AMZN - Amazon.com Inc.

[JAllen]

It would be a mistake to break out maintenance capex for competitive reasons and it would be prone to error and overconfidence.  It's more conservative to deduct all capex for FCF.

 

 

And for ROIC, they hinted at this on the call, but they have to use something internally to compare potential projects, because even though they hired twice as many employees in the last quarter as Facebook has, there are so many projects they could work on, they have to choose between them.

[no_free_lunch]

Also, regarding the profits, I am thinking operating cash flow is probably fairly close.  As KClarkin said, most of their investments are growth related.  They are posting just under $6B in operating cash flow as of last quarter.  Obviously some of the capital expenditures are maintenance, not sure how much.  That might push it down do 4 or 5 billion.  Either way, their definitely is profit.

 

I am also thinking that the way that they hire employees ahead of time, they are probably expensing future growth via salaries.  That is, at steady state, I believe that their salary expenses would come down as a percentage of sales.  Can't prove it yet :) but I'm going to keep digging over past records to see if there isn't some evidence.  I am starting to think their true steady state cash flow, owner earnings whatever you want to call it is conservatively closer to $6-7B.  Depending on the future growth rate, the stock may be quite attractive at these levels.

[JAllen]

I am fairly bullish on Amazon the company.  Still trying to figure out the stock.

 

The one item I am having trouble reconciling is the low sales forecasts for the holiday qtr vs the huge ramp-up in employees.  Did they just goof up with all that hiring or is there more to this?  Do they have a history of under-promising/over-delivering on their forecasts?  Given that they increased headcount by about 15% QUARTER OVER QUARTER it seems odd that sales would only grow 7% year over year.

 

 

It is interesting, I agree.  My guess is that the reason is a combination of two things: one, they are either expecting a brutally competitive holiday season, where maybe AMZN will price its goods even lower than they normally do, to drive increased adoption and scale of the massive amounts of infrastructure they've built over the last four years.  This would have the effect of putting more competitors on their knees financially, so to speak.  They built new FCs and sortation centers at 3X the sales growth rate (2X gross profit growth rate) over the last four years, so my guess is that these are underutilized and can probably handle twice the level of sales.

 

 

And the other is just to ensure that there are no late packages and crazy successful on time rates this holiday season, to prevent negative press from last year - to continue to widen the moat.  I could also see them start to do more same-day/one-day deliveries for free if they have the capacity.

[JAllen]

This chart shows why their expenses and capex have gone up so much over the last four years.

[no_free_lunch]

I like the chart. 

 

The question is how early are they pulling these expenses exactly.  Or what exactly would the expenses need to be to match their current sales level. 

 

Your chart is just more evidence that Bezos just pushes expenses up to match sales.  This I presume is to hold off the tax man and prep for future growth.  He basically just keeps reinvesting their profits into growth.  This is all at the expense of making the story complicated for shareholders as you can't see the profits, which I kind of like.  This seems to have some parallels to the Malone story, albeit without the stock spinoff games.

[JAllen]

Here's a transcript of a talk given about buying high quality stocks, even when the greatness is already recognized and baked into the stock price according to traditional cigar-butt type investing.  If someone came to me and asked me to teach them about investing, this would be in the top ten things I would have them read, because it would help get them out of the low p/e - p/b mindset, and enable them to make money from value investing even in strong macroeconomic times.

 

 

By Sanjay Bakshi at a Columbia University Talk

 

 

https://dl.dropboxusercontent.com/u/28494399/Blog%20Links/October_Quest_2013.pdf

 

 

"So, we have another evidence now supporting my point that quality tends to get

underpriced by markets. Most Graham & Dodd investors would not have touched Asian

Paints at P/E multiple of 25 back in 2005. History shows they would have been wrong"

 

 

 

"Incidentally, if you dig deeper in Buffett's philosophy, you'll find that he loves taking

on projects that are overwhelmingly likely to succeed".

