muscleman Posted September 30, 2014 Share Posted September 30, 2014 Muscleman - a couple of cautions with your calculation: - the Technology & Content wouldn't all be capitalizable costs. The majority of these would be ongoing costs for running the business and providing the content they give away. To take the $4.2bn in 1H 2014 and turn it all into capex depreciated over 5 years would be way overstating earnings. There is a note that contents such as Amazon instant video is not part of the expense in Technology & Content. So I am not sure how much of the "Technology & Content" is over expensed. But clearly Amazon instant video content is part of the expense that does not fit your explanation here for "ongoing costs for running the business and providing the content they give away" That's true - and some of that content would be in COGS as opposed to here. Unfortunately there's not enough to disclosure to get a decent breakdown - and ultimately it all gets washed through the cash flow statement whether it's expense or capex. The question is really can they stop spending it and still maintain growth/service. Yep. I agree. That's exactly why I am only willing to pay 12 P/E instead of 25. Part of the reason being that my calculation of the P/E may turn out to be optimistic and I would like to have some margin of safety. Margin of Safety is the core of this value investing game, isn't it. Paying 25 P/E for a 30% growth means you cannot have any margin of error in your own projections. :) On the other hand, it is interesting to see that Jeff Bezo made the Twitch acquisition with debt instead of equity. Why did he do that? If the stock is grossly overvalued, it would make more sense to do a stock deal, like what FB is doing. Link to comment Share on other sites More sharing options...
JAllen Posted October 1, 2014 Share Posted October 1, 2014 Well this is interesting news! http://mobile.reuters.com/article/idUSL2N0RW14020141001?irpc=932 "PepsiCo Inc for the first time is introducing a product exclusively through Amazon.com Inc as the snack and soft drink maker aims to expand its footprint in e-commerce. The product, a naturally sweetened soda called Pepsi True, will be available on Amazon in mid-October in 24-packs of 7.5-ounce cans, the company said. It will not be in brick-and-mortar outlets, though Pepsi said it plans to eventually sell True in grocery stores. By introducing True through Amazon, Pepsi says it can better assess demand and gain insight into where people are buying it ahead of a wider launch." Emphasis mine. Yet another advantage of e-commerce over B&M? Link to comment Share on other sites More sharing options...
Palantir Posted October 1, 2014 Share Posted October 1, 2014 I did not know until today that I don't have to pay sales tax on Amazon and there is free shipping over $35. Maybe you all know this and I am slow. :-[ Good luck WMT. Link to comment Share on other sites More sharing options...
TorontoRaptorsFan Posted October 1, 2014 Share Posted October 1, 2014 Bezos should bury Blue Origin and focus all his energy on Amazon. Link to comment Share on other sites More sharing options...
dwy000 Posted October 2, 2014 Share Posted October 2, 2014 On the other hand, it is interesting to see that Jeff Bezo made the Twitch acquisition with debt instead of equity. Why did he do that? If the stock is grossly overvalued, it would make more sense to do a stock deal, like what FB is doing. Maybe Twitch didn't want AMZN stock? It's volatile and they'd likely be locked up for at least a year. Cash in hand always better. Link to comment Share on other sites More sharing options...
rkbabang Posted October 2, 2014 Share Posted October 2, 2014 Bezos should bury Blue Origin and focus all his energy on Amazon. If I were an Amazon shareholder I'd probably agree, but since I'm not, I like the fact that people Bezos and Musk are trying to shake up the space industry a bit. It has been the exclusive domain of governments and government contractors for far too long. Yes I know both Blue Origin and SpaceX are accepting government contracts, but they both have long term ambitions that far exceed just being a taxi service for the state. Link to comment Share on other sites More sharing options...
Liberty Posted October 2, 2014 Share Posted October 2, 2014 I did not know until today that I don't have to pay sales tax on Amazon and there is free shipping over $35. Maybe you all know this and I am slow. :-[ Good luck WMT. I've been taking advantage of that for, I don't know, 10+ years... Link to comment Share on other sites More sharing options...
