AMZN - Amazon.com Inc.

[JAllen]

What are AMZN and WMT's respective PPE/sales ratios?  Could this ratio be the key to understanding the relative capital intensity between the companies' retail businesses?

[muscleman]

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?

 

I do agree with that. The negative working capital means AMZN will be able to grow much faster than WMT and there is much less capital intensive. This means it is a very good business. There is no question of whether AMZN is a great business or not. What I don't understand is the profitability and valuation issue. Just because the working capital is negative does not have anything to do with its profit margins. If the profit margin is less than WMT, it HAS to have a lower P/S ratio than WMT in order to have the same P/E ratio. Therefore the argument of "paying 50% more adjusted P/S ratio above WMT is cheap" may be flawed.  :)

[Phaceliacapital]

Watch out with mingling the terms.

 

Both WallMart & Amazon have negative working capital, but Amazon's cash conversion cycle is negative while Wallmart's is positive.  Both companies have improved their working capital in recent years as they have become more negative, so customers "kind of" finance the inventory and payables.

 

CCC for Wallmart however is positive, while for Amazon it's negative. The difference is explained by A/P, or better, DPO, because Wallmart has an average DPO of 38 days, while for Amazon this is more than double (currently at 93 days). Days inventory outstanding are almost the same and Wallmart has a little slower A/R collection than Amazon. So Amazon "beats" the traditional retailers on both quicker A/R collection and slower A/P payment.

[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?

 

I do agree with that. The negative working capital means AMZN will be able to grow much faster than WMT and there is much less capital intensive. This means it is a very good business. There is no question of whether AMZN is a great business or not. What I don't understand is the profitability and valuation issue. Just because the working capital is negative does not have anything to do with its profit margins. If the profit margin is less than WMT, it HAS to have a lower P/S ratio than WMT in order to have the same P/E ratio. Therefore the argument of "paying 50% more adjusted P/S ratio above WMT is cheap" may be flawed.  :)

 

Let me put this another way then :)

 

CCC for AMZN is deeply negative compared to slightly positive for WMT. For simplicity lets assume this means AMZN takes excruciatingly longer to pay its suppliers compared to WMT. Lets also assume your primary hypothesis that AMZN currently makes lower profit margins than WMT.

 

Now if you normalize for the CCC i.e. say AMZN suddenly decides to pay its suppliers earlier enough to match WMT's CCC. As part of the bargain, AMZN is now able to demand more discounts from its suppliers (this is standard in retail, quicker you pay, better price you get!). This increased supplier discount now shows up in added profit margins assuming AMZN still sells at same prices right? Then is it possible that WMT and AMZN can have similar profit margins? If thats true, EV/sales ratio needn't be different right?

 

big negative CCC doesn't just mean negative working capital, as others have pointed out even WMT has negative working capital.  There is a quantifiable economic benefit to hugely negative CCC as you can see from above.

[KCLarkin]

What I dont understand is why AMZN supplier terms are sustainable. By all accounts, AMZN treats its suppliers poorly. Why do they let AMZN pay slower than WMT? Why doesn't Walmart require equal terms?

[dwy000]

What I dont understand is why AMZN supplier terms are sustainable. By all accounts, AMZN treats its suppliers poorly. Why do they let AMZN pay slower than WMT? Why doesn't Walmart require equal terms?

 

Very good question.  These guys are both incredibly smart operators.  If Amazon could increase its margins by getting fast-pay discounts from suppliers, why wouldn't they?  With interest rates near zero it wouldn't take much of a discount at all to make that work financially.

 

I wonder whether it has more to do with the 3p/1p sales at amazon.  their third party sales are not recorded as gross revenues, just the amazon fee/margin.  Therefore there's no cost of sales as well. But the cash still flows through Amazon and they would have a large set of payables to those 3rd party suppliers.  Any standard CCC or days payables calculation would be misleading because you're comparing apples (cost of goods sold) to oranges (payables without recording the gross revenues).  It wouldn't affect working capital since that's just a balance sheet calculation.

[dwy000]

The other question it leads to is that, with rapidly growing sales and negative working capital, a good chunk of the Operating Cash Flow and Free Cash Flow would, be definition, actually be just negative working capital.  Of the $2bn of FCF last year (if you don't adjust for $1.3bn of stock options), $400m alone was from deferred revenue growth - which would probably be all the Prime fees that are paid upfront and amortized over the year.  If Prime growth slows, will that cash flow source disappear?

[rpadebet]

What I dont understand is why AMZN supplier terms are sustainable. By all accounts, AMZN treats its suppliers poorly. Why do they let AMZN pay slower than WMT? Why doesn't Walmart require equal terms?

