predicting-amazons-secret-plans-in-physical-retail/ Link to comment Share on other sites More sharing options...
Palantir Posted August 26, 2014 Share Posted August 26, 2014 I don't see it as crazy that stores will start running their system on these Amazon payment products like card readers etc etc. Amazon will continue to want to know what you are buying. Link to comment Share on other sites More sharing options...
saltybit Posted September 2, 2014 Share Posted September 2, 2014 Does anyone know how Zappos is currently accounted for and how it's done post-acquistion? Link to comment Share on other sites More sharing options...
redhots Posted September 5, 2014 Share Posted September 5, 2014 Nice blog post from Benedict Evans. Why Amazon Has No Profits (And Why It Works) http://ben-evans.com/benedictevans/2014/9/4/why-amazon-has-no-profits-and-why-it-works Link to comment Share on other sites More sharing options...
Liberty Posted September 5, 2014 Share Posted September 5, 2014 Nice blog post from Benedict Evans. Why Amazon Has No Profits (And Why It Works) http://ben-evans.com/benedictevans/2014/9/4/why-amazon-has-no-profits-and-why-it-works Good post. That seems to be the bullish thesis: Amazon has perhaps 1% of the US retail market by value. Should it stop entering new categories and markets and instead take profit, and by extension leave those segments and markets for other companies? Or should it keep investing to sweep them into the platform? Jeff Bezos’s view is pretty clear: keep investing, because to take profit out of the business would be to waste the opportunity. He seems very happy to keep seizing new opportunities, creating new businesses, and using every last penny to do it. AMZN is in the too hard pile for me as an investor, but I like them as a customer. Link to comment Share on other sites More sharing options...
Liberty Posted September 7, 2014 Share Posted September 7, 2014 For those who liked the recent Evans post, here he is in a podcast with VC Ben Horowitz about Amazon: http://ben-evans.com/benedictevans/2014/9/5/podcast-amazon Link to comment Share on other sites More sharing options...
muscleman Posted September 7, 2014 Share Posted September 7, 2014 Nice blog post from Benedict Evans. Why Amazon Has No Profits (And Why It Works) http://ben-evans.com/benedictevans/2014/9/4/why-amazon-has-no-profits-and-why-it-works Yeah, but the key question is still: What's the right price to buy? Amazon is clearly a wonderful business. But what's the fair price? If we assume Amazon's FCF + growth Capex is their actual earnings, which is around 6-7% of revenue, then Amazon's adjusted P/E is around 30. Would you buy it at 30 PE? Buffet bought KO when it was 16 PE, right? That means AMZN's fair price to buy is $200-210. From another measurement based on Nygren's letter, third party sales is 20% of revenue, and we assume Amazon takes 13% of fees for 3rd party sellers, then Amazon's adjusted gross revenue, including 3rd party revenue, should be around 170 Bn last year, giving a P/S of 0.93. Comparing that to WMT and COSTCO, they both have P/S of 0.5, but less growth prospects. So maybe I could say, AMZN's P/S of 0.75 is the fair value compared to WMT's P/S of 0.5? In that case, AMZN's fair price would be $279. Note that as of today, I still cannot understand Nygren's statement here: (http://www.oakmark.com/Commentary/Commentary-Archives/2Q14--Bill-Nygren.htm?rf=dr) Is he talking loud without checking his calculators? "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." Link to comment Share on other sites More sharing options...
Palantir Posted September 7, 2014 Share Posted September 7, 2014 I would buy them at 30 PE. I do not feel that is too high at all. I don't see why KO is a benchmark. KO was a good business, but AMZN is a different beast altogether. Link to comment Share on other sites More sharing options...
muscleman Posted September 8, 2014 Share Posted September 8, 2014 I would buy them at 30 PE. I do not feel that is too high at all. I don't see why KO is a benchmark. KO was a good business, but AMZN is a different beast altogether. My point is that I am quite surprised that Nygren publicly talk about his "AMZN is currently cheap" thesis, which seems to be a simple calculation mistake. Link to comment Share on other sites More sharing options...
dwy000 Posted September 8, 2014 Share Posted September 8, 2014 I would buy them at 30 PE. I do not feel that is too high at all. I don't see why KO is a benchmark. KO was a good business, but AMZN is a different beast altogether. I'd be a buyer at a 30 PE too. But a real PE, not an assumed PE. Link to comment Share on other sites More sharing options...
Liberty Posted September 8, 2014 Share Posted September 8, 2014 I guess trying to make people pay a premium price didn't work... http://www.bloomberg.com/news/2014-09-08/amazon-offers-fire-smartphone-for-99-cents-with-at-t-contract.html Link to comment Share on other sites More sharing options...
frommi Posted September 8, 2014 Share Posted September 8, 2014 Has someone looked at AliExpress.com? I doubt that they will replace Amazon, but the prices there are really low and you can order directly from china. I can imagine that local stores worldwide start using this as a sellers platform and they don`t have the burden of the fulfilment centers or money pits like the phones/kindles, so in the end they should be a able to offer a lot cheaper than Amazon. Is Amazon in the end beaten with its own weapons? Or is Amazons moat so deep that price is not the selling point anymore? Link to comment Share on other sites More sharing options...
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