AMZN - Amazon.com Inc.

[muscleman]

http://www.bidnessetc.com/31965-amazon-amzn-claims-sellers-shipped-over-2-billion-items-in-2014/

 

Over 2 bn items sold. Does anyone know what's the revenue increase from last year? This article didn't say anything about that except that the holiday season sales jumped 50%.

 

[rpadebet]

Opened a smallish 3% position today @300 ish. Wish it drops 10-15% more.

[muscleman]

Opened a smallish 3% position today @300 ish. Wish it drops 10-15% more.

 

What's your rational for the valuation? I still can't get my head wrapped around the valuation. ::)

I will receive their stocks over the years so maybe I should just keep them. :)

[HWWProject]

Interested in others valuations as well.

 

I have AMZN's normalized free cash flow at about $1.5B.  At 20 times FCF plus cash on balance sheet (15% discount rate), gives only $80 per share valuation.  ($125 per share at 12% discount rate).

 

I'm a very satisfied customer of their Prime service - both for products and TV/movie streaming.  Just not willing to pay too much for the growth.

[rpadebet]

Opened a smallish 3% position today @300 ish. Wish it drops 10-15% more.

 

What's your rational for the valuation? I still can't get my head wrapped around the valuation. ::)

I will receive their stocks over the years so maybe I should just keep them. :)

 

My gut tells me its undervalued  ;) just kidding!

 

I have explained my valuation in earlier posts. Rationale hasn't changed much since then. There are some things I don't like, but many things I like very much about how the business is being run and how it is being positioned strategically.

 

One thing I especially like about AMZN is they want to be the distruptor rather than just protect themselves against disruption. Its a nice strategic business "hedge" to my other tech holdings (like msft,ebay) where I am constantly worried about being disrupted. With AMZN I sleep happy knowing they are very paranoid and on the attack always.

[JAllen]

How can a more less capital intensive company like AMZN have a lower normalized free cash flow margin than every single B&M retailer (except for Costco), with higher gross margins and higher operating cash flow margins?

 

 

How can AMZN have lower operating margins than WMT?  Is an exchange and digital business purely built on warehouses more or less capital intensive than maintaining thousands of urban B&M stores AND warehouses, over time?

[Jurgis]

Anecdotal personal experience: Bought Xbox One this weekend. BestBuy was about $90 cheaper than Amazon. Walmart.com was about $40 cheaper.

 

I did not even have BestBuy account... but for $90 I was willing to open one. ;)

 

Amazon is still the first "go to" place, but I wonder if competitors are as far behind as people think.

[rpadebet]

Anecdotal personal experience: Bought Xbox One this weekend. BestBuy was about $90 cheaper than Amazon. Walmart.com was about $40 cheaper.

 

I did not even have BestBuy account... but for $90 I was willing to open one. ;)

 

Amazon is still the first "go to" place, but I wonder if competitors are as far behind as people think.

 

This consumer preference to go to amazon first when they think of buying online is a big thing. Kind of like how most people search on google by default. Its difficult for the B&M stores to overcome that preference. They might need a different brand or different marketing strategy.

[CorpRaider]

One possible theory?  UPS and Fed-Ex ain't running the distribution infrastructure for charity.

[rpadebet]

One possible theory?  UPS and Fed-Ex ain't running the distribution infrastructure for charity.

 

AMZN is by far the largest volume driver for them. And on the other hand you have UPS, FEDEX and USPS (charity? non profit?). Who do you think has the leverage here?

[KCLarkin]

How can a more less capital intensive company like AMZN have a lower normalized free cash flow margin than every single B&M retailer (except for Costco), with higher gross margins and higher operating cash flow margins?

 

How can AMZN have lower operating margins than WMT?  Is an exchange and digital business purely built on warehouses more or less capital intensive than maintaining thousands of urban B&M stores AND warehouses, over time?

 

- Walmart has 6x the revenue. Scale advantages?

- Walmart is mostly self-service, so OPEX should be lower than AMZN where then need to pick and ship millions of small orders

- What do you think the operating margins are for AMZN when I buy a $10 book and get free shipping?

 

Even Bezos seems to understand that there core business is a commodity trap.

