AMZN - Amazon.com Inc.

[TheAiGuy]

retail is not a natural monopoly. Perhaps, we just can't see the future shift in competition. The people paying 50x for Walmart in 1999 would be very surprised to learn how vulnerable the company became after only 15 years.

 

This is why I've never bought Amazon.  Retailers can not stay on top forever.  You can't predict what will happen in retail in the future, even though I suspect Amazon.com has a long run ahead of it.  Sears was top of the food chain for a long time, Walmart was as well, but less long than Sears and it will eventually be what Sears is today.  I think Amazon.com will have a long run, but less long than Walmart.  Some company will take them it out eventually, but I'd be shocked if that eventual threat to Amazon came from Walmart.  It will be from a direction we can't anticipate right now with a new business model that Amazon will scramble to copy and fail.

+1

 

However....

The relevant questions are 1) how long will that take? 2) how big/profitable will Amazon get in the meantime? 3) How long/lucrative will the relevant runoff period be? 4) AWS?

 

I think these are incalculable, but as you've said, Walmart has had a pretty good run, as did Sears.

 

 

[Palantir]

There are cultural reasons for why companies can't simply replicate another. Msft could have never created the iphone. GM could have never made a Tesla. A corporate behemoth like WMT used to inertia would never have the executive talent and willingness to create an AMZN, an entity that will canmibalize revenues and spread attention too thin. This is only something Jeff Bezos could create.

[KCLarkin]

retail is not a natural monopoly. Perhaps, we just can't see the future shift in competition. The people paying 50x for Walmart in 1999 would be very surprised to learn how vulnerable the company became after only 15 years.

 

This is why I've never bought Amazon.  Retailers can not stay on top forever.  You can't predict what will happen in retail in the future, even though I suspect Amazon.com has a long run ahead of it.  Sears was top of the food chain for a long time, Walmart was as well, but less long than Sears and it will eventually be what Sears is today.  I think Amazon.com will have a long run, but less long than Walmart.  Some company will take them it out eventually, but I'd be shocked if that eventual threat to Amazon came from Walmart.  It will be from a direction we can't anticipate right now with a new business model that Amazon will scramble to copy and fail.

+1

 

However....

The relevant questions are 1) how long will that take? 2) how big/profitable will Amazon get in the meantime? 3) How long/lucrative will the relevant runoff period be? 4) AWS?

 

I think these are incalculable, but as you've said, Walmart has had a pretty good run, as did Sears.

 

This is the big quandry with AMZN. When Walmart was in it's growth phase, it was earning 20%-30% ROE.  It started paying a dividend 4 years after the IPO. It was a fast grower AND a cash cow. If AMZN waits 20 years before it starts throwing off cash, it may already be in the decline phase.

 

AMZN is a unique beast. A profitless growth machine. It reminds me of Malone's TCI. But in the end TCI had a local monopoly. Fascinating.

[TheAiGuy]

Capital is not a barrier to entry, ask General Motors. It’s a barrier to me entering, but it is not a barrier to Walmart entering. Walmart could replicate the entire physical infrastructure of Amazon with $20 billion (this is not a guess, it’s straight from the PPE line on Amazon’s balance sheet).  That’s about 16 quarters of free cash flow for Walmart.  Walmart could also spend $7 billion a year (2x Cokes ad budget) making sure everyone in the country knows how much better Walmart is and how much lower its prices are.

 

 

You're only considering the capital costs -- there are the also operating costs of running these centers. To break even on the operating costs, that is not hemorrhaging money, you need a sufficiently high utilization of the assets as well. That requires shipping in volume. Walmart doesn't have that -- and the argument is that if they build these shipping centers, they would sit dormant hemorrhaging billions a year.

