AMZN - Amazon.com Inc.

[ScottHall]

You should rejoice, trading well over 100 times next year earnings estimates and 350+ times this year, for a company with a market cap of $285 billion! This company will never be profitable enough to justify its multiple. Never! If they ever raise prices to make real money, sales would collapse.

 

No, you are right, I am not short since a long time. However, I am firmly convinced that this story will end just like Valeant. In the span of a month or two, the share price will be cut by more than half and the story will be over. Fear will grab investors and employees and the company will have to change its strategy. The timing or how high this can go is unpredictable.

 

There are already cracks: size or law of large numbers, treating employees like slaves, large companies now competing with them with the same weapons: Microsoft, Alibaba.

 

Now you may laugh and say look, they still grew sales 30% this quarter. Eventually, the pace can`t continue. You bump into issues. The organization becomes more complex and bureaucracy takes over. This is true throughout history with any empire and without any exception.

 

Cardboard

 

What, like how the company died all those other times the stock fell off a cliff? Keep on preaching, friend; I'd love the opportunity to buy more at half of today's prices.

 

http://finance.yahoo.com/echarts?s=AMZN+Interactive#symbol=AMZN;range=my

[Cardboard]

Very poor disclosure. Investors relying on new made up metrics. And relying on eternal high growth rates.

 

Again, the similarities to a Valeant are striking. It is the same kind of rebuttal that doubters were getting on that other thread.

 

Cardboard

[ScottHall]

Very poor disclosure. Investors relying on new made up metrics. And relying on eternal high growth rates.

 

Again, the similarities to a Valeant are striking. It is the same kind of rebuttal that doubters were getting on that other thread.

 

Cardboard

 

What sort of disclosure would you like? Profitability is irrelevant at this stage in the game; indeed, I'd rather Amazon went back to reporting losses.

 

Amazon isn't the sort of company that can get fucked by investor sentiment; its financiers are its customers & suppliers. Wall Street can knock the stock down but doing so doesn't really threaten the business much.

[rpadebet]

You should rejoice, trading well over 100 times next year earnings estimates and 350+ times this year, for a company with a market cap of $285 billion! This company will never be profitable enough to justify its multiple. Never! If they ever raise prices to make real money, sales would collapse.

 

No, you are right, I am not short since a long time. However, I am firmly convinced that this story will end just like Valeant. In the span of a month or two, the share price will be cut by more than half and the story will be over. Fear will grab investors and employees and the company will have to change its strategy. The timing or how high this can go is unpredictable.

 

There are already cracks: size or law of large numbers, treating employees like slaves, large companies now competing with them with the same weapons: Microsoft, Alibaba.

 

Now you may laugh and say look, they still grew sales 30% this quarter. Eventually, the pace can`t continue. You bump into issues. The organization becomes more complex and bureaucracy takes over. This is true throughout history with any empire and without any exception.

 

Cardboard

 

What, like how the company died all those other times the stock fell off a cliff? Keep on preaching, friend; I'd love the opportunity to buy more at half of today's prices.

 

http://finance.yahoo.com/echarts?s=AMZN+Interactive#symbol=AMZN;range=my

 

+1.

 

next time this is cut in half, please remind me to back up the truck.

 

Hopefully this plays out similar to VRX. I would love to get another bite at the apple like we got there within one year.

 

E-commerce - 15% growth as far as the eye can see with AMZN taking market share not just from B&M but from other e-commerce guys.

AWS - I can't even fathom at this point how huge this will be. It could easily overtake E-commerce

Media - Now this will get more and more interesting with Prime subscribers, cord cutting phenomenon, self produced content and global audience reach.

Advertising - once Media achieves critical mass, think about the ad revenue potential given the direct e-commerce channel

 

 

[nodnub]

There is an interesting article about some of the problems with Amazon's popular fulfillment model (Fullfilled by Amazon aka "FBA"). Commingled inventory from different 3rd party sellers that is stored in AMZN warehouses is not differentiated. It is possible to order product from one 3rd party seller, and receive product submitted into the Amazon warehouse by another third party seller.  In some cases, some of the product is counterfeit.