[dwy000]

How can a more less capital intensive company like AMZN have a lower normalized free cash flow margin than every single B&M retailer (except for Costco), with higher gross margins and higher operating cash flow margins?

 

 

How can AMZN have lower operating margins than WMT?  Is an exchange and digital business purely built on warehouses more or less capital intensive than maintaining thousands of urban B&M stores AND warehouses, over time?

 

In theory it shouldn't.  But it does.  I guess it's a question of what you want to use as "normalized".

[muscleman]

Opened a smallish 3% position today @300 ish. Wish it drops 10-15% more.

 

What's your rational for the valuation? I still can't get my head wrapped around the valuation. ::)

I will receive their stocks over the years so maybe I should just keep them. :)

 

My gut tells me its undervalued  ;) just kidding!

 

I have explained my valuation in earlier posts. Rationale hasn't changed much since then. There are some things I don't like, but many things I like very much about how the business is being run and how it is being positioned strategically.

 

One thing I especially like about AMZN is they want to be the distruptor rather than just protect themselves against disruption. Its a nice strategic business "hedge" to my other tech holdings (like msft,ebay) where I am constantly worried about being disrupted. With AMZN I sleep happy knowing they are very paranoid and on the attack always.

 

I saw your previous posts but didn't fully understand. Basically you said AWS should be worth 20 Bn so let's do EV/EBITDA adjusted by that. Then AMZN is still more expensive than WMT right?

The current EV/EBITDA is over 35 while WMT's over 8. Even if you subtract AWS from EV but nothing from EBITDA, The EV/EBITDA ratio is like 30. Did I do the math correctly?

[rpadebet]

this is what I said

 

Anybody has any thoughts on AWS valuation as a standalone? I have seen values ranging from 20B to 50B?

 

I thought it would be interesting to see how the EV/Adj Sales metric for AMZN (ex-AWS) compares against other retailers like WMT. I suspect there is not much of growth premium built into AMZN retail business. Almost all of the  growth premium most likely relates to AWS.

 

Current EV is 140B

If you take AWS is 20B, then Adj EV is 120B

 

FY15 Sales estimates are 106B. knockoff 10B as AWS sales estimates. Assume a 60/40 1p/3p sales split with 3p being recorded at 13% on remaining and you get Adj Sales of  148B

FY14 Sales are around 90B. Assuming same things, Adj sales for FY14 are 123B.

 

based on FY15 estimates AdjEV/AdjSales = 0.8

based on FY14 actuals AdjEV/AdjSales = 1

 

WMT EV/Sales 332/476(FY14) or 332/487 (FY15) so roughly 0.7

 

So, if you value AWS at 2X sales (20B), you are paying a small premium for the retail growth. If you value AWS at the higher end at 5x sales (50B), you are actually valuing the AMZN's retail business in line with WMT as of FY14 and discount wrt FY15 estimates.

 

[muscleman]

this is what I said

 

Anybody has any thoughts on AWS valuation as a standalone? I have seen values ranging from 20B to 50B?

 

I thought it would be interesting to see how the EV/Adj Sales metric for AMZN (ex-AWS) compares against other retailers like WMT. I suspect there is not much of growth premium built into AMZN retail business. Almost all of the  growth premium most likely relates to AWS.

 

Current EV is 140B

If you take AWS is 20B, then Adj EV is 120B

 

FY15 Sales estimates are 106B. knockoff 10B as AWS sales estimates. Assume a 60/40 1p/3p sales split with 3p being recorded at 13% on remaining and you get Adj Sales of  148B

FY14 Sales are around 90B. Assuming same things, Adj sales for FY14 are 123B.

 

based on FY15 estimates AdjEV/AdjSales = 0.8

based on FY14 actuals AdjEV/AdjSales = 1

 

WMT EV/Sales 332/476(FY14) or 332/487 (FY15) so roughly 0.7

 

So, if you value AWS at 2X sales (20B), you are paying a small premium for the retail growth. If you value AWS at the higher end at 5x sales (50B), you are actually valuing the AMZN's retail business in line with WMT as of FY14 and discount wrt FY15 estimates.

 

Thanks! So you are doing the math with EV/Sales instead of EV/EBITDA.