 

One more and I'm done:

 

 

6) Alternate products. The prime membership has alternate benefits that promote lock-in, namely Kindle and Prime video. This isn't important to everyone, but it is marginally beneficial.  Again, anecdotally, I'm starting to here more about Transparent and The Man in the High Castle, and the only way you can get those is Amazon. This benefit is similar to Costco selling gas at cost -- it keeps you coming back to the store and is a loss leader.

 

 

Walmart can replicate this with a 15 minute phone call to Reed Hastings. “Hey Reed, we want to offer a Prime video with our new Prime offering, can we just partner with Netflix and offer all of our members free Netflix and we’ll pay you $80/year.” “Sure.” Bam.  Walmart has the same loss leader except with better content.

 

 

No, this is clearly not true. Amazon is already undercutting Netflix on price, and Netflix is marginally profitable. Netflix is unlikely to be willing to accept lower revenue, and content owners in general have pricing power if there content is valuable. Walmart cannot offer a similar product at a similar price point without -- and this is key -- setting piles of money on fire.

 

You are overestimating Walmart's financial position and how long it's investor base would tolerate a clear and deliberate attempt to lose money for strategic purposes (they can do that a little sure, but there are limits).

[Vish_ram]

I think Amazon is causing a profound behavioral change. I'm seeing kids glued to their tablets, smart phones playing minecraft for countless hours. If they want something ,they go to Amazon, check it out and then pester their parents. You never had this kind of behavior in WMT or other brick and mortar companies.

 

Many go to Amazon to do product searches, read feedback on them, look at competing offers from many vendors and order. You cannot replicate this experience in any other website. Amazon is a marketplace, a platform, an ecosystem and not just a shop. My 8 yr old daughter who orders every Geronimo stilton book knows where to go when she wants something. Her behavior will continue when she grows up. Kids read a lot of books and Amazon catches them young.

 

Take a look into Sams club Vs Costco. Costco catered to a different clientele, offered great products and beat the crap out of Sams club. WMT's access to capital, unique distribution centers could not be of any help in competing against Costco. People always complained about Costco's low margins but look at their growth and profits.

 

Amazon prime is Costco on steroids. Club members on average spend lot more. You see the same pattern in prime. Higher volume, sales.

 

But what is perplexing to me is, when WMT had the same sales growth as AMZN in early years, WMT produced lots of profits. What is different now?

 

in pic below, blue line is WMT sales. I superimposed AMZN sales on top of this. It is remarkable that over 10 years they are lining up too close. I think WMT sales growth took a beating with emergence of online shopping.

 

-------

P.S. I've been long a few shares of AMZN.

[Vish_ram]

I think WMT's profits (in early years) are a function of efficiency improvement that could be had. WMT's superiority in its biz model must have been miles ahead of its competitors. This difference translated to huge profits even during growth years.

 

Compared to this AMZN is offering great convenience but less benefits to customers in terms of pricing. As AMZN grows bigger, the economies of scale may allow it to compete well on price and still retain profits.

 

 

[KCLarkin]

I think WMT's profits (in early years) are a function of efficiency improvement that could be had. WMT's superiority in its biz model must have been miles ahead of its competitors. This difference translated to huge profits even during growth years.

 

Compared to this AMZN is offering great convenience but less benefits to customers in terms of pricing. As AMZN grows bigger, the economies of scale may allow it to compete well on price and still retain profits.

 

Walmart was competing against small town shops. Walmart had a cost and convenience advantage. Amazon is competing against Walmart and Costco. After shipping, I don't think Amazon has any cost advantage. So it competes solely on convenience (and a willingness to forgo margin).

 

Now, there is a bullish argument. (Perhaps) Walmart's financials had less fix cost. Each store was very profitable. To grow you just open more stores. Amazon's model is more centralized (and hence higher fixed cost). Maybe there is some point where the fixed cost model becomes more efficient and Amazon starts printing money due to operating leverage. This seems to be the implicit bet.