 

http://www.wsj.com/articles/on-amazon-pooled-merchandise-opens-door-to-knockoffs-1399852852

 

 

--

It seems this is the reason why you will see a bunch of review for a product saying that it's great, just like the original, and then you will see a couple reviews that say that it is an obvious counterfeit product. A common example would be knock-off phone chargers. So if buying something via Fulfilled by Amazon, it's sort of a lottery whether you will get legit or counterfeit product. (but usually tend to get legitimate product).

[Ross812]

Scott, profitability may be irrelevant at this point but in the retail sector you have:

 

TJX at 1.6x revenue with 7.6% margins 11% growth

Costco trading at .6x revenue with 2% margins 10% growth

Walmart at .37x revenue at 3% margins 3% growth

 

Amazon at 3x revenue at -.2% margin 19% growth

 

What is the end game here? I understand reinvesting in their own business and the benefit of claiming a loss each year. Its smart and a great strategy. My only problem is what comp do you use for AMZN?

 

They have to grow revenue at 20%/yr and raise margins from nothing to 2% over 10 years to equal Costco's arguably stretched valuation today.  Even if you believe AMZN will become the next dominant retailer in the US what does the end game look like?

 

What are the rosiest projections? grow revenue at 20% until becoming a third of all retail sales in the US in 20 years est. ~$9T in 2035. So amazon has 3T in revenue and grows at the same rate as retail spending at 4% there after? Value that 3T in revenue like Walmart today and Amazon is worth 1T. So end game 20 years from now is realizing 6.5% CAGR on your investment? 

 

I mean if you think you are going to make 12% annualized going forward you are valuing Amazon at 3T in 20 years and implying they control the entire $9T pie of US retail spending.

 

 

[Palantir]

Maybe some enjoy making losses? You shouldn't be judging what others like to do behind closed doors. Be who you are...

[PatientCheetah]

Scott, profitability may be irrelevant at this point but in the retail sector you have:

 

TJX at 1.6x revenue with 7.6% margins 11% growth

Costco trading at .6x revenue with 2% margins 10% growth

Walmart at .37x revenue at 3% margins 3% growth

 

Amazon at 3x revenue at -.2% margin 19% growth

 

What is the end game here? I understand reinvesting in their own business and the benefit of claiming a loss each year. Its smart and a great strategy. My only problem is what comp do you use for AMZN?

 

They have to grow revenue at 20%/yr and raise margins from nothing to 2% over 10 years to equal Costco's arguably stretched valuation today.  Even if you believe AMZN will become the next dominant retailer in the US what does the end game look like?

 

What are the rosiest projections? grow revenue at 20% until becoming a third of all retail sales in the US in 20 years est. ~$9T in 2035. So amazon has 3T in revenue and grows at the same rate as retail spending at 4% there after? Value that 3T in revenue like Walmart today and Amazon is worth 1T. So end game 20 years from now is realizing 6.5% CAGR on your investment? 

 

I mean if you think you are going to make 12% annualized going forward you are valuing Amazon at 3T in 20 years and implying they control the entire $9T pie of US retail spending.

 

Remember we are in a bull market and we don't know how long but it doesn't last forever...

[physdude]

An interesting discussion regarding AMZN's reported cash flows here - http://boards.fool.com/on-the-other-hand-amzn-generated-almost-10-31958149.aspx

[benchmark]

An interesting discussion regarding AMZN's reported cash flows here - http://boards.fool.com/on-the-other-hand-amzn-generated-almost-10-31958149.aspx

Great find, thanks.

[JayGatsby]

An interesting discussion regarding AMZN's reported cash flows here - http://boards.fool.com/on-the-other-hand-amzn-generated-almost-10-31958149.aspx

 

Their press release says $9.8B of operating cash flow. The cash flow statement in their Q has a TTM column and shows $9.8B of cash from operations. It also shows $4.4B of capex, and the press release says $5.4B of FCF. There are some fair reasons why this might not be the best metric (stock based comp, requires continually increasing negative NWC, etc), but calling it a made up "metric W" is disingenuous.

 

[Palantir]

Plus, I'm pretty sure these capital leases are growth capex.

[JayGatsby]

It looks like their "Free Cash Flow" includes a deduction for all capex whether growth or maintenance. I'm not sure where that author was getting that. I agree they don't capitalize operating leases, but I'm not aware of any company in America that does that. Criticizing a company for not deviating from basic GAAP methodologies is a stretch at best.