I agree that EBITDA may be understated as they heavily invest and expense the invests, but they seem to lease most of the fulfillment centers, so what exactly do you think they are investing in?

I am a little bit concerned about using EV/Sales because that assumes there's got to be some net profit margin. But when WMT sells products, people drive in to pick up the products. When AMZN sells the products, they ship to customers. The shipping cost has been very high for 3P FBA segment. Unlike what's perceived to be almost 100% gross margin for 3p, it could be less than 40%. Check the Fulfillment costs on the 10-K and 10-Q.

[rpadebet]

The variability in costs and expensing is why I use sales ratio instead of ebitda,ebitdar, net income, or Fcf.

 

You are right, primary assumption here is amzn retail profitability is comparable to wmt profitability.

 

And that is why we have so much discussion here on which model is better or more efficient. That's the beauty of sales ratio metrics as you can take out all the downstream accounting differences, capital structure differences, depreciation, leasing etc.

 

As I have been saying, given these valuation metrics, investment here comes down to your comfort level with which model you think will be profitable in the long term. I should add that potentially there could be convergence in the models given enough time as they adapt in their own ways to consumer preferences.

 

I like the wind behind amzn model as that part of retail is growing, others might like the established scale and market share of wmt.

 

Amzn has an owner operator. Astute capital allocation. Disruption based model + aws whose market position, growth and potential moat in future is underappreciated because everyone is focussed on retail business.

 

And amzn experiments so much, sooner or later something might stick :) - that's the VC optionality  element. You just don't want them pissing away $s like msft did with their cash cows. That is why I don't like their forays into hardware. Advertising and media is fine. Though I would have preferred them buying nflx instead of trying to build a competitor.

[dwy000]

Great article on Bezos and amazon in Fast Company this week.  "the Real Story Behind Jeff bezos's Fire Phone Debacle and What it Means For Amazon's Future".  Can't link it from here but just go to fastcompany.com and see trending articles.

[LC]

http://www.fastcompany.com/3039887/under-fire

[innerscorecard]

The variability in costs and expensing is why I use sales ratio instead of ebitda,ebitdar, net income, or Fcf.

 

You are right, primary assumption here is amzn retail profitability is comparable to wmt profitability.

 

And that is why we have so much discussion here on which model is better or more efficient. That's the beauty of sales ratio metrics as you can take out all the downstream accounting differences, capital structure differences, depreciation, leasing etc.

 

As I have been saying, given these valuation metrics, investment here comes down to your comfort level with which model you think will be profitable in the long term. I should add that potentially there could be convergence in the models given enough time as they adapt in their own ways to consumer preferences.

 

I like the wind behind amzn model as that part of retail is growing, others might like the established scale and market share of wmt.

 

Amzn has an owner operator. Astute capital allocation. Disruption based model + aws whose market position, growth and potential moat in future is underappreciated because everyone is focussed on retail business.

 

And amzn experiments so much, sooner or later something might stick :) - that's the VC optionality  element. You just don't want them pissing away $s like msft did with their cash cows. That is why I don't like their forays into hardware. Advertising and media is fine. Though I would have preferred them buying nflx instead of trying to build a competitor.

 

Is it contradictory to say that you think Bezos is a great capital allocator and then also acknowledge the company spending money to try to become a hardware company, which seems to show a lack of strategy in how Amazon spends money?

 

Or by capital allocation, do we only narrowly mean the issuing and buying back of equity and debt?

[rpadebet]

The variability in costs and expensing is why I use sales ratio instead of ebitda,ebitdar, net income, or Fcf.

 

You are right, primary assumption here is amzn retail profitability is comparable to wmt profitability.

 

And that is why we have so much discussion here on which model is better or more efficient. That's the beauty of sales ratio metrics as you can take out all the downstream accounting differences, capital structure differences, depreciation, leasing etc.

 

As I have been saying, given these valuation metrics, investment here comes down to your comfort level with which model you think will be profitable in the long term. I should add that potentially there could be convergence in the models given enough time as they adapt in their own ways to consumer preferences.

 

I like the wind behind amzn model as that part of retail is growing, others might like the established scale and market share of wmt.

