AMZN - Amazon.com Inc.

[Grenville]

Amazon beginning to test out service offering in Seattle. The one mentioned is a TV installation service conducted by a third party.

 

http://gizmodo.com/5967752/amazon-wants-to-ship-you-a-laborer-to-install-your-purchases

[Grenville]

Really cool feature added by Amazon for MP3s based on what you've bought on Amazon as a cd or mp3. They give you free cloud access to stream or download 256kb/s rip of the music.

 

"Introducing “Amazon AutoRip” – Customers Now Receive Free MP3 Versions of CDs Purchased From Amazon – Past, Present and Future"

http://phx.corporate-ir.net/phoenix.zhtml?c=176060&p=irol-newsArticle&ID=1773251&highlight=

 

“What would you say if you bought music CDs from a company 15 years ago, and then 15 years later that company licensed the rights from the record companies to give you the MP3 versions of those CDs… and then to top it off, did that for you automatically and for free?” said Jeff Bezos, Amazon.com Founder and CEO. “Well, starting today, it's available to all of our customers – past, present, and future – at no cost. We love these opportunities to do something unexpected for our customers.”

 

[rkbabang]

Really cool feature added by Amazon for MP3s based on what you've bought on Amazon as a cd or mp3. They give you free cloud access to stream or download 256kb/s rip of the music.

 

"Introducing “Amazon AutoRip” – Customers Now Receive Free MP3 Versions of CDs Purchased From Amazon – Past, Present and Future"

http://phx.corporate-ir.net/phoenix.zhtml?c=176060&p=irol-newsArticle&ID=1773251&highlight=

 

“What would you say if you bought music CDs from a company 15 years ago, and then 15 years later that company licensed the rights from the record companies to give you the MP3 versions of those CDs… and then to top it off, did that for you automatically and for free?” said Jeff Bezos, Amazon.com Founder and CEO. “Well, starting today, it's available to all of our customers – past, present, and future – at no cost. We love these opportunities to do something unexpected for our customers.”

 

If you already have the CD it isn't much effort to rip it yourself though.  This doesn't give you anything you don't already have.  The two exceptions I can think of are 1: you bought the CD years ago and lost it or 2: you bought it to give as a gift to someone else so you don't own it at all.  In both cases you do not have the CD, but you now have access to the mp3s.  The only other case this would make a difference is if you're computer does not have a CD-ROM drive, but most computers do.

[racemize]

Well, if you had 25 or 50 CDs, ripping them would take some effort.  It's nice, but I'm already all digital anyway, and I didn't buy them from Amazon in the first place, sooooo I'll just see myself out.

[rkbabang]

Well, if you had 25 or 50 CDs, ripping them would take some effort.  It's nice, but I'm already all digital anyway, and I didn't buy them from Amazon in the first place, sooooo I'll just see myself out.

 

That's pretty much my point.  Who has a music collection on CDs and hasn't ripped them already?  Unless they don't want the digital version of them, then this Amazon feature is of no use.  It would be convenient I suppose if you were buying new music, but I wouldn't pay more for this feature.    Not that I've purchased a CD in many years anyway.    My kids have lists of songs they want to buy, not albums.  And Most of us old folks already own all the music we want or need (I've already got 3000 or so of my favorite songs on my ipod).    Who exactly buys CDs?

 

[txlaw]

http://www.cbsnews.com/video/watch/?id=50138922n

 

60 minutes piece on robots and job growth.  Shows Kiva Systems robots at work.  Kiva is owned by AMZN.

[Grenville]

Well, if you had 25 or 50 CDs, ripping them would take some effort.  It's nice, but I'm already all digital anyway, and I didn't buy them from Amazon in the first place, sooooo I'll just see myself out.

 

That's pretty much my point.  Who has a music collection on CDs and hasn't ripped them already?  Unless they don't want the digital version of them, then this Amazon feature is of no use.  It would be convenient I suppose if you were buying new music, but I wouldn't pay more for this feature.    Not that I've purchased a CD in many years anyway.    My kids have lists of songs they want to buy, not albums.  And Most of us old folks already own all the music we want or need (I've already got 3000 or so of my favorite songs on my ipod).    Who exactly buys CDs?

 

This may not change your opinion on the service, but I forgot the feature of scanning your itunes library and adding those songs automatically to your Amazon Cloud Player in 256kbps. It's a nice feature to backup your music in the cloud and download it in high quality.

