AMZN - Amazon.com Inc.

[JAllen]

OK this tweet is a thousand times better than I could have put it:

 

 

"2007 Crowd: FK that Kindle sucks. 2014, Publishers: $AMZN unfair platform in books. DAY 1 in electronics for Amazon (@biggercapital)"

 

 

 

 

Seriously, people hated the Kindle, and seven years there are literally dozens of prominent people saying they're a monopoly.  Yes, it's still Day One for AMZN and non-Kindle hardware.  There was e-book hardware competition then too, albeit not nearly as strong as today's smart phone competition.

 

 

[KCLarkin]

AMZN successfully transferred a dominant position in physical books into a dominant position in the nascent e-books market. That seems like a pretty straightforward strategy.

 

I can't imagine any winning strategy for AMZN in the smartphone market. They are trapped between AAPL on the high-end and cheap Chinese knockoffs on the low-end. Their typical strategy is to eat the other guy's margins BUT there already smartphone players offering razor thin margins. Plus, Samsung and AAPL have huge scale advantages.

[dwy000]

Or this Echo speaker.  It's neat....but huh?  How's that fit into the massive retailer strategy?  Why are they spending precious cash flow on stuff like this?  Isn't it better left to Sky Mall or Brookstone?

[Andrew6892]

The Echo is brilliant. I'm sure you'll be able to stream Amazon Music (free for Prime members), buy songs, hear news, weather, add products to your Amazon shopping cart, including general products or AmazonFresh, place the orders. Amazon is all about making it as easy as possible to buy everything from them. I can't say if this will be a hit, but it is certainly innovative and it has better odds of success than the Fire Phone had pre-launch. Echo is also another example of chipping away at Google's dominance of search.

[rpadebet]

but it is certainly innovative and it has better odds of success than the Fire Phone had pre-launch.

 

I agree Echo has better odds. Fire phone had a 1% chance of success and this probably has a 2% chance :P

 

Their decision to innovate and get into devices is pretty dumb. Its a moatless business. its tough even for the big guns like AAPL who have to constantly innovate to keep market share.

 

I dont see synergies or any cross selling opportunities here. Maybe there is some advertising/PR value to this particular gadget, but I agree with dwy000, its pissing away the cash flow which can be productively used elsewhere.

 

All growth isn't good. Only growth within your moat is value additive.

[Andrew6892]

I completely disagree, but I'm not going to argue about it here. I believe someone on this board once asked who had even read an Amazon 10-K and maybe two other people said they had.

[dwy000]

I completely disagree, but I'm not going to argue about it here. I believe someone on this board once asked who had even read an Amazon 10-K and maybe two other people said they had.

 

I've read it.  Whole thing.  Still don't understand how developing a speaker fits into the strategy.  It may chip away at Google's dominance in search but is that saying that Amazon now wants to be a search provider?

[Andrew6892]

The 10-K is just the starting point. There is a huge amount of readily available information out there that can answer that question.

[dwy000]

The 10-K is just the starting point. There is a huge amount of readily available information out there that can answer that question.

 

So I don't go off on a wild goose chase by doing a search on "Amazon", can you link some of that info?

[txlaw]

I completely disagree, but I'm not going to argue about it here. I believe someone on this board once asked who had even read an Amazon 10-K and maybe two other people said they had.

 

I've read it.  Whole thing.  Still don't understand how developing a speaker fits into the strategy.  It may chip away at Google's dominance in search but is that saying that Amazon now wants to be a search provider?

 

Point of sale protection. 

 

As Eric Schmidt recently pointed out, AMZN is a (perhaps, the) major search competitor to GOOG when it comes to searching for things to buy.  If you are trying to buy some goods -- say you want toilet paper -- you either have to go to the store (or have someone go to the store for you) or order the goods for delivery.  It's a retailer's job to make sure that they are the point of sale for those goods.  The Internet allows e-commerce retailers to set up websites and apps as points of sale where consumers can purchase goods.  Amazon is obviously a huge player here, with many people (including me) using them as an "everything store."

 

In the near future, though, people may start using voice recognition assistants (Google, Siri, Cortana, Alexa) instead of websites/apps to buy many types of goods.  So while Echo is billed as a speaker, I think of the speaker functionality as a way to entice consumers to let Amazon's ear into your home.  It's the microphone and voice recognition that matters for the long term strategy.