 

 

"When it comes to investing

in enduring moats, we should abandon dumb anchors like P/E multiples, and all-time high

stock prices."

 

 

"The term "value investing" is widely used to imply the purchase of stocks having

attributes such as a low ratio of price to book value, a low price-earnings ratio, or a

high dividend yield. Unfortunately, such characteristics...are far from determinative as

to whether an investor is indeed buying something for what it is worth and is therefore

truly operating on the principle of obtaining value in his investments.

Correspondingly, opposite characteristics - a high ratio of price to book value, a high

price-earnings ratio, and a low dividend yield - are in no way inconsistent with a

"value" purchase."13 - Warren Buffett

And I say why keep struggling looking for very cheap stocks that may or may not reprice, or may or may not come along at all for five or ten years, when you can buy the unstoppable freight train which is Amazon for 25-30X FCF. 

 

 

Of course, if you really believe AMZN is incapable of earning any GAAP income on $90B of revenue, with higher gross margins than other retailers, that's another thing we can continue arguing about.  :D

[no_free_lunch]

The thing is, who cares if there is GAAP earnings?  There are plenty of companies that have grown without those.

 

I think the company has a reasonable multiple, based on owner earnings.  I think you can use conventional multiples on this one.  It's probably at 20-30x owner earnings, depending on the assumptions used.  Not crazy cheap, but not overly priced for a company that has historically grown 20%+.    I don't think it's unreasonable at all to pay 30x earnings if you think it can grow 20%.  That is pretty reasonable if it can keep doubling every 4 years or so.

[dwy000]

The thing is, who cares if there is GAAP earnings?  There are plenty of companies that have grown without those.

 

I think the company has a reasonable multiple, based on owner earnings.  I think you can use conventional multiples on this one.  It's probably at 20-30x owner earnings, depending on the assumptions used.  Not crazy cheap, but not overly priced for a company that has historically grown 20%+.    I don't think it's unreasonable at all to pay 30x earnings if you think it can grow 20%.  That is pretty reasonable if it can keep doubling every 4 years or so.u

 

What number would you use as owners earnings?  They have $5+Bn in operating cash flow and that's adding back about $1.5-2bn of stock based comp and with a good chunk of that coming from working capital not operations, so even if you use that number and assume no capex at all they're at 25x.

 

I also think they'll struggle on the growth front to achieve 20%+ just given law of large numbers.  If they are projecting a 4q top end of 18% it doesn't bode we'll for a consistent growth rate of 20%+.

 

The danger though (in my mind - this has been argued to death here) is that the stock is priced for perfection.  If it's trading at 30x owners earnings today (with owners earnings not reflecting cash flow but an idealized cash flow if things change) how does the price go up other than thru enthusiasm?

 

Even at 20x FCF (real cash), to get a 12% return on the stock over the next 10 years you have to assume sales are going to hit like$600-700m.

[no_free_lunch]

I hadn't thought of the stock comp!  I guess I was rushed.  Still though, I think operating cash flow is $5.7B in the most recent quarter.  Take out $1.4B stock comp, and say $1.5B maint capex.  That leaves $2.8B.  Where it gets kind of funny is I then estimate how much of their labour expenses are maintenance vs pre-hires for future capacity.  I think there is $2-3B of salary expenses in various categories that is not maintenance.  That is out of about $24B in non-cost of goods operating expenses.  So I get $4.8B to $5.8B in basically pre-tax owner earnings.  Bezos has things on the expense side so there is no tax.    So that's a 23-28 PE.  I think there's a chance I am being too pessimistic on the maintenance labour expenses.  There could be $4-5B in growth labour expenses.  If it's $5B, you get $7.8B in owner earnings.  It's optimistic but that would give you a PE of 17.

[Sehayes1982]

AMZN is not a value investment. As Gundlach pointed out, the credit that shareholders are perpetually willing to give the company for earnings that never materialize is "perplexing." You're in love with a company that doesn't exist, because of an obsession with what could be. growth in revenue is the only drug that makes shareholders believe the elusive story, and the irony is that actions to increase eps will signal lower growh expectations, which will crater the stock. A value stock has value because the price reflects a discount to what already exists that is under appreciated, not a morphed reality for a company priced as a growth company.