 

"In July, Amazon added new scan and match technology that enables customers to import music into Amazon Cloud Player by scanning their iTunes and Windows Media Player libraries and matching songs on their computers to Amazon’s music catalog. All matched songs – even music purchased from iTunes or ripped from CDs – are upgraded to high-quality 256 Kbps audio and are made available instantly in customers’ Cloud Player libraries, making it even easier for customers to enjoy their entire music collection anywhere."

[Guest valueInv]

This is what happens when you miss analyst expectations:

 

http://www.google.com/finance?client=ig&q=NASDAQ:AMZN

 

Oh wait, never mind.  ::)

[Guest valueInv]

I smell mushrooms:

 

http://venturebeat.com/2013/01/29/amazon-cfo-tom-szkutak-takes-the-fifth-on-just-about-every-important-question/

[Cardboard]

5 brokerage houses rushed yesterday to upgrade the stock following these: "much better than anticipated operating margin". I have not seen any discussion about valuation regarding these upgrades in the press. It is a game of: if the results appear good, then put a price target 20 to 30% above the current price.

 

Now, regarding the results, they were abysmal. They missed on sales, earnings and forecast for two quarters in a row now. For any normal company, tech or not, this would have resulted in a roughly 20% drop in the share price. Not for Amazon with its current $121 billion market cap. It has to be the most manipulated stock on the market.

 

Now, getting back to these "amazing" operating margins, they reported $405 million in operating income in the fourth quarter which is the most important for any retailer, read most profitable. For the year, it was only $676 million and that is on $61 billion in sales. You can add back stock compensation of $833 million if you like since the way it is portrayed by Amazon, it is not a real cost. The operating income is still no good for what is described as a leader in the business. And certainly way too low to justify a market cap of $121 billion.

 

We also keep hearing about investments affecting costs. It is funny because investments are normally CAPEX and increasing costs due to more buildings to maintain and the hiring of more staff become on-going costs. Also, normally when you make heavy investments, it shows in sales growth. Interestingly enough, sales growth has declined to 22% in the 4th quarter. Are we are starting to see the law of large numbers slowing them down?

 

And please, don't tell me about Amazon being a Costco or Wal-Mart. These two great firms always made a significant profit margin after taxes despite them growing at very fast rates for decades. 

 

Anyway, the numbers and valuation don't add up. I am losing money on this short so far and it sucks, but I think that I will be proven right long term. If there was a hint of doubt on their profitability or just about 10% of the attention that is paid daily on Apple's future, this stock would plummet.

 

Cardboard

[txlaw]

Cardboard, you're a smart guy.  Why the heck are you wasting your time shorting a company like AMZN?  Are you not finding any suitable long ideas?

[ItsAValueTrap]

Is Amazon intentionally losing money on part of its business?  (e.g. Kindle)

 

If you separate out the online retailing aspect of its business from the intentionally money-losing parts of the business, what would the right valuation be?

 

Sometimes companies have money-losing segments that make them hard to analyze.  A few businesses in the world intentionally lose money trying to hit a critical mass... webVan (total failure), new media formats like BluRay and HD-DVD, Microsoft with its Bing search engine, Starbucks (kind of; they were unprofitable when they started), etc.

 

2- How can they not make money in online retailing? 

 

Their used books business should be an amazing business with extremely high margins (to me, it is like a mini-eBay).

 

Their new books business should be a good business.  Books are high margin items and they don't have inventory and bricks&mortar costs like the traditional bookstores that they are putting out of business.

[ShahKhezri]

5 brokerage houses rushed yesterday to upgrade the stock following these: "much better than anticipated operating margin". I have not seen any discussion about valuation regarding these upgrades in the press. It is a game of: if the results appear good, then put a price target 20 to 30% above the current price.

 

Now, regarding the results, they were abysmal. They missed on sales, earnings and forecast for two quarters in a row now. For any normal company, tech or not, this would have resulted in a roughly 20% drop in the share price. Not for Amazon with its current $121 billion market cap. It has to be the most manipulated stock on the market.

 

Now, getting back to these "amazing" operating margins, they reported $405 million in operating income in the fourth quarter which is the most important for any retailer, read most profitable. For the year, it was only $676 million and that is on $61 billion in sales. You can add back stock compensation of $833 million if you like since the way it is portrayed by Amazon, it is not a real cost. The operating income is still no good for what is described as a leader in the business. And certainly way too low to justify a market cap of $121 billion.