[undervalued]

I think Amazon is causing a profound behavioral change. I'm seeing kids glued to their tablets, smart phones playing minecraft for countless hours. If they want something ,they go to Amazon, check it out and then pester their parents. You never had this kind of behavior in WMT or other brick and mortar companies.

 

Many go to Amazon to do product searches, read feedback on them, look at competing offers from many vendors and order. You cannot replicate this experience in any other website. Amazon is a marketplace, a platform, an ecosystem and not just a shop. My 8 yr old daughter who orders every Geronimo stilton book knows where to go when she wants something. Her behavior will continue when she grows up. Kids read a lot of books and Amazon catches them young.

 

Take a look into Sams club Vs Costco. Costco catered to a different clientele, offered great products and beat the crap out of Sams club. WMT's access to capital, unique distribution centers could not be of any help in competing against Costco. People always complained about Costco's low margins but look at their growth and profits.

 

Amazon prime is Costco on steroids. Club members on average spend lot more. You see the same pattern in prime. Higher volume, sales.

 

But what is perplexing to me is, when WMT had the same sales growth as AMZN in early years, WMT produced lots of profits. What is different now?

 

in pic below, blue line is WMT sales. I superimposed AMZN sales on top of this. It is remarkable that over 10 years they are lining up too close. I think WMT sales growth took a beating with emergence of online shopping.

 

-------

P.S. I've been long a few shares of AMZN.

 

I don't follow AMZN too closely but they have a lot more smaller division than WMT does which AMZN invests in. Web service, mechanical turks, tablets/ereaders, etc. Does AMZN uses its profit to research it's space program or does it fall under Bezo's separate entity? AMZN reinvests most of its cash kind of like what Alphabets is doing with its cash I guess.

[Liberty]

Does AMZN uses its profit to research it's space program

 

Blue Origin is a separate thing.

 

https://en.wikipedia.org/wiki/Blue_Origin

[FCharlie]

I don't think many of us are here to say Amazon is a crappy company. I think we are saying it's a crappy investment. The thing that no one seems to answer is, how does AMZN make for a good investment today? Twenty years ago, Wal Mart sold at extreme multiples because everyone was saying they were going to expand for decades, they were going to capture the grocery market, etc.. Well, WalMart now has a SuperCenter within five miles of something like 80% of the country. They have huge market share in grocery. They have raised the dividend 1000% and they have repurchased an astronomical amount of stock and the share price is flat.

 

What are the AMZN longs expecting from the share price going forward?  At a $316 billion market cap, they would need to eventually have $30 billion of free cash flow annually to justify the valuation.... except the share count rises by over a million shares every quarter! There are currently 137 million shares available for compensation purposes, (30% dilution). AMZN's share count over the past two years:

 

Jan 17, 2014:  459,264,535

Apr 16, 2014:  460,167,404

July 16, 2014:  462,036,113

Oct 15, 2014:  463,006,452

Jan 16, 2015:  464,383,939

Apr 15, 2015:  465,680,957

July 15, 2015:  467,710,218

Oct 14, 2015:  468,762,005

 

That's approx. $700 million of share dilution per quarter. If they continue at that pace, and issue the entire `137 million shares, and the price goes to $1,000 then AMZN will have a $600 billion market cap. To justify that they'd need $60 billion of annual free cash flow. That's the type of cash generation you  need to sustain that level of market value. Anything less than $60 billion of free cash flow annually and AMZN shares, if they are held long enough, will lose. 

 

What are the longs here expecting? I don't want to hear about how good their customer service is. I want to know how they can justify this price and this level of dilution?

[Jurgis]

This thread suffers from the fact that most participants do not clearly distinguish their attitude towards Amazon as a retailer (from customer POW), as a business, and as an investment.

 

For example:

- Great retailer. A+. Hope it continues to be one and adds more products/areas. E.g. groceries/food selection and prices are crappy (I don't get Amazon Pantry/whatever it's called though).

- I think it's strong business. Lot's of discussion on this thread why this is the case.

- Too hard/too expensive as investment for me.

