AMZN - Amazon.com Inc.

[KCLarkin]

Slightly insulting and unprofessional. Calm down.

 

No insult intended. I've given you my honest advice. You are free to ignore.

 

My last piece of unwanted advice: look at the Balance Sheet. Amazon doesn't pay dividends or do buybacks, so all of your $5.5 B in Free Cash Flow should be on the balance sheet. What do you see? Cash balance down. Other long term liabilities skyrocketing. Dilution. To me, this suggests negative free cash flow.

 

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P.s. There is no sin in a rapidly growing company showing negative free cash flow. You just can't use FCF as a shortcut to value the company.

 

Update: I am comparing balance sheets from Dec 30, 2014 Sept 30, 2015, as shown in the 10Q. This might be unfair due to seasonality of the business.

 

[Guest Grey512]

 

My last piece of unwanted advice: look at the Balance Sheet. Amazon doesn't pay dividends or do buybacks, so all of your $5.5 B in Free Cash Flow should be on the balance sheet. What do you see? Cash balance down. Other long term liabilities skyrocketing. Dilution. To me, this suggests negative free cash flow.

 

 

Sep'15 cash & securities balance up vs Sep'14.

Dec'15 cash & securities balance up vs Dec'14.

So on.

 

Not sure what you're talking about here.

 

Regarding long-term liabilities: not to sound like a broken record, but the strategy here is not unlike Cheniere - invest and build for years and years, with a massive J-curve, so that you can hold and then perpetuate a monopoly position in an attractive, wide-open market.

Things like drones, Prime, 1-day delivery and X-ray vision in Amazon Videos - you wouldn't get any of those if AMZN was run in a way that would generate reported financials that would be more attractive to you, KCLarkin.

 

[Guest Grey512]

You just can't use FCF as a shortcut to value the company.

 

The whole point here is that the 1.5-3% FCF yield (whatever metric you use) is there despite the fact that AMZN/Bezos did not even scratch the surface on how much FCF they really could generate if they turned off the expansion spend, R&D, acquisitions, marketing, and jacked up their take rates.

 

The sentiment is reciprocated - let me know what other things you are long (VRX?) so I can short them, and what you are short (AMZN?) so that I can go more long.

[KJP]

 

Similarly, the more acceptable way to try to frame the argument your way is to strip out the lease-related expenses (e.g. add-back $3b to my unlevered FCF calculation above) and then add back the full $31b "OBS" liability to the net debt. I'm not even multiplying that number by 0.7x or whatever it is that people do nowadays. As I add it to the "net debt", that will probably double-count some of the things in the EV calculation from Bloomberg, but whatever.

 

 

A question about your method:  If Amazon didn't use operating leases, what would its CapEx number have been for the last twelve months?  I agree that in that scenario you'd want to add back lease-related payments from operating earnings.  But it seems to me that if you're looking for annual FCF numbers to need to look at what the CapEx would have been without the use operating leases.  To simply add the entire off balance sheet operating lease liability to enterprise value is mixing stocks and flows.

[KCLarkin]

Sep'15 cash & securities balance up vs Sep'14

 

I am comparing balance sheets from Dec 30, 2014 and Sept 30, 2015, as shown in the latest 10Q. This might be unfair due to seasonality of the business.

 

But issuing $6B of long-term debt in Q4 2014 is not exactly a convincing argument for strong FCF either. I'm too lazy to do the math, but what does cash + securities - LT debt tell you (even ignoring the rapidly rising liabilities and dilution)?

 

you wouldn't get any of those if AMZN was run in a way that would generate reported financials that would be more attractive to you, KCLarkin.

 

You are betting on a story stock and justifying your recklessness by slapping a 50x multiple on bullshit FCF. It's your money, do what you please.

 

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Disclosure: No position. I am genuinely interested in a rational valuation model for Amazon. But you are doing a great disservice to this forum by spreading this FCF myth.

[Guest Grey512]

You say "Amzn is a story stock", I say "Kclarkin is a reversion to the mean fallacy victim".

 

You say "issuing debt for Amzn is dumb", I say "issuing debt in the current ZIRP environment where equity (even for Amzn) is dearer is actually pretty smart, if the debt will enable more aggressive capex to improve the service".