 

We also keep hearing about investments affecting costs. It is funny because investments are normally CAPEX and increasing costs due to more buildings to maintain and the hiring of more staff become on-going costs. Also, normally when you make heavy investments, it shows in sales growth. Interestingly enough, sales growth has declined to 22% in the 4th quarter. Are we are starting to see the law of large numbers slowing them down?

 

And please, don't tell me about Amazon being a Costco or Wal-Mart. These two great firms always made a significant profit margin after taxes despite them growing at very fast rates for decades. 

 

Anyway, the numbers and valuation don't add up. I am losing money on this short so far and it sucks, but I think that I will be proven right long term. If there was a hint of doubt on their profitability or just about 10% of the attention that is paid daily on Apple's future, this stock would plummet.

 

Cardboard

 

Agree completely, this is my largest short ever at 12.5% of assets.  I was at 4% 2 weeks ago, and added significantly at 276 and 269 a week ago.  Now avg at 263. 

 

Also thinking of adding to my CRM short, current avg at 165.

[bargainman]

wow..  the streets are covered with really smart value guys who shorted great companies on valuation.  It's a game I will never ever play.  If I ever short it will be by buying puts (limited downside) not shorting stock (unlimited downside, and accelerating downside as the stock goes up).  If I were either of you, I'd make sure to buy some leap OTM calls in case, assuming they aren't too hard to get (thereby turning the short position into a synthetic put and limiting your loss potential).  This is a dangerous game you're playing...  IMHO.  Amusingly there is another value investor with a reasonable record (won hulbert's recent award iirc) who is long amzn.

[Guest longinvestor]

FWIW, want to share my view as an Amazon customer. I've no earthly idea what all this means for the stock price. Zero interest in that.

 

Somehow or other, Amazon has become my most frequent shopping location. I started buying "exotic" items which would typically make me go from store-to-store to find, then I started buying into Electronic items and then into "large" items. Heck, I've been sending Gift Cards to folks (used to be iTunes Gift cards before). The shopping convenience is unmatched. Most of the stuff I buy are new items, mostly branded. Speed of delivery is fanatastic almost without exception. The $79 prime membership is easily paid by not driving. (Two gas fillings per year).

 

Packaging is something I've worried about a little and they have to work on this more. Also they need to come up with shipping and handling options of large items especially thru my front door and into the house. Cannot see how they can handle more volume of large stuff without local arrangements. UPS / Fedex is unwieldy for this. And the other thing I think about is returns, again of large items. I came very close to doing something like this and decided against.

 

And I'm not a 20-something customer, I know several in that demography that buy everything from Amazon. Hearing that city dwellers are more and more into this kind of shopping.  My Amazon spend is in 4 digits now! It was in 2 digits a short while back. And I don't like to overspend, Walmart/Sam's club and two low cost local groceries are it for me. Amazon is doing something right!

 

 

 

 

[infinitee00]

I actually have the opposite experience. After Amazon started charging sales tax in my state, I have been finding less and less reason to buy from Amazon. In fact, I have decided not to renew my Prime membership after the membership ends this year. I live in a big city so most of the Walmarts, Costcos and Best Buys are located close to work or home. With Best buy matching prices for any electronics item on Amazon, I see less reason to buy on Amazon compared to just picking up the stuff from the local Best Buy. I have purchased several items ( >$100) this year from Costco, Baby'srus or Bestbuy which were priced the same or lower than Amazon but without the inconvenience of waiting 2 business days for the product. I bought a nexus 7 tablet for my mom last month and the cheapest price was being offered by Staples. Even, friends who previously would buy most of their electronic items from Amazon have been finding better value at other stores.

 

Yes, I have to agree that the shopping experience is really good and I still find the best prices for new or used paper books on Amazon, but when I am buying a TV, or a stroller/car-seat for my kid, I prefer to buy it from a store so that if the product turns out to be a lemon, I can return it and get another one the same day. Just the thought of returning a TV or a stroller makes me not want to buy from Amazon anymore. Previously the 0% sales tax would sort of convince me to disregard the inconvenience, especially for higher priced items, but now I don't see much reason for it ( the cheapskate that I am ;)). Yes, I know not everyone is price sensitive and most of what I am saying is anecdotal. But, if there are more people like me, then Amazon does have something to worry about.