 

Honestly, some other threads suffer from the same issue... ;)

[TheAiGuy]

This thread suffers from the fact that most participants do not clearly distinguish their attitude towards Amazon as a retailer (from customer POW), as a business, and as an investment.

 

For example:

- Great retailer. A+. Hope it continues to be one and adds more products/areas. E.g. groceries/food selection and prices are crappy (I don't get Amazon Pantry/whatever it's called though).

- I think it's strong business. Lot's of discussion on this thread why this is the case.

- Too hard/too expensive as investment for me.

 

Honestly, some other threads suffer from the same issue... ;)

 

+1

[Vish_ram]

What are the longs here expecting? I don't want to hear about how good their customer service is. I want to know how they can justify this price and this level of dilution?

 

I'm expecting 8-12% CAGR for next 20 years.

 

If you believe in their FCF numbers that they publish, then they generated 51B FCF between 09 & 15, and total sales were approx 437BB (assuming reasonable Q4 numbers). Given growth rate, you can value this by fcf/(r-g).

 

I also tried modeling using income method. I assumed 0% net income margin and gradually increased it as sales growth drops (start with 20% and keep reducing it by 3% every year). Then use 10 times NI for tail value (I know AZ_value may not approve this). Current valuation shows discount rate of 12%.

 

AMZN is not cheap in any way you dissect the numbers. I wont buy it at today's prices. On any day, AMZN is a better buy compared to scores of commodities companies discussed here (where people always lose money in the end).

 

[Jurgis]

compared to scores of commodities companies discussed here (where people always lose money in the end).

 

Way OT, but having fun responding to potshots: No, not always. Had great returns in 2008-2010. 10x+ on GPOR.

 

And in the end all of us are dead.  8)

[KCLarkin]

If you believe in their FCF numbers that they publish, then they generated 51B FCF between 09 & 15

 

Look at the balance sheet.

 

It is very clear that there is nowhere near $50B in "free cash flow". Shares have increased about 10% since 2009, so net buybacks have been negative. There is no dividend. So any Free Cash Flow should be sitting on the balance sheet. The goodwill line is relatively small (and Zappos was all cash), so FCF hasn't been used on acquisitions. Cash is up dramatically but so is debt. Assets have ballooned but so have liabilities.

 

---

 

FCF is a non-GAAP term, so you are free to believe their numbers. Just be aware of the "tricks" they are playing by paying their employees with stock and using leases to bypass the "capex" line.

 

If Amazon paid all their opex using stock options instead of cash, they would have over $90B in FCF! What is your valuation when you plug that into fcf/(r-g)?

[rukawa]

retail is not a natural monopoly. Perhaps, we just can't see the future shift in competition. The people paying 50x for Walmart in 1999 would be very surprised to learn how vulnerable the company became after only 15 years.

 

Agree. But no company out-Walmarted Walmart. Amazon played a totally different game. Nobody will out Amazon Amazon. But somebody will eventually built something disruptive. That could happen 5 years from now or 30 years from now though.

 

On financials I agree that Amazon looks like a good short. But my view is that you should never short a well run company with excellent management.

[Palantir]

I don't think many of us are here to say Amazon is a crappy company.

 

Nope, that is exactly what a lot of people are saying "It doesn't make any money" "WMT could replicate its business model if it wants to, but it's a crappy business model"etc.

 

I do wonder though, to the person who said it is a short, if this is so badly misvalued, when is it going to correct?

[dwy000]

"The market can stay irrational longer than you can stay solvent."

John Maynard Keynes

[cmlber]

I don't think many of us are here to say Amazon is a crappy company.

 

Nope, that is exactly what a lot of people are saying "It doesn't make any money" "WMT could replicate its business model if it wants to, but it's a crappy business model"etc.

 

I do wonder though, to the person who said it is a short, if this is so badly misvalued, when is it going to correct?