Palantir Posted October 2, 2014 Share Posted October 2, 2014 SpaceX is just a government contractor albeit with a sexy story and a celebrity founder. Link to comment Share on other sites More sharing options...
dwy000 Posted October 2, 2014 Share Posted October 2, 2014 I did not know until today that I don't have to pay sales tax on Amazon and there is free shipping over $35. Maybe you all know this and I am slow. :-[ Good luck WMT. I've been taking advantage of that for, I don't know, 10+ years... Do it quick though. Most states are going to start charging sales tax on online purchases starting in 2015. Still free shipping though. Link to comment Share on other sites More sharing options...
yadayada Posted October 2, 2014 Share Posted October 2, 2014 So best guess, in 10 years time, what kind of FCF will this thing throw off very roughly? ? The thing that really matters in the end. What is ballpark on FCF on this thing. Link to comment Share on other sites More sharing options...
rkbabang Posted October 2, 2014 Share Posted October 2, 2014 I did not know until today that I don't have to pay sales tax on Amazon and there is free shipping over $35. Maybe you all know this and I am slow. :-[ Good luck WMT. I've been taking advantage of that for, I don't know, 10+ years... As have I, (although the sales tax doesn't matter to me now that I live in a state with no sales tax, but I used to live in MA which made this a really nice benefit) only I'm an Amazon Prime member so I can order a $5 item and have it the day after tomorrow for free with the 2-day free shipping, or I can choose free ground shipping and get a $1 credit for digital content. Also get Amazon Prime's streaming service for free (although it isn't as good as Netflix by a long shot). And not to mention I pay with my Amazon Visa and get 3% cash back on everything I buy. EDIT: And I almost forgot, I do all of my shopping through http://smile.amazon.com/ and Amazon donates 0.5% of my purchases to the charity of my choice. I have it set to The Free State Project right now. You can change your charity any time you wish. Link to comment Share on other sites More sharing options...
muscleman Posted October 3, 2014 Share Posted October 3, 2014 Why do you keep mentioning KO as the benchmark? I don't get it... Then how about GEICO? It has been growing at 24% per year from 1967 to 1998. When Buffet first bought it, its market share was 1%, and it is the lowest cost insurer, very similar to where AMZN stands today. At what P/E did Buffet buy it? Link to comment Share on other sites More sharing options...
Palantir Posted October 3, 2014 Share Posted October 3, 2014 http://basehitinvesting.com/wp-content/uploads/2013/05/The-Security-I-Like-Best.pdf According to this, 8x earnings. If you found AMZN selling at 8x earnings, it would obviously be a buy....but why not evaluate this opportunity on its own merits? Link to comment Share on other sites More sharing options...
JAllen Posted October 3, 2014 Share Posted October 3, 2014 Amazon's growing way faster than Geico was... Link to comment Share on other sites More sharing options...
dwy000 Posted October 3, 2014 Share Posted October 3, 2014 Geico generates a ton of cash. Link to comment Share on other sites More sharing options...
JAllen Posted October 3, 2014 Share Posted October 3, 2014 So does AMZN relative to the capital invested... > 50% OCF/IC Link to comment Share on other sites More sharing options...
dwy000 Posted October 3, 2014 Share Posted October 3, 2014 Not after capex. And, yes if you could buy it at 1x BV. Not at $330/share. I'm talking FCF that's available to shareholders. Link to comment Share on other sites More sharing options...
Palantir Posted October 3, 2014 Share Posted October 3, 2014 Why would you want FCF available to shareholders when management can reinvest that? Link to comment Share on other sites More sharing options...
rpadebet Posted October 3, 2014 Share Posted October 3, 2014 Not after capex. And, yes if you could buy it at 1x BV. Not at $330/share. I'm talking FCF that's available to shareholders. To get to FCF, you need to know the extent of Maintenance Capex. What is your estimate of that? Please don't cite AMZN's own definition of FCF ;), they don't even adjust that for stock comp . When you sell a Kindle at cost or slightly below, can it be construed as growth capex? Should that loss be added to OCF to get to FCF? Is money spent on acquiring new content licenses growth capex or maintenance capex or plain business expense? I honestly don't think AMZN provides us all the quantitative inputs we need to come up with a valuation analysis using FCF. I also think it is deliberate on their part. Remember Bezos saying "Your margin is my opportunity", surely they apply that to themselves and don't want to disclose their own margins. That said, most of their business is retail e-commerce, so we can make educated guesses on the underlying economics based on other businesses selling similar things. Valuation is a different story for a company growing at such speed and being so disruptive. The zone of reasonableness/cheapness/richness can be pretty wide with a lot of overlap here. Qualitative judgments of the business, judgments about managerial skill and long term perspective are far more important than cheap valuation here. So I can understand investors putting this in "too hard" pile or "wait for right price" pile. Link to comment Share on other sites More sharing options...
muscleman Posted October 3, 2014 Share Posted October 3, 2014 Amazon's growing way faster than Geico was... GEICO grows at 24% for 40 years. AMZN is in the early stages. If we look back 25 years later, will you be confident that AMZN grew at 24% for the past 40 years? Maybe. But in that case, I would buy at 8 PE, not 25 :) Link to comment Share on other sites More sharing options...
