AMZN - Amazon.com Inc.

[DCG]

Echo looks interesting. It's basically Siri, but hands off and always on. I'd be surprised if it responds nearly as fast as it does in their promo video in real life though.

[Andrew6892]

As an owner of a business with enormous reinvestment opportunities, I want them to make those investments for a very long time. Why is it unfortunate that they have these opportunities for reinvestment? Other companies are envious of them for having these reinvestment opportunities. Instead of investing like crazy in AWS, they should stop and let Google and Microsoft take this huge market? Just to show more GAAP profit? And what should they do with those "profits" instead? Pay out dividends? So essentially, they should forgo investing in huge market opportunities and pay out dividends that suffer from double taxation? That would be the definition of terrible capital allocation.

 

The bottom line is owning Amazon only makes sense if one truly has a long-term perspective. Talking about "the story wearing thin with investors" suggests you care more about what Mr. Market thinks in the short-run. That's fine. You should short it.

[txlaw]

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

 

I have no dog in this fight either.  I don't own any AMZN -- too expensive, IMO.

 

However, it is fairly clear to me that they are indeed earning cash profits in various lines of businesses, and that all of the cash is being invested by Bezos & Co. at a rapid clip.  Therefore, I don't think it's accurate to say they have no earnings, though they certainly don't have GAAP earnings (as opposed to owner earnings) on a consolidated basis.  As to whether the cash that comes in the door is being wisely deployed, I'd say very likely yes, given what I know about Bezos and the types of expenditures that they are making.  But one can debate that.  IMO, flops such as the Fire Phone are inevitable with the "throw it at the wall" type of capital deployment that goes on at companies like AMZN and GOOG.

 

In any case, I still don't own AMZN because of valuation concerns.  However, I have to say that I'm not a big fan of thematic short selling of AMZN based on a narrative of "no earnings."  A tell-tale sign of such theme-based shorting is when Einhorn or Chanos get on the bandwagon.  And Einhorn just disclosed that he added AMZN to his "bubble basket."

[dwy000]

Every company has unlimited investment opportunities.  But very few are allowed to invest every dollar of cash back in the business for 20 years and still have no profits to show for it. Show me (or any investor) the return on all this reinvested capital.  And if they need to invest it all to show the growth, what happens when that investment stops (which they have not indicated will ever happen).

 

Are you saying Amazon would be growing at WMT rates if they didn't reinvest all this cash?  I think they would be growing at 15%+ without all this investment just based on etailing momentum and their market dominance. 

 

The company says they judge themselves in cash flow and ROIC.  Both of these are close to zero.  How are you judging the return on reinvested capital?

 

[dwy000]

Andrew, walk me through the math that makes this a buy:

 

If you want a 12% return on the stock over the next 10 years the market cap needs to grow to over $460bn.  At 15x earnings that implies net income of over $30bn.  At a 4% after tax margin that implies sales of $776bn.

 

Do you think Amazon is going have sales of over $776bn 10 years from now?  All while stopping the growth spend that will lead to a 4% after tax earnings? That's over 22% growth every single year.  They are projecting 18% in 4Q this year.

 

What are the assumptions you are using that the stock is a Buy here. 

[Andrew6892]

We will never agree if you insist they make "no profits." Do you understand that companies can make investments through the P&L? Say you own a restaurant that makes a lot of money and decide to open a second restaurant. In some cases, it can take three years before the second location becomes as profitable as the first. In the first year, it would probably lose money. On a consolidated basis, the profitability of your restaurant group would look low, maybe even breakeven.

 

 

[Andrew6892]

I'm certainly not going to walk you through anything. The logic you are using is good, but I think your assumptions are way off. Small changes in the assumptions lead to huge changes in the conclusion.

 

I would encourage you to read all of Jeff's shareholder letters, The Everything Store, One-Click, The Amazon Way, and every transcript that is available. Watch every interview Jeff has ever done. Understand the management philosophy. Do independent research on their various business lines. Read eBay's 10-K and figure out what their Marketplace business is worth and compare that to Amazon's Marketplace. What are they doing with AWS? What are they doing with AmazonFresh? Where does the Fire TV fit in? Why did they buy Twitch? Why did they buy Kiva Systems? How many fulfillment centers do they have and where are they? Why did they hire 39,700 people in the last twelve months and 16,900 in 3Q alone? Is there some way to monetize their data? What is the long-term vision? If you do all that, you might be able to make more realistic assumptions. But I'll bet money you won't do all that.