 

Basically, Amazon wants to manage your household inventory for you.  Google wants to do the same thing.  If you need something, you tell them you need it, and it gets to you somehow.  Depending on how comprehensive the connected household becomes, and how much they can target you behaviorally, they may even be able to start suggesting items to put into your cart.

 

It's not that difficult to see how this type of thing fits into Amazon's biz plans.  I expect Amazon to be a major player when it comes to IoT in the home.

[dwy000]

I completely disagree, but I'm not going to argue about it here. I believe someone on this board once asked who had even read an Amazon 10-K and maybe two other people said they had.

 

I've read it.  Whole thing.  Still don't understand how developing a speaker fits into the strategy.  It may chip away at Google's dominance in search but is that saying that Amazon now wants to be a search provider?

 

Point of sale protection. 

 

As Eric Schmidt recently pointed out, AMZN is a (perhaps, the) major search competitor to GOOG when it comes to searching for things to buy.  If you are trying to buy some goods -- say you want toilet paper -- you either have to go to the store (or have someone go to the store for you) or order the goods for delivery.  It's a retailer's job to make sure that they are the point of sale for those goods.  The Internet allows e-commerce retailers to set up websites and apps as points of sale where consumers can purchase goods.  Amazon is obviously a huge player here, with many people (including me) using them as an "everything store."

 

In the near future, though, people may start using voice recognition assistants (Google, Siri, Cortana, Alexa) instead of websites/apps to buy many types of goods.  So while Echo is billed as a speaker, I think of the speaker functionality as a way to entice consumers to let Amazon's ear into your home.  It's the microphone and voice recognition that matters for the long term strategy.

 

Basically, Amazon wants to manage your household inventory for you.  Google wants to do the same thing.  If you need something, you tell them you need it, and it gets to you somehow.  Depending on how comprehensive the connected household becomes, and how much they can target you behaviorally, they may even be able to start suggesting items to put into your cart.

 

It's not that difficult to see how this type of thing fits into Amazon's biz plans.  I expect Amazon to be a major player when it comes to IoT in the home.

 

But I guess by that logic is there any product that Amazon could make that would not fit into their "dominate the purchase of products" strategy?  I'm not convinced that an interactive speaker is the way to go about it (especially if your phone already does everything the speaker does).  But whether it's a speaker or a car or an interactive refrigerator, they can't compete with every company in the world.  It's too expensive and spreads resources and expertise too thin.  You compete in everything and are the best at nothing because those you compete with are solely focused on that one product. 

[JAllen]

Isn't the strategy to sell as many things as possible to as many people as possible?  Part of that is experimenting with new ways of delivering and ordering.  Surely having a device sitting in everyone's living room that responds to voice commands could be useful toward that end.  Selling or just delivering digital music could actually be a very good business and contribute to Prime growth if AMZN's devices do that the best way.

 

 

But if you come up with an idea that you think MAY work, you should go out and build it if you have the capital, which is exactly what AMZN is doing.  As a long term shareholder I'm thrilled about the experimentation going on.  What did that cost them?  $100-$200M, max, including hardware?  What if they're really popular, then people would be glad they experimented, just like with the Kindle, where AMZN has gained a strong position in a large digital media market.

[JAllen]

What would the naysayers AMZN investment policy look like?  How should AMZN invest its operating cash flow?  Which segments; which products?  And I'm being serious - I really want to know. 

 

 

I know that part of the idea is to get out in front of other companies.  That's why they've built their FC space 3X faster in recent years.  It's why they built a phone, because it is a potential competitive threat to be blocked out of the phone buying process; but a phone is also something everyone carries around all day long and is a way to purchase retail products and is a device to consume digital media.

[Scudbucket]

I think the Echo is sweet, and I'm signing up to hopefully get one.

 

Anyone have any thoughts on Amazon vs. Flipkart in India?  What is more important: Flipkart's local knowledge vs. Amazon's resources?

[dwy000]

Isn't the strategy to sell as many things as possible to as many people as possible?  Part of that is experimenting with new ways of delivering and ordering.  Surely having a device sitting in everyone's living room that responds to voice commands could be useful toward that end.  Selling or just delivering digital music could actually be a very good business and contribute to Prime growth if AMZN's devices do that the best way.