 

Amzn has an owner operator. Astute capital allocation. Disruption based model + aws whose market position, growth and potential moat in future is underappreciated because everyone is focussed on retail business.

 

And amzn experiments so much, sooner or later something might stick :) - that's the VC optionality  element. You just don't want them pissing away $s like msft did with their cash cows. That is why I don't like their forays into hardware. Advertising and media is fine. Though I would have preferred them buying nflx instead of trying to build a competitor.

 

Is it contradictory to say that you think Bezos is a great capital allocator and then also acknowledge the company spending money to try to become a hardware company, which seems to show a lack of strategy in how Amazon spends money?

 

Or by capital allocation, do we only narrowly mean the issuing and buying back of equity and debt?

 

No it is not contradictory. Is Warren Buffett a bad capital allocator because he lost money in the various shoe businesses he invested in? Even great capital allocators sometimes take risks which don't pay off.

 

Having said that, Jeff Bezos has built this 100B+ company from almost nothing. So he definitely knows better than me why he is in the hardware business. I just happen not to like it or maybe to put it in a better way, I dont understand the strategic rationale of how it widens his moat or fits into the greater scheme of things.

[JAllen]

Google's cloud preferred by fewer CIOs at end of 2014; AWS first at 35%:

 

 

http://blogs.wsj.com/digits/2015/01/06/googles-cloud-loses-following-among-cios-survey-finds/

[HWWProject]

How can a more less capital intensive company like AMZN have a lower normalized free cash flow margin than every single B&M retailer (except for Costco), with higher gross margins and higher operating cash flow margins?

 

 

Good question.  From $75 Billion in Revenue they report only about $3.9 Billion EBITDA (2013 numbers).  Of that, my model has $1.5B of free cash flow remaining (or "Owner Earnings" as I'm trying to calc.).  That's only $3.50 per share.  20 times FCF is my normal max even with their tremendous growth. 

 

Found this excellent HBR article that evaluates this exact issue:  https://hbr.org/2014/10/at-amazon-its-all-about-cash-flow/

 

Article is very positive on Amazon, Bezos and its future, but brings to light concerns about Amazon's cash conversion cycle.  I noted the chart in the article at $2B in FCF for 2013.

[muscleman]

You are right, primary assumption here is amzn retail profitability is comparable to wmt profitability.

 

Well, do you agree that WMT's profit margin is much lower than department stores? Then WMT and COSTCO should trade at a lower p/s than department stores when they finally stabilize, right? If we travel back in time, and we were comparing the newly born WMT's valuation with department stores, we cannot say, ok, both trade at similar p/s levels, so WMT is clearly a better buy because there was no growth premium built into it. That seems wrong to me because WMT's business model is low profit margin and high inventory turnover and it SHOULD trade at a much lower p/s!

 

Now look at today's comparison between AMZN and WMT. Why do you think AMZN's long term profit margin must be equal to WMT or even higher? It seems to me to be exactly the opposite: AMZN's profit margin could be even lower than WMT, and requires an even higher inventory turnover. Is that possible?

 

If that's true, and AMZN's adjusted p/s is 50% higher than WMT, it may not be cheap. At least you can't say there is not much growth premium built into it.

[muscleman]

http://www.businessweek.com/articles/2015-01-07/amazon-vs-dot-jet-dot-com-marc-lore-aims-to-beat-bezos

 

Thoughts?

[rpadebet]

Why do you think AMZN's long term profit margin must be equal to WMT or even higher? It seems to me to be exactly the opposite: AMZN's profit margin could be even lower than WMT, and requires an even higher inventory turnover. Is that possible?

 

Muscleman you raise some very interesting and thought provoking questions here.

 

I might be wrong here, but  I don't necessarily see Amazon requiring more turns even if margin is lower. Cash conversion cycle appears to be the key here.

 

Amzn cash conversion cycle is deeply negative compared to wmts which is slightly positive( other dept stores have CCC high positive). This means amzn doesn't have to put up equivalent capital to fund same level of inventory, as the -ve cash cycle means amzns suppliers are basically lending amzn money. Its similar to float in the insurance world.

 

So with a lower capital base, with this float enabled leverage, they can fund same inventory, turn it over at similar rates, but can get same returns on capital or profitability at lower margins right?