 

Does AMZN (the retailer, not AWS) make any money?

[rpadebet]

I don't think many of us are here to say Amazon is a crappy company.

 

Nope, that is exactly what a lot of people are saying "It doesn't make any money" "WMT could replicate its business model if it wants to, but it's a crappy business model"etc.

 

I do wonder though, to the person who said it is a short, if this is so badly misvalued, when is it going to correct?

 

Does AMZN (the retailer, not AWS) make any money?

 

If they didn't make any money how do you think they built this big a business? Just issuing stock? Look at all the stock issuances including employee stock and see the total capital raised, compare it to their retail revenues. Where did the capital for building AWS come from? I understand some people need to measure to believe the size of the monument being built even when the monument is standing before them.

 

This is the inefficiency in the market related to AMZN.

 

I will paraphrase something said in some other context with I think the opposite meaning.

 

" You don't need to know the exact weight of the person to surmise whether or not he/she is fat"

 

For people worried about the current valuation, nice touch comparing the revenues to US GDP. AMZN plays in the global market. Look at its share as % of total retail commerce in the world. Look at how big ecommerce currently is and how it is growing. Look at how big AMZN is in comparison and how it is growing compared to ecommerce growth. Then tell me the runway is over.

 

In the short term, I don't know where this thing goes. I sold half my stake at 20-30% below today's prices. I learnt a valuable lesson since. Good management can create value beyond our current imagination.

 

My thesis for AMZN is still simple. Look at all the businesses they are in. Look at their competitors. All competitors without an exception worry about what AMZN would do to them. I like the business I own to be always on the offensive and scare the shit out of it's competitors. That way I am not worried about competition to my business.

[KCLarkin]

Does AMZN (the retailer, not AWS) make any money?

 

If they didn't make any money how do you think they built this big a business? Just issuing stock? Look at all the stock issuances including employee stock and see the total capital raised, compare it to their retail revenues. Where did the capital for building AWS come from?

 

This is the magic of Amazon. They are big because they don't make money. So how do they fund the growth?

 

Amazon has a negative cash conversion cycle. Which means that it has free "float" from it's suppliers and customers. Magic.

 

Amazon needs to invest heavily in AWS and distribution centers?  Finance them with leases. Magic.

 

Amazon needs some equity to backstop the loans and leases? Pay employees with stock instead of cash. Magic.

 

--

 

This is easy to see when you look at the  Shareholder's Equity section of the balance sheet:

Treasury Stock                    (1,837)        --- Buybacks

Additional Paid-in Capital      11,134        --- mostly stock-based compensation

Retained Earnings                1,949          --- total cumulative earnings since there is no dividend

                                          ---

Total equity                        10,741

 

So with a few simplifying assumptions, we can argue that all of the equity is from stock-based compensation. And NONE of the money used to build the business was actually earned by Amazon. This is the power of O.P.M...

 

I see the magic. I just don't know how to value it.

 

---

 

Amazon also needs to fund operating losses in new businesses. So if you look at a portfolio of product categories, you could say that Amazon is making money in cash cows and funding the dogs. Even if Amazon is making little money overall, the cash cows plus the option value of the dogs might justify the current valuation.

 

 

 

 

[dwy000]

Does AMZN (the retailer, not AWS) make any money?

 

If they didn't make any money how do you think they built this big a business? Just issuing stock? Look at all the stock issuances including employee stock and see the total capital raised, compare it to their retail revenues. Where did the capital for building AWS come from?

 

This is the magic of Amazon. They are big because they don't make money. So how do they fund the growth?

 

Amazon has a negative cash conversion cycle. Which means that it has free "float" from it's suppliers and customers. Magic.

 

Amazon needs to invest heavily in AWS and distribution centers?  Finance them with leases. Magic.

 

Amazon needs some equity to backstop the loans and leases? Pay employees with stock instead of cash. Magic.