[Palantir]

I agree it is not a value investment. Value investing is investing in quantitatively cheap stocks, not fast growing companies with high valuations....they are different styles of investing with different investor bases and yet people continue to parrot the line...."value and growth are joined at the hip". ::)

[rpadebet]

I agree it is not a value investment. Value investing is investing in quantitatively cheap stocks, not fast growing companies with high valuations....they are different styles of investing with different investor bases and yet people continue to parrot the line...."value and growth are joined at the hip". ::)

 

I disagree. Value and Growth are joined at the hip. Value investing for me is just buying something for far less than its worth, waiting for price and value to converge and sell it if required when price is above value

 

Standard quantitative ratio based investing is just one way of doing it. You need a margin of safety when you invest and that MoS can come in various forms. Low PE and low PB are just one of the ways of getting the margin of safety. I can accept that it is a far more deterministic way of getting the MoS, but excellent Moat, highly probable growth for free/cheap etc are some of the other ways to get your MoS.

[CorpRaider]

Seems like you have to be able to determine that their continuing investments are going to yield a sufficient ROI; maybe above those of simply expanding and defending their current businesses.  Way way way too hard for me to determine if they can compete effectively against IBM, MSFT, etc... and then AAPL and Samsung in the devices; goog and facebook in search?; not to mention their main business where they are competing/winning for now against WMT and TGT;  Oh yeah and the huge operation competing with nflx, Hulu, hbo etc...; now they want to start webvan 2.0?  Seems like they spend 80% of their time thinking of ways to piss away the profits from the developed businesses.

 

Not to mention they no longer have the huge advantage of avoiding sales tax.

[Palantir]

I agree it is not a value investment. Value investing is investing in quantitatively cheap stocks, not fast growing companies with high valuations....they are different styles of investing with different investor bases and yet people continue to parrot the line...."value and growth are joined at the hip". ::)

 

I disagree. Value and Growth are joined at the hip. Value investing for me is just buying something for far less than its worth, waiting for price and value to converge and sell it if required when price is above value

 

 

Then pretty much all investing is value investing, you can pretty much justify any investment or acquisition with "oh its worth a lot more". Value investing is looking for investments in pools of quantitatively cheap stocks. It is like drafting Russell Wilson in the third round, or finding a productive starter in a UDFA rather than Peyton Manning 1st overall.

[Rainforesthiker]

I agree it is not a value investment. Value investing is investing in quantitatively cheap stocks, not fast growing companies with high valuations....they are different styles of investing with different investor bases and yet people continue to parrot the line...."value and growth are joined at the hip". ::)

 

I disagree. Value and Growth are joined at the hip. Value investing for me is just buying something for far less than its worth, waiting for price and value to converge and sell it if required when price is above value

 

 

Then pretty much all investing is value investing, you can pretty much justify any investment or acquisition with "oh its worth a lot more". Value investing is looking for investments in pools of quantitatively cheap stocks. It is like drafting Russell Wilson in the third round, or finding a productive starter in a UDFA rather than Peyton Manning 1st overall.

 

Well, I think all true investing IS value investing; that would be in line with Charlie Munger's quote on the subject "But to me, all intelligent investing is value investing."  I don't think you can justify any purchase as an investment just by flippantly saying "it's worth a lot more".  Graham's definition of investment required an element of "thorough analysis" that "promised safety of principal and a satisfactory return".  Thus to qualify as an investment, your thorough analysis must indicate that the value of the investment is much higher than the price being paid. I also agree with rpadabet that growth is one component of value.  Focusing solely or mostly on quantitative cheapness based on past data is one form of value investing, but certainly not the only one.

 

Munger:  “The whole concept of dividing it up into ‘value’ and ‘growth’ strikes me as twaddle.”

