AMZN - Amazon.com Inc.

[beerbaron]

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

 

That video was so painfull, it felt like an ad from the 80's. I think the Omnibot would have made a better impression.

 

http://www.timidfutures.com/2013/12/five-things-12-23-13-toys-part-2/

 

BeerBaron

[Scudbucket]

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

 

This is what I don't like.  I'm still getting it, though.

[Liberty]

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

 

This is what I don't like.  I'm still getting it, though.

 

I'd wait for real-world reviews. How things work in commercials and how they really work -- there's often a pretty large gap (a chasm?) between theory and practice.

[txlaw]

So in addition to unlimited photo storage for Prime Members, Amazon has just released a public API for Cloud Drive.  They're also working on a desktop application for Mac (looks like they already have one for PC?) that will work similarly to Dropbox, Box, and Google Drive.

 

This could be a pretty big deal and just shows how all this stuff is getting commoditized thanks to companies like AMZN. 

[JAllen]

Yet another small, but meaningful competitive advantage for AWS: https://enterprise.github.com/aws  Github is making it easy for enterprise code work to be hosted on AWS, and not anyone else.

 

 

This is akin to product reviews: it's just one more small reason a company would use AWS and not another provider.  IAAS is a commodity to a large extent, but not completely, just like retail is purely commoditized  - almost.  There are a few things you can do to distinguish yourself, especially, when you're the biggest, have the first-mover advantage and have a number of small but distinguishing factors like Github building its enterprise offering on your infrastructure.

 

 

If you believe that Github probably knows what they're doing and is the future of much software, then this Github announcement is actually kind of a big deal. I mean Twitter Bootstrap, MeteorJS, and many other huge, important projects are hosted on it (these are actually small compared to some others). 

 

Github is the leader in the future of software, if you ask me.  If you're not in the tech/software space at all, I suggest you learn a bit more about what Github is and why it's important.  One quick way to think about Github is that it's the Facebook of software: Github enables companies to host their codebase and collaborate together using private repositories, while it also offers free, public repositories for open-source software projects.

[rkbabang]

So in addition to unlimited photo storage for Prime Members, Amazon has just released a public API for Cloud Drive.  They're also working on a desktop application for Mac (looks like they already have one for PC?) that will work similarly to Dropbox, Box, and Google Drive.

 

This could be a pretty big deal and just shows how all this stuff is getting commoditized thanks to companies like AMZN. 

 

I've been using the PC application to backup my photos. It just pops up a window and says drag files/folders here.  You drag something there and it uploads it.  What I did is drag the photos directory from my PC which contains all of my folders arranged in sub-folders by year then again by date.  When I add folders or photos to that directory structure I just re-drag the top level folder to the application and it uploads only the new files.  I don't think it checks if a file has changed like a backup application, I think if the name exists it skips uploading it.

 

The Google Drive app is a lot better, it actually mirrors your Google drive onto your PC and maintains them as exact copies.  Hopefully Amazon will improve its software, or maybe with the API available there will be some 3rd party applications available to manage your Amazon cloud drive soon.

 

[JAllen]

The best business inside AMZN grows in the thirties - this is why gross profit has gone up over the last few years.

 

 

http://www.internetretailer.com/mobile/2014/11/11/sales-growth-amazons-marketplace-outpace-growth-ebay

 

 

"Although sales growth on Amazon's marketplace slowed to 32.4% in October from 37.9% in September, the rate is still twice the rate of the overall e-commerce growth of 15%, according to data from ChannelAdvisor clients who sell on the platform. And it's more than seven times higher than the sales growth on eBay."

 

 

 

via http://stockbase.com/news

[JAllen]

What are the board's thoughts about AMZN/third-party unit sales mix?

 

 

They've reported that 41% of sales are third-party.  Do we believe that 9-10% of unit sales are digital media: audio, books and movies from AMZN?  That suggests that third-party unit sales are roughly 50% of sales, excluding AWS + advertising. 

 

 

What does the board think of that estimate?  It could be underestimating third-party sales, as digital sales are inherently lower-priced...

[JAllen]

Something else I've been wondering:  AMZN's stock price has continued to rise for about six years now, despite the lack of profits. 