 

I can buy an argument that their segment level disclosures are lacking and can buy an argument that they aren't very profitable, but haven't seen anything indicating they're a fraud. From what I can tell they're very transparent that they aren't very profitable.

[Palantir]

"Second, Metric W includes increases in negative working capital.

As Dell would once have told you, negative working capital is a great

thing to have, and when it goes up that's even better, but it's a kind of debt.

Cost-free debt, but debt nonetheless."

 

The crowd here would call it "float". :D

[physdude]

An interesting discussion regarding AMZN's reported cash flows here - http://boards.fool.com/on-the-other-hand-amzn-generated-almost-10-31958149.aspx

 

Their press release says $9.8B of operating cash flow. The cash flow statement in their Q has a TTM column and shows $9.8B of cash from operations. It also shows $4.4B of capex, and the press release says $5.4B of FCF. There are some fair reasons why this might not be the best metric (stock based comp, requires continually increasing negative NWC, etc), but calling it a made up "metric W" is disingenuous.

 

It also has a line "Free cash flow less finance lease principal repayments and capital acquired under capital leases -- TTM" which is what the author seems to be driving at as being the "real" FCF. This does come in at $637m TTM. Not necessarily agreeing with him but I can see why that would make since if you really want to include all capex in FCF.

[cmlber]

Plus, I'm pretty sure these capital leases are growth capex.

 

That's a fair point, but isn't the growth in working capital that is a huge chunk of the "free cash flow" only the result of growth?  The working capital inflow stops when they stop growing, so arguably "growth" capex is necessary to just maintain the "free cash flow", making growth in a weird way maintenance.

 

It doesn't seem like their free cash flow number is remotely close to economic owner earnings.

[Palantir]

Can't you account for the capital leases by adding their PV to LTD?

[JayGatsby]

An interesting discussion regarding AMZN's reported cash flows here - http://boards.fool.com/on-the-other-hand-amzn-generated-almost-10-31958149.aspx

 

Their press release says $9.8B of operating cash flow. The cash flow statement in their Q has a TTM column and shows $9.8B of cash from operations. It also shows $4.4B of capex, and the press release says $5.4B of FCF. There are some fair reasons why this might not be the best metric (stock based comp, requires continually increasing negative NWC, etc), but calling it a made up "metric W" is disingenuous.

 

It also has a line "Free cash flow less finance lease principal repayments and capital acquired under capital leases -- TTM" which is what the author seems to be driving at as being the "real" FCF. This does come in at $637m TTM. Not necessarily agreeing with him but I can see why that would make since if you really want to include all capex in FCF.

 

Now I'm confused. I see what you're referencing. So when they purchase equipment under capital lease shouldn't that be showing up as a negative cash flow under cash from investing and a positive cash flow under financing (same as if they'd bought a piece of equipment with a loan from a bank)? Then they start making principal payments which would only hit financing. So if they reduce OCF by capex and then reduce it again for principal payments made aren't they double counting to the negative (If I finance a $30k car and then make $2k of principal payments my cash flow isn't -$32k)? I'm also confused why PP&E acquired under capital lease is higher than PP&E acquired. I guess they must have refinanced some of their equipment or sold some?

[physdude]

An interesting discussion regarding AMZN's reported cash flows here - http://boards.fool.com/on-the-other-hand-amzn-generated-almost-10-31958149.aspx

 

Their press release says $9.8B of operating cash flow. The cash flow statement in their Q has a TTM column and shows $9.8B of cash from operations. It also shows $4.4B of capex, and the press release says $5.4B of FCF. There are some fair reasons why this might not be the best metric (stock based comp, requires continually increasing negative NWC, etc), but calling it a made up "metric W" is disingenuous.

 

It also has a line "Free cash flow less finance lease principal repayments and capital acquired under capital leases -- TTM" which is what the author seems to be driving at as being the "real" FCF. This does come in at $637m TTM. Not necessarily agreeing with him but I can see why that would make since if you really want to include all capex in FCF.

