AMZN - Amazon.com Inc.

[dwy000]

There was a good article today stating that it will be the employees who force the company to shift gears to focus on profits, not the investors.  Amazon is notorious for not being an enjoyable place to work and they underpay - but it all gets made up with stock options.  With a declining stock price they are going to struggle to keep them motivated.  That probably means more options, more dilution and more pressure on the stock price which means more options, etc etc etc.

[Palantir]

Or buybacks...

[dwy000]

That requires cash.  They only generate $1bn in free cash flow but they expense $2bn of stock based comp (at least this year).

 

 

[JAllen]

They have $8B cash so they could definitely buy back shares.  Could also issue debt if they wanted too.  They should generate more cash this upcoming quarter than in other quarters - in January they'll have a bunch at least.

 

 

They said on the call that nearly all of the write down was on COS.

[rpadebet]

What continues to perplex me is why nearly everyone, including conference call participants, has never read Bezos' annual letters and continues to focus on financial metrics AMZN's management does not focus on.  People just can't accept that AMZN is managed differently and doesn't care what's it's currently earning. 

 

 

That or the approach is so antithetical to nearly everyone else's it's incomprehensible.

 

You should be thankful.  It provides others who align with Bezos's thinking great prices.  As you are aware, I'm sure, the longer your time horizon, the better this is for you.

 

I think most people don't actually read any filings.  Most rely on journalists, CNBC, blogs, etc.  There is an incredible amount of information for those that take the time to read.  Most people are lazy, though.  Which, again, we should be thankful.

 

This can't be surprising though. JB has a long term view but it has been over 20 years. At some point you need to generate a return for your investors.  Or at least explain how and when you plan to show a profit.  If he gave a roadmap or timeframe he would get cut a lot more slack.  But you just can't continue to show virtually no return for 20 yrs, then stonewall your investors and expect them to keep pumping up an already inflated stock. It's not surprising they are revolting. It's surprising it has taken this long.

 

Just look at it as a buying opportunity if you still believe the story. Hurts from the previous price chance to average down.

 

I don't understand the need to see accounting earnings by investors. In someways this is similar to the need of dividend investors to see BRK pay out dividends. Its just common sense to see that as long as capital allocation is good and sensible, automatic reinvestment of cash generated is by far a more efficient model.

 

And how can Jeff Bezos put a timeline on when he will show profitability in accounting terms when the runway in front of him is wide and long. How can anyone predict with any certainty when eCommerce or cloud computing or shift to streaming media will completely mature? And why would investors want JB to share his roadmap? Isn't it like giving away your playbook to your opponents in this industry? I think he is rightly focused on aggressive reinvestment of cash generated as fast as he can.

 

Accounting profits will come. They might even overtake cash flows some day. PE might look ridiculously cheap then and we will have a whole bunch of investors walk into that trap ala IBM now. Because when that happens, more often than not, above average reinvestment opportunities would have dried up.

 

[rpadebet]

They have $8B cash so they could definitely buy back shares.  Could also issue debt if they wanted too.  They should generate more cash this upcoming quarter than in other quarters - in January they'll have a bunch at least.

 

 

They said on the call that nearly all of the write down was on COS.

 

I don't think buybacks are best use of cash at this point. Yes, it maybe value accretive but that needs to be weighed against reinvestment opportunities within the business.

 

By buying back, investors would be implicitly reinvesting into some of the more mature slow growth businesses like "media and books" alongside the fast growing ones. It would be a better use of that cash to reinvest in emerging market eCommerce or AWS which have a much longer and faster growth profile.

[CorpRaider]

There was a good article today stating that it will be the employees who force the company to shift gears to focus on profits, not the investors.  Amazon is notorious for not being an enjoyable place to work and they underpay - but it all gets made up with stock options.  With a declining stock price they are going to struggle to keep them motivated.  That probably means more options, more dilution and more pressure on the stock price which means more options, etc etc etc.