 

 

But if you come up with an idea that you think MAY work, you should go out and build it if you have the capital, which is exactly what AMZN is doing.  As a long term shareholder I'm thrilled about the experimentation going on.  What did that cost them?  $100-$200M, max, including hardware?  What if they're really popular, then people would be glad they experimented, just like with the Kindle, where AMZN has gained a strong position in a large digital media market.

 

I would agree with that to a point.  If you invest in everything that MAY work you are just wasting money.  There are too many things that MAY work.  And not only would they have to end up picking the right product but then also make the best one out there that everyone wants to buy.  The "spray and pray" approach doesn't work - you can't get an acceptable ROI in that way.

 

The Kindle made infinite sense - Amazon, as the dominant bookseller had the most to gain and lose directly.  Plus there was nothing out there to compete with it (Nook and the others were, and are, crap).  But a phone?  With no differentiation in a very crowded, competitive market?  A speaker that does what your phone currently does.

 

I get the argument - really, I do.  But they simply do not have the resources to chase every opportunity and every product that MAY work.  And to be the best at it.  They are the best online (or even offline) retailer in the world.  Focus on that part of the business and nobody can take it away from you regardless of what miracle product gets established - all they can do at that point is partner with you.  Amazon doesn't need to control everything, just be the retailer of choice.

[dwy000]

What would the naysayers AMZN investment policy look like?  How should AMZN invest its operating cash flow?  Which segments; which products?  And I'm being serious - I really want to know. 

 

 

I know that part of the idea is to get out in front of other companies.  That's why they've built their FC space 3X faster in recent years.  It's why they built a phone, because it is a potential competitive threat to be blocked out of the phone buying process; but a phone is also something everyone carries around all day long and is a way to purchase retail products and is a device to consume digital media.

 

Put the excess cash flow into what you know how to do best and where your moat is.  Expand the FC space, invest in logistics and delivery capabilities, etc.  If you do that and continue to be the best and most efficient at it, you don't need to give away music and movies and make TV shows and waste money on all the other stuff.  If somebody makes a phone or speaker that helps with online purchasing that's fantastic - celebrate because you are the primary beneficiary.  It's not like a phone company or other speaker maker is going to use that ability to replace Amazon.

 

And if after reinvesting in your core business you - god forbid - have cash left over, maybe you can share it with the shareholders who have funded the business to that point.

[Andrew6892]

Has Amazon's 20 year track record of investment spending and innovation been successful or not? Has Jeff Bezos's leadership and decision making been good or bad? The answers are self-evident.

 

Not everything has worked and not everything will work. But they keep innovating and their winners have been such HUGE winners. And most of them didn't work out right of the gate and were panned by critics. That includes the Kindle. That includes 3P.

 

It is reasonable to put the stock in the too hard pile. It isn't reasonable to call this management team "dumb" or suggest their strategy is wasteful or doesn't work.

[JAllen]

Digital content is a core part of their strategy, as it should be IMO. The average American still spends over five hours watching TV A DAY!  It would be a mistake to ignore this.  There's also music.

 

 

The strategy is to sell things that people do all the time, and the more you sell things, the more likely they are to buy EVERYTHING at AMZN.  This makes perfect sense. 

[dwy000]

Has Amazon's 20 year track record of investment spending and innovation been successful or not? Has Jeff Bezos's leadership and decision making been good or bad? The answers are self-evident.

 

Not everything has worked and not everything will work. But they keep innovating and their winners have been such HUGE winners. And most of them didn't work out right of the gate and were panned by critics. That includes the Kindle. That includes 3P.

 

It is reasonable to put the stock in the too hard pile. It isn't reasonable to call this management team "dumb" or suggest their strategy is wasteful or doesn't work.

 

Their 20 year record of sales growth has been successful.  But the ultimate success of investment spend is not revenues - it's profits.  Return on investment.  There are no profits or cash flows to speak of.  And most importantly no indication from management that that will change - ever!  And no discussion of what the investment strategy is.  Everyone guesses and assumes at it but management never discusses it. 

 

Nobody is calling management dumb.  You don't build $80bn of revenues if you're dumb.  I've said over and over this is a fantastic business.  For consumers.  But it's a horrible stock and will continue to be until the profits and cash flow become evident.

 

[Andrew6892]

Where do you think their investment spending shows up in their financial statements?

 

Just one example. There is an entire eBay inside Amazon. It is now bigger than eBay, is growing 4x as fast as eBay is, and is a better business for a number of reasons. Is eBay profitable?