 

Now I'm confused. I see what you're referencing. So when they purchase equipment under capital lease shouldn't that be showing up as a negative cash flow under cash from investing and a positive cash flow under financing (same as if they'd bought a piece of equipment with a loan from a bank)? Then they start making principal payments which would only hit financing. So if they reduce OCF by capex and then reduce it again for principal payments made aren't they double counting to the negative (If I finance a $30k car and then make $2k of principal payments my cash flow isn't -$32k)? I'm also confused why PP&E acquired under capital lease is higher than PP&E acquired. I guess they must have refinanced some of their equipment or sold some?

 

I have generally found Amazon's financial reporting to be a bit unusual, to say the least, and since their valuation has looked way too high for me to comfortable even with the most favorable interpretation I haven't really dug in to their reports. Having said that, they clearly distinguish between capital and finance leases (looking under the financing activities section of the balance sheet in their earnings release) so I don't think your interpretation works. They also do not report the capital raised from capital leases in either their financing or investing activities but do report the principal repayments. Hence, I am guessing their capital leases might be working off-balance sheet but it is really hard to figure out. Further, their capital leases are mostly for AWS according to their 10q so it is vital to understand it if one wants to understand the profitability of AWS.

 

From a quick search of their 10q as I got piqued , this is what I found on page 33:

"Free cash flow less finance lease principal repayments and capital acquired under capital leases is free cash flow reduced

by “Principal repayments of finance lease obligations,” which are included in cash flow from financing activities, and property

and equipment acquired under capital leases. In this measure, property and equipment acquired under capital leases is reflected

as if these assets had been purchased for cash, which is not the case as these assets have been leased. The following is a

reconciliation of free cash flow less finance lease principal repayments and capital acquired under capital leases to the most

comparable GAAP cash flow measure, “Net cash provided by (used in) operating activities,” for the trailing twelve months

ended September 30, 2015 and 2014 (in millions):"

 

From the figures following after that, I get the following. In the TTM period, their total capex including capex made using capital leases is $9.023b ($4.424b conventional, $4.599b by capital leases) while their OCF is $9.823b so unless a lot of that capex is growth capex, their owner earnings after accounting for stock based compensation is not that great. The $637m figure also does not use principal repayments of capital lease obligations (and nor does the OCF), only principal payments of finance lease obligations, so it seems the right figure to me.

 

Hence, the owner earnings over TTM would seem to me to be $637m - stock compensation + growth capex. (The above is just from a quick look and I am not particularly familiar with AMZN business metrics so there could very well be mistakes.)

 

[physdude]

Looking closer at the capital leases, they do seem to be on the B/S under "other long-term liabilities". Their cash flow handling is peculiar though as I have not seen a positive cash flow from financing coming in due to capital leases in their last few 10qs. (I should be asleep but this is bugging me :) ).

 

Well, another article which seems to be saying the same thing - http://seekingalpha.com/article/2743335-understanding-how-amazons-use-of-capital-leases-overstates-its-cash-flow-metrics.

[JayGatsby]

Interesting. Thanks for clarifying. I understand how they're doing it now. Maybe I spoke too soon... I didn't know GAAP lets you do that... does it?

[Palantir]

Wouldn't adding the Other Liabilities to Debt account for the capital lease obligation? To me it seems they are financing growth capex by capital leases, which doesn't look shady to me...

[JayGatsby]

Wouldn't adding the Other Liabilities to Debt account for the capital lease obligation? To me it seems they are financing growth capex by capital leases, which doesn't look shady to me...

I just meant on the cash flow statement. I've never seen it done the way they do it before where they exclude it from both investing and financing at the outset and shove it down in that little "supplemental" section.

[physdude]

Wouldn't adding the Other Liabilities to Debt account for the capital lease obligation? To me it seems they are financing growth capex by capital leases, which doesn't look shady to me...

 

What is borderline shady is that their cash flow statement only shows capex of 4.4b when it is actually 9b. This could make investors believe that their maintenance capex is much less than what it actually is.

 

Their debt is also quite large given their owner earnings if growth capex is only in the 2-3b range - about 17b as of now. And people actually talk more about IBM's debt  ::) (not Moody's though whose credit rating for Amazn is Baa3 with negative outlook which is a far cry from IBM's rating).

[Palantir]

I understand, but isn't it typical to add capital leases to debt for valuation? Re: IBM debt, let's not forget, IBM also has a significant pension plan liability which is debt-like as well.