 

All that equity compensation gets backed out of the gross profit, right?  ;D

[KCLarkin]

What continues to perplex me is why nearly everyone, including conference call participants, has never read Bezos' annual letters and continues to focus on financial metrics AMZN's management does not focus on.  People just can't accept that AMZN is managed differently and doesn't care what's it's currently earning. 

 

 

That or the approach is so antithetical to nearly everyone else's it's incomprehensible.

 

I get the outsider capital allocation story. I just wonder why an investor would choose to invest in AMZN given the lack of earnings and limited transparency when there are plenty of other companies growing value at a similar rate that:

- are much cheaper

- easier to understand

- occasionally pay dividends

- have less dilution risk

 

I assume this is mostly availability bias. Instinctively, I think $140B is a reasonable price to pay for AMZN. But I just can't get any confidence given their lack of disclosure. I'm putting this back on my too hard pile.

[Palantir]

Which companies are growing at similar rates?

[blainehodder]

Which companies are growing at similar rates?

 

And price dirt cheap? REPR! Did you mean megacaps only?

[dwy000]

What continues to perplex me is why nearly everyone, including conference call participants, has never read Bezos' annual letters and continues to focus on financial metrics AMZN's management does not focus on.  People just can't accept that AMZN is managed differently and doesn't care what's it's currently earning. 

 

 

That or the approach is so antithetical to nearly everyone else's it's incomprehensible.

 

You should be thankful.  It provides others who align with Bezos's thinking great prices.  As you are aware, I'm sure, the longer your time horizon, the better this is for you.

 

I think most people don't actually read any filings.  Most rely on journalists, CNBC, blogs, etc.  There is an incredible amount of information for those that take the time to read.  Most people are lazy, though.  Which, again, we should be thankful.

 

This can't be surprising though. JB has a long term view but it has been over 20 years. At some point you need to generate a return for your investors.  Or at least explain how and when you plan to show a profit.  If he gave a roadmap or timeframe he would get cut a lot more slack.  But you just can't continue to show virtually no return for 20 yrs, then stonewall your investors and expect them to keep pumping up an already inflated stock. It's not surprising they are revolting. It's surprising it has taken this long.

 

Just look at it as a buying opportunity if you still believe the story. Hurts from the previous price chance to average down.

 

I don't understand the need to see accounting earnings by investors. In someways this is similar to the need of dividend investors to see BRK pay out dividends. Its just common sense to see that as long as capital allocation is good and sensible, automatic reinvestment of cash generated is by far a more efficient model.

 

And how can Jeff Bezos put a timeline on when he will show profitability in accounting terms when the runway in front of him is wide and long. How can anyone predict with any certainty when eCommerce or cloud computing or shift to streaming media will completely mature? And why would investors want JB to share his roadmap? Isn't it like giving away your playbook to your opponents in this industry? I think he is rightly focused on aggressive reinvestment of cash generated as fast as he can.

 

Accounting profits will come. They might even overtake cash flows some day. PE might look ridiculously cheap then and we will have a whole bunch of investors walk into that trap ala IBM now. Because when that happens, more often than not, above average reinvestment opportunities would have dried up.

 

It's not just the accounting profits.  Analysts and investors get that - just look at the cable providers.  The CFO was asked directly on the call what metrics they use internally or that people should judge them by.  They said Free Cash Flow and Return on Invested Capital.  TTM free cash flow was $1bn - effectively where it was 5 years ago on 1/3 of the revenues.  ROIC was 6% (8.5% over the last 12 months).  So even by their own metrics the performance was pretty poor and getting worse.

[KCLarkin]

Which companies are growing at similar rates?

 

I don't think 20% revenue growth is a particularly high hurdle. I'm not really a growth investor but as an example, I own Alimentation Couche-Tard. Since AMZN IPO, ATD.B is up 4327%. AMZN is up 208%. ATD.B pays a dividend and trades at 23 PE.

 

But even if you are a large-cap growth investor willing to pay silly prices, why would you buy AMZN rather than CMG?

[rpadebet]

Which companies are growing at similar rates?