[dwy000]

We will never agree if you insist they make "no profits." Do you understand that companies can make investments through the P&L? Say you own a restaurant that makes a lot of money and decide to open a second restaurant. In some cases, it can take three years before the second location becomes as profitable as the first. In the first year, it would probably lose money. On a consolidated basis, the profitability of your restaurant group would look low, maybe even breakeven.

 

They do make no profits. That's not an assumption by me, that's a fact - straight out of the K and Qs.  What you are arguing is that they COULD have profits if they weren't doing all the growth investing.  While that's probably true we would also disagree on how much profit that would be and what the implications are on growth.  Plus the question as to if and when that will ever happen.

[dwy000]

I'm certainly not going to walk you through anything. The logic you are using is good, but I think your assumptions are way off. Small changes in the assumptions lead to huge changes in the conclusion.

 

I would encourage you to read all of Jeff's shareholder letters, The Everything Store, One-Click, The Amazon Way, and every transcript that is available. Watch every interview Jeff has ever done. Understand the management philosophy. Do independent research on their various business lines. Read eBay's 10-K and figure out what their Marketplace business is worth and compare that to Amazon's Marketplace. What are they doing with AWS? What are they doing with AmazonFresh? Where does the Fire TV fit in? Why did they buy Twitch? Why did they buy Kiva Systems? How many fulfillment centers do they have and where are they? Why did they hire 39,700 people in the last twelve months and 16,900 in 3Q alone? Is there some way to monetize their data? What is the long-term vision? If you do all that, you might be able to make more realistic assumptions. But I'll bet money you won't do all that.

 

actually I have read most if not all of those.  I just haven't swallowed the Jeff Bezos koolaid and believe this stock is a buy at any price.  It is not (unless you want to lose money).  And nobody can answer all those questions above except Bezos himself - and he isn't telling anyone. So you are making assumptions.  You tell me, why did they buy Twitch?  $1bn.  show me how that gets an acceptable ROI.  Why did they hire 40,000 people?  Im guessing to improve order fulfillment. So what? How does that make the stock cheap?

 

You won't share the assumptions that justify why the stock is a buy?  On a value stock board. Why?This isn't Yahoo Finance, we are all here to make smart, rational investments and share ideas.  I gave you the assumptions why I think it is overpriced.  I think you just read the Everything Store and are a fan of Bezos.

[Andrew6892]

I call BS. You didn't even know they are in the search business until I told you. There is no worse combination than confidence and ignorance.

[dwy000]

I call BS. You didn't even know they are in the search business until I told you. There is no worse combination than confidence and ignorance.

They are not in the search business (not the google type search).  Schmidt said they were their biggest competitor in search because people go on amazon to search for goods.

 

You can call BS all you want. I love the company but don't own the stock and have nothing to lose.  You won't even justify why it's a buy at this price.

[JAllen]

Ok, be honest: how many of you watched the Echo video before writing it off? Even I, the most biased towards AMZN, wrote it off, but that was before I watched the video.

 

 

Anyways, I just watched the video, and this thing is awesome. I will totally get one and can imagine millions of American households with at least two of these in a few years.  I think this will be a home run for AMZN if it works as well as it appears to. 

 

 

Obviously a key part of this is the voice functionality.  Why do I have confidence the Echo will be successful?  Because they sent me an Amazon Dash a few weeks ago, and it pretty much understood exactly what I was saying, every time, except when I would speak gibberish into it or dirty words.  And the dash is a tiny device, so a bigger device will have room for better hardware if need be.

[LC]

Well, they really need to take a tip from Apple. The Echo looks like a glorified trash can. Would it hurt too much to add a little high gloss paint? After all, they want me to put this on my coffee table or bookshelf, not behind the toilet.