 

We're just talking past each other here. If you can't evaluate the argument i'm making here, then I'm done. You'd be well served to look into Tom Russo and his philosophy. Or do what pleases you, which is basically slavishly cloning 13Fs to invest in IBM, CMPR, VRX, etc. You wont catch those instances in the market where things that never happened before happen. Thats where the real money is made. In the end, that sums up Amzn.

[dwy000]

You just can't use FCF as a shortcut to value the company.

 

The whole point here is that the 1.5-3% FCF yield (whatever metric you use) is there despite the fact that AMZN/Bezos did not even scratch the surface on how much FCF they really could generate if they turned off the expansion spend, R&D, acquisitions, marketing, and jacked up their take rates.

 

The sentiment is reciprocated - let me know what other things you are long (VRX?) so I can short them, and what you are short (AMZN?) so that I can go more long.

 

Over the past 12 months the company generated $637M of cash flow after leases (which they use like capex).  And that's not counting the stock dilution from share based comp.  So the 1.5-3% FCF yield is not an accurate measure of cash generation.  They've never generated real cash anywhere near those levels.

 

The whole theory of this stock is that they can shut off all this spend at some point and start generating real cash flow.  While it's probably true they can get more cash flow and stop some extra spending, at that point growth grinds to a halt (since by everyone's argument that cash flow is being reinvested into growth).  So a 10-15 multiple is more appropriate for a GDP grower.  Whether they can do that without impacting competitiveness is an open question.  But somewhat moot too because management has indicated they will continue on the existing path for the foreseeable future.

 

Even with rosy assumptions, there is no way to put realistic intrinsic value that makes the stock a buy at this level or half of this level.

[Vish_ram]

Even being long, I can perfectly understand KCLarkin's concerns.

 

In the end, it depends on what you believe in. If you believe in their FCF statements (not the GAAP cash flow), then AMZN is a phenomenal business. If it is bogus, then AMZN is a subpar online retailer that solely exists to benefit customers and employees at the expense of shareholders.

 

Only time will tell.

[Liberty]

https://oraclefromomaha.wordpress.com/2015/12/07/amazon-and-world-domination/

[rukawa]

I don't get why anyone is arguing about this. Its an expensive stock. There is basically no disagreement about that regardless of what you assume about accounting. Why even look at the cashflow statement? 30 multiple v 60 multiple...does it really matter.

[TheAiGuy]

Even being long, I can perfectly understand KCLarkin's concerns.

 

In the end, it depends on what you believe in. If you believe in their FCF statements (not the GAAP cash flow), then AMZN is a phenomenal business. If it is bogus, then AMZN is a subpar online retailer that solely exists to benefit customers and employees at the expense of shareholders.

 

Only time will tell.

 

Honestly, I don't know about that. I don't really buy that their FCF statements reflect anything economic about the business but I still think they'll do fine.

[Cardboard]

"The sentiment is reciprocated - let me know what other things you are long (VRX?) so I can short them, and what you are short (AMZN?) so that I can go more long."

 

Should be careful because the discussion in this thread about dismissing financial statements and instead looking at new metrics and this thinking that the sky is the limit was exactly the same before the epic collapse of Valeant.

 

If Ackman enters big into AMZN, then I will short following the initial euphoria.

 

Cardboard

[Guest Grey512]

"The sentiment is reciprocated - let me know what other things you are long (VRX?) so I can short them, and what you are short (AMZN?) so that I can go more long."

 

Should be careful because the discussion in this thread about dismissing financial statements and instead looking at new metrics and this thinking that the sky is the limit was exactly the same before the epic collapse of Valeant.

 

If Ackman enters big into AMZN, then I will short following the initial euphoria.

 

Cardboard

 

Everyone loved VRX when I went short.

Most people I speak to hate, hate AMZN. When I mention I am long AMZN, they look like they're disappointed in me.

So I don't think that the two situations are similar.

 

There are some great 'value' stocks out there that screen cheap. The list is familiar: OUTR. BBBY. etc. They trade at single digit multiples of FCF. The financial statements are simple. They buy back stock. Everyone loves them. The discussion on those stocks tends to be the mirror image of AMZN. When it comes to AMZN, people fixate on the financials; bulls (like me) huff & puff and point to pie in the sky. And when it comes to OUTR & BBBY, the bulls point to the financials, the buy-back, the yield,  and I take the other position.