 

I don't think 20% revenue growth is a particularly high hurdle. I'm not really a growth investor but as an example, I own Alimentation Couche-Tard. Since AMZN IPO, ATD.B is up 4327%. AMZN is up 208%. ATD.B pays a dividend and trades at 23 PE.

 

But even if you are a large-cap growth investor willing to pay silly prices, why would you buy AMZN rather than CMG?

 

For me personally growth by itself isn't sufficient. Growth needs to happen within the context of moat and for it to be sustainable there needs to be large enough runway with high probability of the subject company being able to capture that in future. Only then it makes sense to pay high looking multiples.

 

Why not CMG? I don't believe its growth is as sustainable or moat defendable. I see a big addressable market, but I don't see specific competitive advantages which cannot be replicated easily. Its not a high probability bet that CMG will capture a big portion of that future fast food sales pie.

 

I have high confidence that the future ecommerce retailing pie will not only be a multiple times larger than it is presently, but that AMZN given its scale advantages, reinvestment philosophy, consumer mind share etc will be a significant if not a big part of that market.

 

Same is the case with the cloud computing pie, as Satya Nadella recently said, scale and size of investment is a big competitive differentiator here and only the already top 3 have a chance of survival going forward. For a poker analogy, the blinds are pretty big already in this space, so only a few can play at this game.

[KCLarkin]

Just to clarify, my performance number for AMZN was from bubble peak not the IPO. From the 2001 bottom, the performance is much better.

 

I'm not saying that AMZN isn't a better investment than other large cap growth companies. Just that the shareholder-hostile behavior of the company makes it very difficult to make an objective comparison.

[rpadebet]

"shareholder-hostile behavior of the company" ???

 

Please don't club them with the likes of Allergan..

What is so hostile of what they are doing to shareholders? JB is a big shareholder himself. How can he be hostile to himself? I think what they are doing is incredibly shareholder friendly

[KCLarkin]

"shareholder-hostile behavior of the company" ???

 

Please don't club them with the likes of Allergan..

What is so hostile of what they are doing to shareholders? JB is a big shareholder himself. How can he be hostile to himself? I think what they are doing is incredibly shareholder friendly

 

Allergan is a different class of hostility. Maybe "shareholder-averse" is a more appropriate term for AMZN. AMZN is probably creating enormous value for shareholders. I'm just not sure there is any way to be sure given the limited amount of disclosure.

[rpadebet]

"shareholder-hostile behavior of the company" ???

 

Please don't club them with the likes of Allergan..

What is so hostile of what they are doing to shareholders? JB is a big shareholder himself. How can he be hostile to himself? I think what they are doing is incredibly shareholder friendly

 

Allergan is a different class of hostility. Maybe "shareholder-averse" is a more appropriate term for AMZN. AMZN is probably creating enormous value for shareholders. I'm just not sure there is any way to be sure given the limited amount of disclosure.

 

I can agree with the limited amount of disclosure. They can do better and provide more clarity for investors.

 

What kind of disclosures would we like to see?

 

I would like to see

• Gross margin breakdown for each business and historical trends
  
• Breakdown of operating expenses per business by line item and historical trends
  
• Rough breakdown of what they consider growth capex per business and historical trends
  
• Basically give a way to estimate actual free cash flows from the existing businesses
  

 

Something like Valeant does with their Cash EPS would go a long way

 

But disclosing some of these might be in conflict with maintaining or increasing strategic position in the market.

 

 

[JAllen]

It would be a huge mistake to disclose anything before they have to.  In a couple of years they will have to segment AWS because it will be 10% of revenues (I think that's the threshold).

 

 

To respond to why I don't own some Canadian company I've never heard of:  because I've never heard of it, never used their products, and I don't know anything about it.  Amazon is the exact opposite: I've been using Amazon's products and services for years now and they are leaders in literally every business they're in, except for phones, which were launched three months ago.

 

 

Also, Bezos is a perfect capital allocator and the company can grow by at least 15X in the U.S, obviously more internationally.  They have massive decades-long tailwinds, as commerce moves to the Internet. 