   

Buffett: “The two approaches [value and growth] are joined at the hip: Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive.”

[Palantir]

Well...if all intelligent investing is "value investing" to you, then it is indeed moot.

[frommi]

I would really like to see the calculation where AMZN is at current prices an investment with a margin of safety that doesn`t factor in growth rates above 20% until eternity.

 

(And other assumptions that may come true ... or not)

[PatientCheetah]

AMZN partially offsets the sales tax increase by opening distribution centers all over the country. After my order ships from AMZN, I am getting my order within a day or two instead of 3-4 days a few years ago.

 

Seems like you have to be able to determine that their continuing investments are going to yield a sufficient ROI; maybe above those of simply expanding and defending their current businesses.  Way way way too hard for me to determine if they can compete effectively against IBM, MSFT, etc... and then AAPL and Samsung in the devices; goog and facebook in search?; not to mention their main business where they are competing/winning for now against WMT and TGT;  Oh yeah and the huge operation competing with nflx, Hulu, hbo etc...; now they want to start webvan 2.0?  Seems like they spend 80% of their time thinking of ways to piss away the profits from the developed businesses.

 

Not to mention they no longer have the huge advantage of avoiding sales tax.

[rpadebet]

I would really like to see the calculation where AMZN is at current prices an investment with a margin of safety that doesn`t factor in growth rates above 20% until eternity.

 

(And other assumptions that may come true ... or not)

 

@ current prices you definitely are paying for some growth, but not 20% till eternity ;)

 

Let me cite some comparisons,rough calcs and see if I can offer a different perspective

 

WMT currently trades at 0.6 EV/Sales, AMZN currently trades at approx. 0.9 EV/Adj Sales (just 3p/1p adjustment).

 

If you believe, WMT is trading at a fair multiple, which AMZN eventually should be trading at when it gets to similar 5%-6% forecasted growth, then you are looking for 50% more Adj Sales in AMZN

 

If current revenue growth rate of about 20% continues for 2-3 years, AMZN's sales should increase by that 50%+ amount. If current price doesn't change, then at that point it would imply WMT and AMZN both trading at around 0.6EV/Sales. WMT is forecasted to grow revenues at 5%-6% at best. If you think AMZN revenue growth would decelerate to that in 2-3 years from 20% level, then current price is approximately fair. If you think it will take longer for AMZN growth to decelerate, that's your margin of safety in growth.

 

 

[dwy000]

I would really like to see the calculation where AMZN is at current prices an investment with a margin of safety that doesn`t factor in growth rates above 20% until eternity.

 

(And other assumptions that may come true ... or not)

 

@ current prices you definitely are paying for some growth, but not 20% till eternity ;)

 

Let me cite some comparisons,rough calcs and see if I can offer a different perspective

 

WMT currently trades at 0.6 EV/Sales, AMZN currently trades at approx. 0.9 EV/Adj Sales (just 3p/1p adjustment).

 

If you believe, WMT is trading at a fair multiple, which AMZN eventually should be trading at when it gets to similar 5%-6% forecasted growth, then you are looking for 50% more Adj Sales in AMZN

 

If current revenue growth rate of about 20% continues for 2-3 years, AMZN's sales should increase by that 50%+ amount. If current price doesn't change, then at that point it would imply WMT and AMZN both trading at around 0.6EV/Sales. WMT is forecasted to grow revenues at 5%-6% at best. If you think AMZN revenue growth would decelerate to that in 2-3 years from 20% level, then current price is approximately fair. If you think it will take longer for AMZN growth to decelerate, that's your margin of safety in growth.

 

Well, the other assumption in there Rpadebet is that they convert from little to no operating earnings and FCF to levels equivalent to WMT.  I think that's a more unlikely hurdle over the next 3 years than the growth question (especially since the company has expressed no intention of making that conversion to profits).

[rpadebet]

I agree dwy000. I also take your point that, it remains to be seen if AMZN can indeed reach WMT's operating margins of 5-6% while not hurting sales. Some investors are comfortable with that and some are not.