 

 

[txlaw]

Pretty interesting announcement.

 

http://paidcontent.org/2013/02/01/sorry-netflix-and-hulu-amazon-gets-exclusive-streaming-rights-to-downton-abbey/

 

I also noticed that the Prohibition documentary by Ken Burns only appears to be on AMZN, and not on NFLX. 

 

In related news, NFLX's House of Cards is being released this weekend, I believe.  I'm looking forward to watching it.

[Liberty]

http://www.theatlantic.com/business/archive/2013/02/why-amazon-is-special-and-apple-is-not-in-1-paragraph/272791/

[DCG]

http://www.theatlantic.com/business/archive/2013/02/why-amazon-is-special-and-apple-is-not-in-1-paragraph/272791/

 

I agree with all their points, but at some point valuation has to come into play when talking about the stock price.

[Guest valueInv]

http://www.theatlantic.com/business/archive/2013/02/why-amazon-is-special-and-apple-is-not-in-1-paragraph/272791/

 

I agree with all their points, but at some point valuation has to come into play when talking about the stock price.

The best description of Amazon I've seen so far- "a charity financed by shareholders " .

[Palantir]

I respect that Amazon may have great, profitable days ahead. That being said, if the argument is that "AMZN is not very profitable because it is spending on the future", shouldn't it at least show some growth in OCF that's balanced out by CapX?

 

 

[jjsto]

Another interesting article on amazon/apple:

 

http://www.eugenewei.com/blog/2012/11/28/amazon-and-margins

[siddharth18]

A new perspective on valuing AMZN http://quinzedix.blogspot.com/2013/02/the-forest-for-trees.html

[Cardboard]

Very clever way to justify the unjustifiable! Add back: intangibles amortization, spending on marketing for growth! and spending on technology for growth! to get to EBIT. Not EBITDA, but EBIT. Which brings another error since they are spending massively on CAPEX or bypassing the income statement and the depreciation charge will keep on rising for years to come. So the current depreciation charge is likely too low within EBIT unless the new warehouses and other CAPEX spending really don't require much upgrades over time.

 

So basically what this is guy is saying is that all the acquisitions that they are making and all extra spending on marketing and technology do not add to the current top line neither do they hurt the bottom line. They should just be ignored to get to a truer picture of cash generating ability.

 

The reality is that growth slowed to 22% on the top line in the 4th quarter or the biggest one for a retailer and that is despite a lot of spending on more warehouses to distribute more goods, lots of adds on television and more offering than ever which is also true at AWS (explaining some of the additional spending on technology). Again, something does not add up. If sales had gone up 40%, then one could argue that the additional spending was a temporary surge to gain more sales and market share that would then translate into more cash flow with a return to more normal spending. What seems to be happening instead is that the company is spending more cash to gain fewer sales than it previously did. As I mentioned before, $62 billion in sales is roughly Target. And even if internet sales keep on growing, they will not surpass total retail sales. Then you have to consider that Wal-Mart, Costco, Target, Best Buy and all others won't just stay put waiting for Amazon to steal all their sales. They too have internet sites, have distribution centers and warehouses and a few are now offering to match Amazon prices all year long at their brick and mortar stores.

 

So competition is rising while Amazon is now being hit with sales tax which increases its prices and at a time when they are heavily investing or adding permanent on-going costs to their structure. I see a squeeze to their margins which are already inadequate, then if Wall Street ever wakes up, stock related compensation will become tough to accept for most employees. It will finally be recognized as a true cost on the income statement. Just ask an Apple employee today about stock compensation and how they feel about it.

 

The fairy tale would then be ended and we should see that Bezos never created anything worthwhile, but just a brand name selling items below their true cost or one necessary to earn a reasonable return on capital. The guy talks a lot about free cash flow, the long term and serving customers. Kind of sound like the Level 3 story. Lots of promises, but you never really see the free cash flow showing up. They stopped believing Crowe when sales never really materialized in a big way. I wonder what will happen when sales only go up 10% a year at Amazon. 

 

Cardboard

[Guest valueInv]

Another interesting article on amazon/apple:

 

http://www.eugenewei.com/blog/2012/11/28/amazon-and-margins

 

Only problem - Google is using the same strategy in the same market.