 

Whether these in-home devices will take off, I have no idea. I think they might be too early, but what do I know.

[prevalou]

The problem with Echo is that "big brother"is in your living room...

[DCG]

As I said earlier, the question is whether it actually works the ways it does in the video. Sure, they can make it look good in an ad, but they're of course asking it a set of questions they know it will answer, and I'm guessing it was edited to make it respond faster in the video than it actually does.

 

Their video for the Fire phone made it seem great as well, but the experience of people who bought the phone hasn't realy been the same as all the people they featured in their video ad.

[rkbabang]

Well, they really need to take a tip from Apple. The Echo looks like a glorified trash can. Would it hurt too much to add a little high gloss paint? After all, they want me to put this on my coffee table or bookshelf, not behind the toilet.

 

+1  That is the problem with all of Amazon hardware (and Google's too).  It all just looks like cheap shit.  It would be a cold day in hell before my wife would let me put that Echo thing with the glowing light ring in our house anywhere visible (behind the toilet would probably be okay).  What they need is to find some way to lure Jony Ive away from Apple.  :)

 

[Palantir]

 

Well, they really need to take a tip from Apple. The Echo looks like a glorified trash can. Would it hurt too much to add a little high gloss paint? After all, they want me to put this on my coffee table or bookshelf, not behind the toilet.

 

[LC]

I'll take my GCD (garbage can device) in high gloss, please!

[KCLarkin]

Ok, be honest: how many of you watched the Echo video before writing it off? Even I, the most biased towards AMZN, wrote it off, but that was before I watched the video.

 

 

Anyways, I just watched the video, and this thing is awesome. I will totally get one and can imagine millions of American households with at least two of these in a few years.  I think this will be a home run for AMZN if it works as well as it appears to. 

 

Ugggh. That video was painful.

 

I can see the value of a voice controlled Sonos. But I can't see the value in any of the other features when I already have Siri on my wrist or in my pocket.

 

http://dcurt.is/amazon-has-no-taste

 

[rkbabang]

Ok, be honest: how many of you watched the Echo video before writing it off? Even I, the most biased towards AMZN, wrote it off, but that was before I watched the video.

 

 

Anyways, I just watched the video, and this thing is awesome. I will totally get one and can imagine millions of American households with at least two of these in a few years.  I think this will be a home run for AMZN if it works as well as it appears to. 

 

Ugggh. That video was painful.

 

I can see the value of a voice controlled Sonos. But I can't see the value in any of the other features when I already have Siri on my wrist or in my pocket.

 

http://dcurt.is/amazon-has-no-taste

 

 

Thanks for posting that link.  I can't find a single thing to argue with in it about Amazon hardware, all Amazon hardware.  Amazon.com (and its shareholders) would be much better served by abandoning all hardware projects immediately (with the possible exception of the e-ink Kindle), and focus on its retail and AWS businesses. They can create apps for other companies' devices.

 

[JAllen]

Waiting to see when the profits appear on AMZN's financials reminds me of Buffett's quote: "You pay a high price for a cheery consensus".

 

The greatest returns will be earned by those that see things others don't.  And that's what I invite others to do with AMZN.  Look and you will see, is what I say.

 

Think of how many things AMZN is working on that aren't generating much revenue, that are widening AMZN's moat, and add up to be huge expenses:

 

• Third-party Digital Video Content: $1.75B
  
• Original Digital Video: $400M
  
• Selling millions of Kindle books below cost for $9.99: this is not talked about at all: $1B
  
• Kindle hardware R&D: $200M
  
• Employing dozens if not hundreds of seasoned engineers for Prime Air: $50M
  
• Building the Dash: $30M
  
• Giving the Dash away $50M
  
• Fire Phone Development: $100M
  
• Licensing digital music and giving it away: $150M
  
• Building multiple FCs in India: $300M
  
• Operating Losses in India + China + Brazil: $1B
  
• Building AWS datacenters before they really need them to ensure high service levels and performance: $500M
  
• Building 15 sortation centers over the last three years: $400M
  

This is something like $4-5B and most of these are estimates, but veteran software engineers cost serious money.