 

 

 

 

[JAllen]

AMZN has higher operating cash flow margins than all of the other discount retailers.

[txlaw]

I completely disagree, but I'm not going to argue about it here. I believe someone on this board once asked who had even read an Amazon 10-K and maybe two other people said they had.

 

I've read it.  Whole thing.  Still don't understand how developing a speaker fits into the strategy.  It may chip away at Google's dominance in search but is that saying that Amazon now wants to be a search provider?

 

Point of sale protection. 

 

As Eric Schmidt recently pointed out, AMZN is a (perhaps, the) major search competitor to GOOG when it comes to searching for things to buy.  If you are trying to buy some goods -- say you want toilet paper -- you either have to go to the store (or have someone go to the store for you) or order the goods for delivery.  It's a retailer's job to make sure that they are the point of sale for those goods.  The Internet allows e-commerce retailers to set up websites and apps as points of sale where consumers can purchase goods.  Amazon is obviously a huge player here, with many people (including me) using them as an "everything store."

 

In the near future, though, people may start using voice recognition assistants (Google, Siri, Cortana, Alexa) instead of websites/apps to buy many types of goods.  So while Echo is billed as a speaker, I think of the speaker functionality as a way to entice consumers to let Amazon's ear into your home.  It's the microphone and voice recognition that matters for the long term strategy.

 

Basically, Amazon wants to manage your household inventory for you.  Google wants to do the same thing.  If you need something, you tell them you need it, and it gets to you somehow.  Depending on how comprehensive the connected household becomes, and how much they can target you behaviorally, they may even be able to start suggesting items to put into your cart.

 

It's not that difficult to see how this type of thing fits into Amazon's biz plans.  I expect Amazon to be a major player when it comes to IoT in the home.

 

But I guess by that logic is there any product that Amazon could make that would not fit into their "dominate the purchase of products" strategy?  I'm not convinced that an interactive speaker is the way to go about it (especially if your phone already does everything the speaker does).  But whether it's a speaker or a car or an interactive refrigerator, they can't compete with every company in the world.  It's too expensive and spreads resources and expertise too thin.  You compete in everything and are the best at nothing because those you compete with are solely focused on that one product.

 

Actually, there are an infinite number of products that would not fit into the "protect the point of sale" strategy.  And I agree with you that you can't "compete in everything."

 

My only point was that the speaker + microphone + interactive voice recognition technology (Alexa) combination makes plenty of sense for Amazon.  Especially since the OS guys (GOOG, AAPL, and MSFT) are all themselves trying to be in the home as well in order to be a choke point for distribution.

[dwy000]

Where do you think their investment spending shows up in their financial statements?

 

Just one example. There is an entire eBay inside Amazon. It is now bigger than eBay, is growing 4x as fast as eBay is, and is a better business for a number of reasons. Is eBay profitable?

 

 

 

You assume those figures because the company won't break them out. 

 

Yes, EBAY is profitable.  Very profitable.  Is Amazon?  Even with a bigger EBAY inside it?

[dwy000]

AMZN has higher operating cash flow margins than all of the other discount retailers.

 

But no cash flow and no earnings.

 

When does the investment stop?  When do they start letting that cash flow drop to the bottom line?  When do they say "I don't need to invest in growth anymore"?  I've never seen a company say that ever.

[dwy000]

You guys can argue with me all day long but frankly I don't have a dog in this fight.  I own zero Amazon and won't until the price reflects actual cash flow not theoretical cash flow. I have nothing to lose if I'm wrong. 

 

You are making a 10 year (20 year?) call on something.  20 years ago this company and online retailing didn't even exist.  I don't know how anyone can make a 10 year call on any industry (let alone online retailing and all the other businesses they're in) because nobody knows what factors will come out of the woodwork to turn it on it's head.

 

But this stock has risen and been justified by it's "potential earnings" for decades now.  And the story is wearing very thin with investors.  Unless they provide some proof to the pudding, the risk is by far, to the downside.  Just look at the performance over the past year and after each earnings call.  If they hit the midpoint of their own projections with 17% growth, the stock will be crushed again because the "growth investment" is no longer working.

 

Your 10 year view may work.  But you are very likely to feel intense pain on that investment in the meantime because today's price doesn't reflect today's value - it represents future potential that is always in the future