 

Very good question.  These guys are both incredibly smart operators.  If Amazon could increase its margins by getting fast-pay discounts from suppliers, why wouldn't they?  With interest rates near zero it wouldn't take much of a discount at all to make that work financially.

 

 

AMZN probably feels its better to borrow from suppliers than the market? Since they are growing and have increasing needs of capital, they probably feel this revolver facility from the suppliers is cheaper .

 

Regarding the sustainability of negative CCC's, I guess it has something to do with the internet business model itself. If I am not wrong even Dell had this attribute and it was a source of competitive advantage for them compared to their other distributor based competitors like Compaq/HP etc. Gieco (online sales) vs Allstate also comes to mind.

[KCLarkin]

Regarding the sustainability of negative CCC's, I guess it has something to do with the internet business model itself. If I am not wrong even Dell had this attribute and it was a source of competitive advantage for them compared to their other distributor based competitors like Compaq/HP etc. Gieco (online sales) vs Allstate also comes to mind.

 

No, AMZN's negative CCC is 100% due to slow payments to suppliers (relative to WMT). I believe WMT actually has better inventory control and AR. 3rd-party sales could account for this but I think they had similar CCC before 3P sales took off. My other theory is that it is related to product mix.

 

 

[rpadebet]

Regarding the sustainability of negative CCC's, I guess it has something to do with the internet business model itself. If I am not wrong even Dell had this attribute and it was a source of competitive advantage for them compared to their other distributor based competitors like Compaq/HP etc. Gieco (online sales) vs Allstate also comes to mind.

 

No, AMZN's negative CCC is 100% due to slow payments to suppliers (relative to WMT). I believe WMT actually has better inventory control and AR. 3rd-party sales could account for this but I think they had similar CCC before 3P sales took off. My other theory is that it is related to product mix.

 

Yes 3p sales isn't a very convincing explanation for this because they had the negative CCC going on before the 3p sales thing ever happened. At least as per some of the charts in the link below

 

http://www.forbes.com/sites/ycharts/2012/03/10/the-cash-conversion-cycle/

 

http://www.gurufocus.com/term/CCC/AMZN/Cash%252BConversion%252BCycle/Amazon.com%2BInc

 

 

There is one thing to note regarding the relative profit margins though. WMT's sales mix has a larger component of lower margin,lower shelf life products compared to AMZN currently, as they still sell more groceries than AMZN. AMZN's sales mix tends to be more electronic devices etc. This should imply AMZN's actual margins are higher than WMT's given the mix. But I don't hang my hat on this argument for the long term because, slowly but surely AMZN will get into the grocery business as well and then even the actual margins may converge.

 

Can you please explain the mix theory of negative CCC?

[JAllen]

This might be the most detail-rich, AWS/cloud-computing article we've read.

 

 

http://highscalability.com/blog/2015/1/12/the-stunning-scale-of-aws-and-what-it-means-for-the-future-o.html

[Eric50]

Interesting article on amzn pricing strategy:

 

http://recode.net/2015/01/13/how-amazon-tricks-you-into-thinking-it-always-has-the-lowest-prices/

[muscleman]

Interesting article on amzn pricing strategy:

 

http://recode.net/2015/01/13/how-amazon-tricks-you-into-thinking-it-always-has-the-lowest-prices/

 

 

Sears is trying to do something smart by replacing a lot of its paper price stickers with electronic ones that directly connects to their wifi, so they can update their price more often. Unfortunately their execution was too bad and they had too many problems. For example their wifi doesn't seem to work all the time.

[muscleman]

This might be the most detail-rich, AWS/cloud-computing article we've read.

 

 

http://highscalability.com/blog/2015/1/12/the-stunning-scale-of-aws-and-what-it-means-for-the-future-o.html

 

What kind of valuation do you assign to AWS? If this is worth $40 bn, then the remaining is only 95 bn. Assuming next year's revenue to be 115 bn, then adjusted revenue could be over 300 bn. Is my math correct?

[JAllen]

I personally haven't spent a ton of time valuing AWS independently.  Rackspace sells for $6.8B. It's really impossible to value something we haven't seen the financials of, but I think it should be worth something like $20 billion now - 3X Rackspace - because of first-mover advantage and rapid growth.  I think that's actually conservative, maybe, but it's good to be conservative.

 

 

As far as non-AWS Amazon, your math could be approximately right, but the physical/digital unit mix is different between 1P and 3P, so that needs to be considered.