[rpadebet]

"The sentiment is reciprocated - let me know what other things you are long (VRX?) so I can short them, and what you are short (AMZN?) so that I can go more long."

 

Should be careful because the discussion in this thread about dismissing financial statements and instead looking at new metrics and this thinking that the sky is the limit was exactly the same before the epic collapse of Valeant.

 

If Ackman enters big into AMZN, then I will short following the initial euphoria.

Y

Cardboard

 

Ackman is tapped out with VRX.

Btw, looks like  I am the only one bullish on both AMZN and VRX :).

Grey512, people have started hating VRX , you should look into it now.

 

IBM financials look great to me. WEBs investment conviction has tempted me to clone the idea, but I cannot figure out what he sees in it. The business they are chasing is just too tough to be a follower in. They don't even have the cash pile GOOG, MSFT have. If they are going after the niche regulator driven sector of the market like banks, health care etc, then I don't think it's worth much. BBRY proved these niches are that sticky as they seem to be, especially in face of a superior product.

 

WMT is a decent investment value, but it likely won't provide the above normal returns I am looking for. They don't have the owner operator they once had and have a cash cow to defend while engineering a pivot to the Ecommerce model. If anyone can do it, it should be WMT, but I still think it's incredibly difficult to pull off even for them.

 

[ccplz]

"The sentiment is reciprocated - let me know what other things you are long (VRX?) so I can short them, and what you are short (AMZN?) so that I can go more long."

 

Should be careful because the discussion in this thread about dismissing financial statements and instead looking at new metrics and this thinking that the sky is the limit was exactly the same before the epic collapse of Valeant.

 

If Ackman enters big into AMZN, then I will short following the initial euphoria.

 

Cardboard

 

Everyone loved VRX when I went short.

Most people I speak to hate, hate AMZN. When I mention I am long AMZN, they look like they're disappointed in me.

So I don't think that the two situations are similar.

 

There are some great 'value' stocks out there that screen cheap. The list is familiar: OUTR. BBBY. etc. They trade at single digit multiples of FCF. The financial statements are simple. They buy back stock. Everyone loves them. The discussion on those stocks tends to be the mirror image of AMZN. When it comes to AMZN, people fixate on the financials; bulls (like me) huff & puff and point to pie in the sky. And when it comes to OUTR & BBBY, the bulls point to the financials, the buy-back, the yield,  and I take the other position.

 

I shorted VRX as well. You can check my posting history.

 

I think you're kidding yourself if you think you have a decent understanding of Amazon... there are too many moving parts for any individual investor (or even most institutional investors) to value this company properly. If you decide to go long without  a rough approximation of what the company is worth, you are speculating, and speculating can be profitable too but you have to be honest with yourself and not delude yourself into thinking you are 'buying value'.

 

Value will not be found in the obvious places, whether cheap or expensive. To perform well you should look where others aren't looking.. and that isn't Amazon.

 

 

[TheAiGuy]

"The sentiment is reciprocated - let me know what other things you are long (VRX?) so I can short them, and what you are short (AMZN?) so that I can go more long."

 

Should be careful because the discussion in this thread about dismissing financial statements and instead looking at new metrics and this thinking that the sky is the limit was exactly the same before the epic collapse of Valeant.

 

If Ackman enters big into AMZN, then I will short following the initial euphoria.

Y

Cardboard

 

Ackman is tapped out with VRX.

Btw, looks like  I am the only one bullish on both AMZN and VRX :).

Grey512, people have started hating VRX , you should look into it now.

 

IBM financials look great to me. WEBs investment conviction has tempted me to clone the idea, but I cannot figure out what he sees in it. The business they are chasing is just too tough to be a follower in. They don't even have the cash pile GOOG, MSFT have. If they are going after the niche regulator driven sector of the market like banks, health care etc, then I don't think it's worth much. BBRY proved these niches are that sticky as they seem to be, especially in face of a superior product.

 

WMT is a decent investment value, but it likely won't provide the above normal returns I am looking for. They don't have the owner operator they once had and have a cash cow to defend while engineering a pivot to the Ecommerce model. If anyone can do it, it should be WMT, but I still think it's incredibly difficult to pull off even for them.