 

 

Usually when the market continues to work against what we believe for many years we might look for what it disagrees with us about.

 

 

What are those things for those that believe AMZN is overvalued?  Is the market just 'drinking the kool-aid'?  What else?

 

 

If a stock was super cheap for 5+ years, we would say, "ok why is it still this cheap?".

[KCLarkin]

Something else I've been wondering:  AMZN's stock price has continued to rise for about six years now, despite the lack of profits. 

 

Usually when the market continues to work against what we believe for many years we might look for what it disagrees with us about.

 

What are those things for those that believe AMZN is overvalued?  Is the market just 'drinking the kool-aid'?  What else?

 

If a stock was super cheap for 5+ years, we would say, "ok why is it still this cheap?".

 

The market has a consistent history of overpaying for growth. The base assumption needs to be that the market has priced in future growth and the growth OpEx. By investing in the stock, you are making a bet that the market has under-priced the stock. In other words, you think the market is wrong. Since you think the market is wrong, you can't exactly fault the bears for thinking the market is wrong.

 

 

[JAllen]

I actually don't think the market is wrong.  I think the market is somewhat fairly valuing AMZN based upon its 4 core businesses, their competitive strengths, and my crazy idea that just maybe, AMZN isn't the only $90B sales company that is totally incapable of ever generating profits, and that a large chunk of their expenses are actually designed to grow the company.  I think the return over the next ten years will about equal something like the average of AMZN's sales and gross profit growth over that time period, which is currently running about 25%.

[JAllen]

And I think the market consistently undervalues growth actually.  This is why some growth stocks return much more than the market. Most people don't really understand compound interest as well.

[dwy000]

I actually don't think the market is wrong.  I think the market is somewhat fairly valuing AMZN based upon its 4 core businesses, their competitive strengths, and my crazy idea that just maybe, AMZN isn't the only $90B sales company that is totally incapable of ever generating profits, and that a large chunk of their expenses are actually designed to grow the company.  I think the return over the next ten years will about equal something like the average of AMZN's sales and gross profit growth over that time period, which is currently running about 25%.

 

At 25% annual return, that implies a market cap in 10 years of over $1.3 trillion.  Even with 6% operating margins and 4% net margins, at 20x PE it suggests revenues of $1.6bn/yr.  From $80bn today with slowing growth (company projects high end of 18% growth in 4Q), is that achievable?  Especially while stopping growth investment to meet the op margin?

[JAllen]

Gross profit is growing 30%.

 

 

I agree that my estimates are optimistic. 

 

 

Also, note that I said "average of sales and growth profit over that time period", not that AMZN will continue growing at the current rates for that time period.  Of course growth will slow over time.

[dwy000]

What would it take in the interim period to shake you off those assumptions?  Given you have a 10+ year view and the company has been very explicit that it has no plans to operate for profits in the near term, the investment premise is very, very back end weighted.  The risk is that you won't know if the theory is right or wrong until 5-10 years from now - which means even if the stock price doesn't decline, it could be dead money for 10 years (or worse, decline in the interim as investors show frustration with continued lack of profitability).

 

What metrics would they need to report to make you question the investment - and how do you avoid losing money in the interim?

 

[Andrew6892]

The gross profit growth and gross margin expansion are due to the mix shift towards 3P and AWS, which both generate net revenues at virtually 100% gross margin. The operating costs associated with those businesses show up below the gross profit line in higher fulfillment and technology & content expenses. So gross profit growth and gross margin expansion have been very strong, but that isn't as meaningful as one would think. Management says this as well. Unfortunately, we can only look to operating income for the full impact of this mix shift, and that is obviously distorted by growth investments.

[JAllen]

 

What metrics would they need to report to make you question the investment - and how do you avoid losing money in the interim?

 

 

Great question.