 

 

If we assumed the product mix was the same, since AMZN is 60% of unit sales, and you have estimated sales of $115B, we would have adjusted revenue of (1/.6) multiplied by $110B (let's assume 3P produces $5B commissions, though I would guess it's more), which is ~$180B, wouldn't we?  This seems much more reasonable than $300B.

 

 

I personally don't like this price/sales approach - AMZN and the discount retailers are growing more different over time.  Sure, they both sell stuff, but the capital structure, capital intensity, growth profile, and diversity of businesses is way too different for WMT to be comparable.  I think it makes sense to compare AMZN with B&M retailers only to contrast them, because of how different AMZN is.

 

 

Price/sales is too simplistic too, IMO.  Free cash flow is what matters.

[muscleman]

I personally haven't spent a ton of time valuing AWS independently.  Rackspace sells for $6.8B. It's really impossible to value something we haven't seen the financials of, but I think it should be worth something like $20 billion now - 3X Rackspace - because of first-mover advantage and rapid growth.  I think that's actually conservative, maybe, but it's good to be conservative.

 

 

As far as non-AWS Amazon, your math could be approximately right, but the physical/digital unit mix is different between 1P and 3P, so that needs to be considered.

 

 

If we assumed the product mix was the same, since AMZN is 60% of unit sales, and you have estimated sales of $115B, we would have adjusted revenue of (1/.6) multiplied by $110B (let's assume 3P produces $5B commissions, though I would guess it's more), which is ~$180B, wouldn't we?  This seems much more reasonable than $300B.

 

 

I personally don't like this price/sales approach - AMZN and the discount retailers are growing more different over time.  Sure, they both sell stuff, but the capital structure, capital intensity, growth profile, and diversity of businesses is way too different for WMT to be comparable.  I think it makes sense to compare AMZN with B&M retailers only to contrast them, because of how different AMZN is.

 

 

Price/sales is too simplistic too, IMO.  Free cash flow is what matters.

 

So the market cap excluding AWS is 118 bn. What kind of FCF would you expect? I don't see any now. We could argue that in the future the net FCF margin might be 3%. Then current FCF might be 5.4 bn based on 180 bn adjusted sales.

 

One thing to note is that right now the FBA shipping cost is pretty high. We can't say that 3P revenue margin is almost 100%. I hope I could see a breakdown of 1P/3P revenue and costs. :)

 

Do you do any technical analysis? This whole 2014 looks like a contracting triangle, about to break down. It is getting more interesting. :)

[JAllen]

I love charts that look like inverted hockey sticks.  That's about the only kind of technical analysis that's attractive to me.

 

If you read my previous posts you can see how I think about AMZN's FCF (wrote pages and pages worth).  AMZN is definitely producing little, if any, FCF now.  Our investing time horizon is 5-20 years, so I'm mostly focused on what I think AMZN will generate in 10 years or so. 

 

Because of the following reasons, I believe that AMZN will have at least high single-digit FCF margins over the long-term:

• AMZN had double-digit FCF margins in the years before they ramped investment spending three times faster than the rate of sales growth
  
• WMT has consistently generated operating margins of ~6%
  
• AMZN requires far less capital than WMT to operate
  
• AMZN's businesses are different and will have higher margins that a purely 1P B&M retailer
  
• This post would have been lost to the nether regions of the Internet had I not copied it before clicking preview, along with numerous other ones.
  

[muscleman]

I love charts that look like inverted hockey sticks.  That's about the only kind of technical analysis that's attractive to me.

 

If you read my previous posts you can see how I think about AMZN's FCF (wrote pages and pages worth).  AMZN is definitely producing little, if any, FCF now.  Our investing time horizon is 5-20 years, so I'm mostly focused on what I think AMZN will generate in 10 years or so. 

 

Because of the following reasons, I believe that AMZN will have at least high single-digit FCF margins over the long-term:

• AMZN had double-digit FCF margins in the years before they ramped investment spending three times faster than the rate of sales growth
  
• WMT has consistently generated operating margins of ~6%
  
• AMZN requires far less capital than WMT to operate
  
• AMZN's businesses are different and will have higher margins that a purely 1P B&M retailer
  
• This post would have been lost to the nether regions of the Internet had I not copied it before clicking preview, along with numerous other ones.
  

 

Thank you! I will definitely check your previous posts. I only started to read this thread after I joined AMZN.  ;D

Would you mind disclosing when your entry was?

 

The chart shows that the 288 support has been touched 4 times this year. Every time it bounces off this support, it makes a lower high, which makes me think the shareholders are more and more eager to sell each time it bounces off the support.