 

I wouldn't suggest you invest in IBM if you don't feel you understand it, but as I see it, BBRY didn't prove $hit. BBRY had the business segment of a consumer products business and the IT business is pretty different. There a good number of examples of lesser products winning for various reasons (Betamax is a classic example, as is Windows) but I think that anytime you compare any line of business to the smartphone business and expect a similar outcome (in any direction), you're going to get killed b/c it just doesn't work out that way most of the time.

[rpadebet]

http://seekingalpha.com/pr/15587416-amazon-announces-the-streaming-partners-program

 

I still think they should have bought NFLX a couple of years ago when it was around $5-$7 bill, but looks like they are serious about making this work. It is amazing to think AAPL has been trying to land something like this (unified subscription service) on their platform for the last year or two and AMZN beats them to the punch.

[KCLarkin]

https://oraclefromomaha.wordpress.com/2015/12/07/amazon-and-world-domination/

 

First off let me say that I am working on the general premise that Amazon has a much more efficient retail model compared to B&M

 

Amazon

Market Cap: $315B

Revenue:  $96,846

Employees: 222,400

Fixed Assets: $20,636

Net shipping costs/sales: 4.6%

 

Costco (2015)

Market Cap: $73B

Revenue: $116,199

Employees: 200,000

Fixed Assets: $15,401

 

Why do we assume an internet retailer that needs to pick, pack, and ship every order is more efficient than a self-serve warehouse like Costco or Walmart?

 

[gjangal]

Ignoring revenue growth distorts this comparison. Fast forward 5 years where Amazon grows revs at ~20% and costco at 7%. If the idea here is to compare revenues per dollar of asset or employee, this comparison  doesn't do justice to Amazon . Just an observation , no opinion on valuation.

[KCLarkin]

If the idea here is to compare revenues per dollar of asset or employee, this comparison  doesn't do justice to Amazon .

 

No, that wasn't the idea. I just put those in context to show that Amazon and Costco are similar size.

 

The question is where does the efficiency come from that more than recoups the 4.6% of revenue spent on shipping? Even if you use robots and drones, wouldn't a self-serve warehouse still be cheaper?

[DTEJD1997]

Ignoring revenue growth distorts this comparison. Fast forward 5 years where Amazon grows revs at ~20% and costco at 7%. If the idea here is to compare revenues per dollar of asset or employee, this comparison  doesn't do justice to Amazon . Just an observation , no opinion on valuation.

If current metrics hold, then Costco is cheaper & better at capital allocation.  They are producing higher sales per employee & more profit to boot.

 

I know I will contribute to Costco's sales.  AMZN, not so much...

[fareastwarriors]

http://fortune.com/amazon-india-jeff-bezos/

 

Amazon India

[Palantir]

Amzn doesn't seem to have consistently great prices. A 1lb pack of Sees Candies costs $30+ on AMZN!

[Jurgis]

Amzn doesn't seem to have consistently great prices. A 1lb pack of Sees Candies costs $30+ on AMZN!

 

A lot of groceries are expensive on Amazon. They don't have a good supply chain for these and a lot of third party merchants jack up the prices. I had to buy Quaker Oats granola online - nothing special though our supermarket does not carry it anymore. Walmart and Jet had OK - supermarket level - prices, Amazon had crappy prices 2x-4x the grocery stores.

 

Amazon has regular prices for some groceries that they carry. But even those are usually just par for the course.

[Spekulatius]

Amzn doesn't seem to have consistently great prices. A 1lb pack of Sees Candies costs $30+ on AMZN!

 

A lot of groceries are expensive on Amazon. They don't have a good supply chain for these and a lot of third party merchants jack up the prices. I had to buy Quaker Oats granola online - nothing special though our supermarket does not carry it anymore. Walmart and Jet had OK - supermarket level - prices, Amazon had crappy prices 2x-4x the grocery stores.

 

Amazon has regular prices for some groceries that they carry. But even those are usually just par for the course.

 

A lot of items are expensive at AMZN, not just groceries.I was spruced by the prices that I saw for some items -same with EBay where some items sell used higher the same item new elsewhere. I think some websites have dedicated shoppers that only buy at one website exclusively, regardless of prices.