 

 

Some of these could happen alone, some would have to occur in tandem with others:

• The death or incapacitation of Jeffrey Preston Bezos
  
• The death or incapacitation of multiple key executives at one time - for instance Werner Vogels and Andy Jassy together
  
• The development and commercialization of a more efficient means of distribution of retail goods in the United States than the Internet, that Amazon does not have access to or is proprietary
  
• The development of a technology or means of distribution that more seamlessly distributes digital media, primarily books, that Amazon does not have access to or is proprietary
  
• The development of a proprietary computing technology superior to those extant and relied upon by Amazon.  For instance, a non-Unix based operating system that becomes more ubiquitous than Unix or a rapid shift from cloud-computing to some new mode (this will occur at some point), that Amazon does not have access to or is proprietary
  
• A sudden, drastic change in overall strategy and vision for Amazon
  
• Material financial fraud
  
• Multiple material countries shutting Amazon's operations down
  
• Multiple years of sub 15% sales growth or sub 20% gross profit growth
  
• A persistent decline of operating cash flow
  
• Someone being crazier and more long-term oriented from a competitive standpoint, especially in the U.S.  Right now, there isn't anyone close in the U.S.  Ma is potentially this someone, but I don't think he could unseat AMZN in the U.S., and probably the West (maybe Japan too because of Sino-Japanese hatred).  From what I've read, Bezos is far crazier than Ma.
  
• An ubiquitous social network, or wall, for instance, that prevents AMZN from reaching its customers
  

[DTEJD1997]

Hey all:

 

After all the problems I've had with Ebay (some of which have been corrected)...I looked into selling on AMZN.

 

Probably NOT GOING TO HAPPEN.

 

Fees to AMZN would be approximately 10% before credit card processing.  This is significantly MORE than Ebay.

 

On most of the items that I sell (computer parts, coins, bullion), AMZN would get all, or a majority of my profit.

 

At a fee rate of 10%+ credit card processing, I don't see how it is worth it for some vendors.

 

If the rate was 5% or so, that would be a different matter....

[LC]

JAllen, just to add to your list, and I think this related to your points on sustained low sales growth/op margins:

 

-Collusion amongst Fedex/USPS/UPS/etc. to raise prices on Amazon.

-Expansion/re-adjustment from Wal-Mart to match Amazon's footprint, product offering and shipping capability.

-Failure to grow their addressable market. In other words, every potential customer is buying from Amazon at the maximum amount they would order from an online retailer.

 

[JAllen]

Shipping costs are one thing I'm quite comfortable with.  Now that AMZN is operating Fresh, with their own trucks handling short-term deliveries in the largest metros, there are five shippers: USPS, UPS; FEDEX; whichever regional carrier exists there - OnTrac here in CA - and Amazon.  The USPS move was one of the more brilliant strategic ones on Bezos' part, IMO.

 

 

The USPS is being very entrepreneurial right now: they're drastically lowered package pricing, causing great consternation at UPS and Fedex, and they're helping AMZN with Sunday deliveries, and soon Fresh deliveries.  The WSJ has had at least one article about it.  I recommend hunting that down.

[JAllen]

Walmart had their chance 5-10 years ago.  Even if they could muster the will to compete, I don't think they could catch up at this point.  Small things, like online reviews, are hard to replicate. 

 

 

The consumer trust just isn't there and online demographics are almost diametrically opposite of Walmart's core demos. 

 

 

You can't manage 20M SKUs in a bunch of stores with unskilled labor.  You need minimal human involvement, algorithms, and robots - exactly what Amazon has been working on for 15 years.

[krazeenyc]

Google is a threat. Their current service is obviously tiny and in its infancy -- but they are willing to think outside the box and think long term. Their bankroll doesn't hurt either.

[JAllen]

Google is a threat.  The reason I'm not more concerned is exactly that: it's miniscule.  It also costs 95% as much as Prime does without a ton of the other benefits.  What they're doing may work in dense metropolises but I don't know how they make it come close to working in the suburbs where it takes at least 30 minutes to drive anywhere...

[Andrew6892]

I am skeptical that Google Express is a big threat. That supply chain has higher total costs. Via Google Express, there are bricks and mortar retail costs plus the cost of Google's drivers and delivery costs. Plus both the retailer and Google need to make a profit. That is a more expensive supply chain than Amazon's. I think Google would need to achieve a huge amount of scale in local markets to make the economics work. Also, I'm a happy Prime customer, but can't imagine paying for two shipping clubs.

[LC]

I've read that Wsj article RE USPS. It makes sense for both parties but things can change, especially when congress is involved. I think Walmart is more of a threat than google. Google has little to no retail experience. Maybe in digital goods they can compete.