Liberty Posted October 3, 2014 Share Posted October 3, 2014 Amazon's growing way faster than Geico was... GEICO grows at 24% for 40 years. AMZN is in the early stages. If we look back 25 years later, will you be confident that AMZN grew at 24% for the past 40 years? Maybe. But in that case, I would buy at 8 PE, not 25 :) Amazon was founded in 1994 and, iirc, it grew at hundreds of percents a year for the first few years. So the back end of the 40 years could have growth in the 15-20% range and the average CAGR could still be quite high. Of course, you didn't buy it in 1994, so that's kind of moot :) Link to comment Share on other sites More sharing options...
dwy000 Posted October 3, 2014 Share Posted October 3, 2014 Not after capex. And, yes if you could buy it at 1x BV. Not at $330/share. I'm talking FCF that's available to shareholders. To get to FCF, you need to know the extent of Maintenance Capex. What is your estimate of that? Please don't cite AMZN's own definition of FCF ;), they don't even adjust that for stock comp . When you sell a Kindle at cost or slightly below, can it be construed as growth capex? Should that loss be added to OCF to get to FCF? Is money spent on acquiring new content licenses growth capex or maintenance capex or plain business expense? I honestly don't think AMZN provides us all the quantitative inputs we need to come up with a valuation analysis using FCF. I also think it is deliberate on their part. Remember Bezos saying "Your margin is my opportunity", surely they apply that to themselves and don't want to disclose their own margins. That said, most of their business is retail e-commerce, so we can make educated guesses on the underlying economics based on other businesses selling similar things. Valuation is a different story for a company growing at such speed and being so disruptive. The zone of reasonableness/cheapness/richness can be pretty wide with a lot of overlap here. Qualitative judgments of the business, judgments about managerial skill and long term perspective are far more important than cheap valuation here. So I can understand investors putting this in "too hard" pile or "wait for right price" pile. Actually, to take that point and run with it, we do know FCF - to the dollar - and it's close to zero on an LTM basis. Maintenance vs. growth capex is very difficult to bucket and to be honest, is somewhat moot unless you plan to stop growing. Until then it's all cash. Link to comment Share on other sites More sharing options...
stevevri Posted October 3, 2014 Share Posted October 3, 2014 Everyone says "long term"..., well if you're expecting a return of 20% per year, then you're expecting in 10 years Amazon to be Trillion dollar company. Even if you use the most optimistic operating cash flow of today there will need to be very substantial growth to get there. Surely the market will want to see more in terms of true free cash flow (not operating cash flow with a bunch of stuff removed...) and will assign a much lower multiple at that time. Can this happen? Sure... This is not a no brainer, and this is not cheap. It's also not a short. I think the bulls are vastly underrating the probability of a Microsoft of the 2000s situation, where they over tripled their profit yet the stock was basically flat because of the high multiple. Link to comment Share on other sites More sharing options...
rpadebet Posted October 3, 2014 Share Posted October 3, 2014 I think the probability of a Microsoft in 2000s situation here is very low (not impossible). Lets estimate what kind of sales growth we need to see in AMZN in 10 years for the stock price to trade flat and at a average multiple of 15x MC(t)=150 B MC(t+10Y)=150 B PE(t+10Y)=15 => Earnings(t+10Y)=10B => Pretax Earnings (t+10Y)~14B Assuming they make similar operating margins as comparable retailers (5%-7%) => Adj sales of 200B-280B ~240B Walmart today has about 480B sales. By this measure Amazon getting to 240B adjusted sales in 10 years doesn't seem like a stretch. From 140B adjusted sales currently, it implies a WMT ish CAGR of 5.5% over the next 10 years. If you believe AMZN's e-commerce market is already so mature as to grow only at 5-6% rate going forward for next 10 years, then yes, this could be a MSFT in 2000's at current prices. I believe AMZN can clear this low bar quite easily. I think at least a mid teens sales CAGR over next 10 years is highly likely given the size of the market opportunity and customer preference dynamics. It is not a typical "value investment", you are paying for growth here at this price...20-25% down it becomes easier 8) Link to comment Share on other sites More sharing options...
dwy000 Posted October 3, 2014 Share Posted October 3, 2014 2 big questions that analysis raises as an investment thesis a) the 5-7% operating margins. The assumption is that there are no earnings or cash flow today because they are investing in growth. If they shift to 5-7% margin it implies they have stopped investing in growth and stopped spending. Will they still be able to grow to those levels if they stop investing? Time will tell... b) that gets you to today's stock price in 10 years. To justify the risk you'd probably want to get at least a 12% CAGR in your investment which implies a Mkt Cap of $466bn. That's $31bn of earnings, $42bn operating earnings or $700bn of sales. Can they get to $700bn in sales while simultaneously cutting growth spend to get to 5-7% margins? That's beyond my comfort level of assumptions. Link to comment Share on other sites More sharing options...
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