 

I take comfort in the fact that AMZN's gross margins @30% are similar to WMT's gross margins of 25% ish. There maybe some items WMT accounts for in COGS and AMZN accounts for in operating expenses owing to the different business models, but they seem roughly in line there. The major difference comes from the operating expenses area.

 

I believe, AMZN's retailing model should be cheaper to operate than WMT's. (Internet retailer vs Brick&Mortar essentially). AMZN is known to pre-invest in scale (building larger and more fulfillment centers, hiring employees before sales materialize etc). These go into the operating expenses line items currently and if AMZN stops this for whatever reason, the margins @AMZN should be roughly comparable to WMT if not better. Would doing this hurt AMZN's ability to grow at 5-6%? I don't think so. They certainly can't grow at 20% if they cut down on these investments, but the more normal growth of 5-6% should still be easily achieved. (moving 5% more units through existing fulfillment centers is not a very aggressive assumption or undertaking)

[dwy000]

Its a good point Rpadebet.  Would love to get a full breakdown from the company to do a more effective analysis.  The CFO has been quite explicit that people shouldn't use Gross Margin as a judging metric because of the shifting nature of the business mix....but then he doesn't give any details of what the business mix is to enable that analysis.

 

Theoretically you're right, an all online business with centralized distribution should have lower ongoing costs than something with 1000's of leases around the country.  But then you throw in the whole AWS business, which would be almost entirely operating expenses and fixed costs, as well as the digital entertainment business which they appear to be giving away for the most part and it throws everything off.  I'm not sure there will ever be a clear answer - which is why some feel $400 is a reasonable long term price and others feel $200 is overvalued.

[frommi]

With my naive view WMT can operate much more efficient than AMZN in retailing because they don`t send their stuff with packages and they don`t need the people to pack the stuff.

What i find really interesting is that AMZN more and more becomes like WMT just from the other side, they build more and more centers and even open shops. And WMT on the other side builds out their internet services. Walmart probably can even offer a much better fresh food service than AMZN can, just because they have that food already so close to the customer.

 

Internationally AMZN has of course the leading position and their cloud services are a really great way to operate their server farms at nearly zero cost for their own business. I really love Amazon and their strategy as a company but the stock feels like a big trap for me. Perhaps its a good buy in the next bear market, whenever it comes.

 

[rpadebet]

With my naive view WMT can operate much more efficient than AMZN in retailing because they don`t send their stuff with packages and they don`t need the people to pack the stuff.

What i find really interesting is that AMZN more and more becomes like WMT just from the other side, they build more and more centers and even open shops. And WMT on the other side builds out their internet services. Walmart probably can even offer a much better fresh food service than AMZN can, just because they have that food already so close to the customer.

 

Internationally AMZN has of course the leading position and their cloud services are a really great way to operate their server farms at nearly zero cost for their own business. I really love Amazon and their strategy as a company but the stock feels like a big trap for me. Perhaps its a good buy in the next bear market, whenever it comes.

 

WMT has pretty much the similar back-end supply chain as AMZN. I don't know if they call those fulfillment centers, but there are centralized locations where "stuff" is stocked before it is shipped to the store front.

 

WMT in addition operates huge retail store fronts with "expensive" leases as compared to fulfillment centers which can be in the middle of nowhere. they have stocking clerks, cash register clerks etc at these store fronts, not to mention the lease also typically includes the huge parking lots we are used to. A website with shipping+packaging costs for the last few miles should be theoretically cheaper to operate especially when u get 2 days to ship and deliver.

[frommi]

Ok forget the packers. I don`t know how much they pay the postal service per package, but this is per item you buy, where as at WMT you buy a lot more stuff in one swoop. Imagine you had to pay 1$ for every item you buy at WMT, or WMT would get 1$ less per item. This adds up to enormous sums of money and that is WMTs advantage and their higher margin. I can`t see how AMZN can ever get to these margins without a fully automated delivery service, like the drones they are testing.