 

 

The stock is not as expensive as people believe. It already has higher operating cash flow margins and gross margins than Walmart and most other large retailers could dream of and its core retailing business is five times less capital intensive than Walmart's.

 

 

Also, its gross profit is growing 30%.  If you owned a business, which would you prefer to be grow faster, gross profit or revenues?

[Palantir]

^ That's just the retail end of it too. The Cloud segment...who knows...I'd like to see them move up the stack into applications in addition to just infrastructure...but this is an enormous potential market imo.

[AzCactus]

It would be a huge mistake to disclose anything before they have to.  In a couple of years they will have to segment AWS because it will be 10% of revenues (I think that's the threshold).

 

 

To respond to why I don't own some Canadian company I've never heard of:  because I've never heard of it, never used their products, and I don't know anything about it.  Amazon is the exact opposite: I've been using Amazon's products and services for years now and they are leaders in literally every business they're in, except for phones, which were launched three months ago.

 

 

Also, Bezos is a perfect capital allocator and the company can grow by at least 15X in the U.S, obviously more internationally.  They have massive decades-long tailwinds, as commerce moves to the Internet. 

 

 

The stock is not as expensive as people believe. It already has higher operating cash flow margins and gross margins than Walmart and most other large retailers could dream of and its core retailing business is five times less capital intensive than Walmart's.

 

 

Also, its gross profit is growing 30%.  If you owned a business, which would you prefer to be grow faster, gross profit or revenues?

 

Hi JAllen,

 

You mention that " the company can grow by at least 15X in the U.S, obviously more internationally."  Were you referring to sales (which based on last years figure of about 74 Billion) would indicate 1.1 Trillion or market cap which would translate to 2.145 Trillion.  Either one, is pretty big.  But even sales would have to be about 2.3X what Walmart did last year.  I agree that AMZN is a good company in some ways with a gigantic moat---but can you please clarify the numbers?

 

Thank You,

David

[no_free_lunch]

I'm not really a growth investor but as an example, I own Alimentation Couche-Tard. Since AMZN IPO, ATD.B is up 4327%. AMZN is up 208%. ATD.B pays a dividend and trades at 23 PE.

 

You missed some 0's here.  AMZN is up about 16,600%, give or take, since it's IPO, not 200%.

[frommi]

Why is nobody else acounting like amazon when it is the superior model to grow?

[JAllen]

Because they don't have a primary shareholder who actually cares how much the company is worth in twenty years.

 

 

By 15X I mean AMZN is now 1% of retail sales in the U.S.  Walmart is ~10% and because AMZN sells >100X the number of products and services Walmart does, I believe it can be materially bigger than Walmart as a percentage of total retail sales.

[JAllen]

And yes, we start getting into the trillions. 

 

 

Go back to the 1990 Dow and you will see that now the largest companies are earning 10X what they were then.  So I basically believe that in 20-30 years the largest companies will be at least 10X what they are today.  And AMZN is one-quarter the size of the largest companies today.  It's one-third XOM and GOOG.  It's two-thirds of FB. It's one-fifth of AAPL.

 

 

If you really think about AMZN's long-term approach, it helps me get comfortable with over time, they will just demolish many other companies - including ones like the large media companies.  The approach is just amazing and will - again over time - lead to very consistent success and growth.  In twenty years, WMT will be today's SHLD, unless they really get their act together, which I don't believe they are.  WMT is still spending 10X on B&M relative to e-commerce.  There's no owner-manager at the helm - key difference and key part of why I'm betting on Bezos.

[no_free_lunch]

In twenty years, WMT will be today's SHLD, unless they really get their act together, which I don't believe they are. 

 

I agree completely with this statement.  The whole argument against amazon in 1999/2000 was that they were so small compared to the likes of walmart that walmart could just hire some IT guys and crush them.  Now their sales are about 100x what they were then.  If walmart was going to crush them it should have happened in the last 14 years.  It's the same as how microsoft would crush google in search.  There is a window where it can happen but that window has passed.  Now the retailers are struggling, the pressure from e-commerce is here right now and they still can't adapt to it.  It's too late.