 

 

Ok, I want to revisit this post, because it's arguably the most important post I've made about AMZN, because if AMZN didn't have these growth expenses, it would show at least a few billion of net income and be paying a billion in taxes each year.

 

 

I was asked by Andrew which of these are guesses.  I'll repost and put a few more thoughts next to each one.  Some of the numbers are revised now.  Most of them are guesses, sure, but all of them costs tens or hundreds of millions, and there are things we don't know about - like the Echo.

 

 

Third-party Digital Video Content: $1.75B - educated guess; would bet this is more like $2-2.5B; regardless, it's growing very fast.  It has to be at least half as much as Netflix spends, which is $4BOriginal Digital Video: $400M - Direct quote from Skzutak on more recent CCSelling millions of Kindle books below cost for $9.99: this is not talked about at all: $500M - guess, this could be quantified with more work because we actually know AMZN's e-book market share and about how much they lose on each book ($5)Operating Losses in India + China + Brazil: $1B - surely hundreds of millions

• Echo development and hardware: $50M
  
• Kindle hardware R&D: $100MEmploying dozens if not hundreds of seasoned engineers for Prime Air: $50MBuilding the Dash: $30MGiving the Dash away $50MFire Phone Development: $100MLicensing digital music and giving it away: $200M
  For the Lab126 hardware development, it is super expensive.  They had thousands of employees and 500,000 square feet of office space a few years ago.  They were doubling the employee count there each year almost.  AMZN has 350 open jobs there right now.
   
  

[dwy000]

What's the ability to stop spending on most of these without impacting growth or having membership decline.

 

The first 3 (video and e-book losses) plus the music, plus the Kindle R&D total up to $3.5bn of annual spend.  If they can stop spending this and not lose growth or membership, you have to question why they are spending the money - and if they are getting any ROI on that investment.  On the other hand, if they are getting payback from that spend (in new members or customer retention), then you have to assume that if they stop spending it, all those ancillary benefits go away.

 

How much of that 20% top line growth this year is due to the investment spend?  What would be the growth if you stop that spend?  The company can't argue that the spend is creating a moat and then say that if/when they stop that spend the moat won't disappear.

[Andrew6892]

The point is not that they can stop this growth spending without negatively impacting their long-term growth. If they stopped all growth spending tomorrow, growth would certainly slow. To some extent it would slow immediately and then the slow down would be much more noticeable in a few years.

 

The point is to distinguish between i) the current expenses, which are the ongoing expenses that are literally the cost of generating the current revenue, and ii) the growth investments, which are made to generate extra revenue in the future. Once you do that, you can value the business in two parts: i) the current business in a steady state or no growth scenario, and ii) the present value of the growth investments.

 

In the restaurant example, what is i) the first successful restaurant worth, and ii) what is the second start-up restaurant worth? That is how any private buyer would value a business with different segments.

 

 

[stevevri]

The point is not that they can stop this growth spending without negatively impacting their long-term growth. If they stopped all growth spending tomorrow, growth would certainly slow. To some extent it would slow immediately and then the slow down would be much more noticeable in a few years.

 

The point is to distinguish between i) the current expenses, which are the ongoing expenses that are literally the cost of generating the current revenue, and ii) the growth investments, which are made to generate extra revenue in the future. Once you do that, you can value the business in two parts: i) the current business in a steady state or no growth scenario, and ii) the present value of the growth investments.

 

In the restaurant example, what is i) the first successful restaurant worth, and ii) what is the second start-up restaurant worth? That is how any private buyer would value a business with different segments.

 

Everyone here understands the restaurant analogy. The problem is that not all of their spending falls into that nature. New distribution facilities or buying their headquarters fall easily into that category.

 

How does video streaming? Turning off video streaming makes Prime significantly worse and would probably piss off a lot of people. Amazon's more likely to have to spend more on video streaming to compete with Netflix and such.

 

 

[Andrew6892]

Anyone can make their own estimates and use their own judgment about which expenses should be considered maintenance and which are growth. No one said analyzing and valuing Amazon is easy. Personally, I would agree that at least some portion of the streaming video content should be considered maintenance.