Usually testing support won't be more than 4 times. We will see if 288 will be broken. :)

[rpadebet]

I love charts that look like inverted hockey sticks.  That's about the only kind of technical analysis that's attractive to me.

 

If you read my previous posts you can see how I think about AMZN's FCF (wrote pages and pages worth).  AMZN is definitely producing little, if any, FCF now.  Our investing time horizon is 5-20 years, so I'm mostly focused on what I think AMZN will generate in 10 years or so. 

 

Because of the following reasons, I believe that AMZN will have at least high single-digit FCF margins over the long-term:

• 
   
  Added a little bit more today....
  This technical analysis discussion is interesting.....contracting triangle breakdown....does it say anything abt the next support level....I hope it is low 250s. :)
  
  • AMZN had double-digit FCF margins in the years before they ramped investment spending three times faster than the rate of sales growth
    
  • WMT has consistently generated operating margins of ~6%
    
  • AMZN requires far less capital than WMT to operate
    
  • AMZN's businesses are different and will have higher margins that a purely 1P B&M retailer
    
  • This post would have been lost to the nether regions of the Internet had I not copied it before clicking preview, along with numerous other ones.
    

 

Thank you! I will definitely check your previous posts. I only started to read this thread after I joined AMZN.  ;D

Would you mind disclosing when your entry was?

 

The chart shows that the 288 support has been touched 4 times this year. Every time it bounces off this support, it makes a lower high, which makes me think the shareholders are more and more eager to sell each time it bounces off the support.

Usually testing support won't be more than 4 times. We will see if 288 will be broken. :)

 

Added a little bit more today...

This technical analysis discussion is interesting....contracting triangle breakdown...does it say anything abt the next support level....I hope it is in the low 250's  :)

[muscleman]

I love charts that look like inverted hockey sticks.  That's about the only kind of technical analysis that's attractive to me.

 

If you read my previous posts you can see how I think about AMZN's FCF (wrote pages and pages worth).  AMZN is definitely producing little, if any, FCF now.  Our investing time horizon is 5-20 years, so I'm mostly focused on what I think AMZN will generate in 10 years or so. 

 

Because of the following reasons, I believe that AMZN will have at least high single-digit FCF margins over the long-term:

• 
   
  Added a little bit more today....
  This technical analysis discussion is interesting.....contracting triangle breakdown....does it say anything abt the next support level....I hope it is low 250s. :)
  
  • AMZN had double-digit FCF margins in the years before they ramped investment spending three times faster than the rate of sales growth
    
  • WMT has consistently generated operating margins of ~6%
    
  • AMZN requires far less capital than WMT to operate
    
  • AMZN's businesses are different and will have higher margins that a purely 1P B&M retailer
    
  • This post would have been lost to the nether regions of the Internet had I not copied it before clicking preview, along with numerous other ones.
    

 

Thank you! I will definitely check your previous posts. I only started to read this thread after I joined AMZN.  ;D

Would you mind disclosing when your entry was?

 

The chart shows that the 288 support has been touched 4 times this year. Every time it bounces off this support, it makes a lower high, which makes me think the shareholders are more and more eager to sell each time it bounces off the support.

Usually testing support won't be more than 4 times. We will see if 288 will be broken. :)

 

Added a little bit more today...

This technical analysis discussion is interesting....contracting triangle breakdown...does it say anything abt the next support level....I hope it is in the low 250's  :)

 

Well, usually when the breakdown happens it can go pretty fast. I am hoping for $220. That would be very interesting.

[rpadebet]

http://seekingalpha.com/pr/12357056-amazon-com-announces-fourth-quarter-sales-up-15-percent-to-29_33-billion

 

Up 8% AH.  >:(

[muscleman]

Revenue growth is getting slower? It is only 16% per year right now. How can that justify a price/operating cash flow of 16?

[Palantir]

Dammit

[constructive]

Amazon opened its first storefront yesterday at Purdue University. They plan to roll out more college campus locations soon along with a flagship store in NYC. It would have big capex implications if they build out retail locations as aggressively as they have built out warehouses.

 

http://money.cnn.com/2015/02/04/technology/amazon-purdue/

[muscleman]

Amazon opened its first storefront yesterday at Purdue University. They plan to roll out more college campus locations soon along with a flagship store in NYC. It would have big capex implications if they build out retail locations as aggressively as they have built out warehouses.

 

http://money.cnn.com/2015/02/04/technology/amazon-purdue/

 

There are some rumors that AMZN is talking to bankrupt RadioShack to buy half of its stores. I think the terms of this purchase would be interesting as RSH's senior debt is trading at only 12 cents on the dollar.  :)