 

--

 

This is easy to see when you look at the  Shareholder's Equity section of the balance sheet:

Treasury Stock                    (1,837)        --- Buybacks

Additional Paid-in Capital      11,134        --- mostly stock-based compensation

Retained Earnings                1,949          --- total cumulative earnings since there is no dividend

                                          ---

Total equity                        10,741

 

So with a few simplifying assumptions, we can argue that all of the equity is from stock-based compensation. And NONE of the money used to build the business was actually earned by Amazon. This is the power of O.P.M...

 

I see the magic. I just don't know how to value it.

 

---

 

Amazon also needs to fund operating losses in new businesses. So if you look at a portfolio of product categories, you could say that Amazon is making money in cash cows and funding the dogs. Even if Amazon is making little money overall, the cash cows plus the option value of the dogs might justify the current valuation.

 

Don't forget unearned revenues which now exceeds $3bn and contributed $1.2bn in cash over the past year.

 

The international growth as a long runway is a tough one when international sales growth was about 5% ytd vs last year.  All the growth is domestic and AWS.

 

I've still yet to see a realistic justification of intrinsic value that makes it a buy at these prices (or half of these prices).  It simply can't be a buy at absolutely any price can it? 

[vinod1]

I don't think many of us are here to say Amazon is a crappy company.

 

Nope, that is exactly what a lot of people are saying "It doesn't make any money" "WMT could replicate its business model if it wants to, but it's a crappy business model"etc.

 

I do wonder though, to the person who said it is a short, if this is so badly misvalued, when is it going to correct?

 

Does AMZN (the retailer, not AWS) make any money?

 

If they didn't make any money how do you think they built this big a business? Just issuing stock? Look at all the stock issuances including employee stock and see the total capital raised, compare it to their retail revenues. Where did the capital for building AWS come from? I understand some people need to measure to believe the size of the monument being built even when the monument is standing before them.

 

This is the inefficiency in the market related to AMZN.

 

I will paraphrase something said in some other context with I think the opposite meaning.

 

" You don't need to know the exact weight of the person to surmise whether or not he/she is fat"

 

For people worried about the current valuation, nice touch comparing the revenues to US GDP. AMZN plays in the global market. Look at its share as % of total retail commerce in the world. Look at how big ecommerce currently is and how it is growing. Look at how big AMZN is in comparison and how it is growing compared to ecommerce growth. Then tell me the runway is over.

 

In the short term, I don't know where this thing goes. I sold half my stake at 20-30% below today's prices. I learnt a valuable lesson since. Good management can create value beyond our current imagination.

 

My thesis for AMZN is still simple. Look at all the businesses they are in. Look at their competitors. All competitors without an exception worry about what AMZN would do to them. I like the business I own to be always on the offensive and scare the shit out of it's competitors. That way I am not worried about competition to my business.

 

I am dumbfounded reading this.

 

But probably the most honest assessment I came across for Amazon.

 

Vinod

[DTEJD1997]

"My thesis for AMZN is still simple. Look at all the businesses they are in. Look at their competitors. All competitors without an exception worry about what AMZN would do to them. I like the business I own to be always on the offensive and scare the shit out of it's competitors. That way I am not worried about competition to my business."

 

This is the problem.  A competitor can be completely irrational and cause terror/confusion to their competitors.  What good is a competitor that operates with no profit?

 

I am of the opinion that AMZN can only operate as it does as long as the street is willing to give it money.  If they have to grow the business out of retained earnings, AND THERE ARE LITTLE/NO earnings, how do you do it?

 

AMZN has been operating for 20+ years.  Where are the profits?  They are still a startup?  When do they NOT become a startup & become a "mature" company?

 

At what price is AMZN priced too richly?

[gjangal]

They are still growing revenues at 30% so definitely not a mature company by that definition. They are profitable on the aws segment. Hypothetically if they spin that out as a separate company , that by itself is worth quite a bit. I have no idea of how much the retail segment is worth.