AMZN - Amazon.com Inc.

[Mark Jr.]

David Stockman calls AMZN "The Next Big Short"

 

http://davidstockmanscontracorner.com/the-next-big-short-jeff-bezos-brobdingnagian-bubble/

 

"But history will surely record that the 48 months since December 2011 comprised the final stages of the most stupendous financial bubble in recorded history. During that period, the casino re-rated Amazon’s meager free cash flow from 40X to 62X to 117X on virtually no improvement in performance."

 

Don't get me wrong, I think Amazon is a *great* company, and I was very wrong to dismiss them back in the early days (missed out entirely) But at these kinds of multiples, with institutional ownership around 82% and providing 1.4% weighting in the S&P500 - I don't see how anybody could put a "value investing" lens on it.

[DTEJD1997]

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.

 

Could these expensive items ACTUALLY be items stocked by 3rd parties and not directly carried by Amazon?  I've noticed that 3rd parties are selling competing items that I sell on Ebay for 50% to 150% more than what I am asking.  To my bewilderment, Ebay allows these competing ads DIRECTLY in my auction.

 

So maybe you've got a 3rd party seller looking to pick up a "silly" sale from an unsuspecting consumer?

[muscleman]

David Stockman calls AMZN "The Next Big Short"

 

http://davidstockmanscontracorner.com/the-next-big-short-jeff-bezos-brobdingnagian-bubble/

 

"But history will surely record that the 48 months since December 2011 comprised the final stages of the most stupendous financial bubble in recorded history. During that period, the casino re-rated Amazon’s meager free cash flow from 40X to 62X to 117X on virtually no improvement in performance."

 

Don't get me wrong, I think Amazon is a *great* company, and I was very wrong to dismiss them back in the early days (missed out entirely) But at these kinds of multiples, with institutional ownership around 82% and providing 1.4% weighting in the S&P500 - I don't see how anybody could put a "value investing" lens on it.

 

 

Is this guy any good though? He doesn't understand AMZN's 3rd party marketplace business, AWS business and the only thing he talks about is 112X PE. Why doesn't he look at the cable companies and say, these companies don't even report a profit for the past 40 years but their share price kept growing. Go short!

[fareastwarriors]

not AMZN investment related but a good deal for shoppers on Amazon:

 

https://www.amazon.com/iss/credit/storecardmember

5% cash back for Prime member

 

[TwoCitiesCapital]

not AMZN investment related but a good deal for shoppers on Amazon:

 

https://www.amazon.com/iss/credit/storecardmember

5% cash back for Prime member

 

You gotta read the fine print - there is a minimum of a $1.50 charge per month for interest which is $18 per year. Not an insane amount, but you'd have to buy $600+ worth of goods every year just to break even with a normal credit card that pays 2% cash back.

 

If you buy everything off of Amazon, or have big ticket items lined up, it might make sense but the benefits are less clear for moderate purchasers who pay off balances every month.

[rkbabang]

not AMZN investment related but a good deal for shoppers on Amazon:

 

https://www.amazon.com/iss/credit/storecardmember

5% cash back for Prime member

 

You gotta read the fine print - there is a minimum of a $1.50 charge per month for interest which is $18 per year. Not an insane amount, but you'd have to buy $600+ worth of goods every year just to break even with a normal credit card that pays 2% cash back.

 

If you buy everything off of Amazon, or have big ticket items lined up, it might make sense but the benefits are less clear for moderate purchasers who pay off balances every month.

 

That isn't true.  I've had this card since September and have paid no fees or interest.  You have the option of selecting 5% cash back as a statement credit or multiple "special finance offers".  It is these special finance offers that have the $1.50 charge per month for interest.  The 5% cash back option has no such charge.

 

[TwoCitiesCapital]

not AMZN investment related but a good deal for shoppers on Amazon:

 

https://www.amazon.com/iss/credit/storecardmember

5% cash back for Prime member

 

You gotta read the fine print - there is a minimum of a $1.50 charge per month for interest which is $18 per year. Not an insane amount, but you'd have to buy $600+ worth of goods every year just to break even with a normal credit card that pays 2% cash back.

 

If you buy everything off of Amazon, or have big ticket items lined up, it might make sense but the benefits are less clear for moderate purchasers who pay off balances every month.

 

That isn't true.  I've had this card since September and have paid no fees or interest.  You have the option of selecting 5% cash back as a statement credit or multiple "special finance offers".  It is these special finance offers that have the $1.50 charge per month for interest.  The 5% cash back option has no such charge.

 

I'm sure you would know more than me, but only taking that from their disclosure when they advertise "no annual fee". If you read the associated footnote, it reads

7. No Annual Fee: As of 3/1/15 variable purchase APR is 25.99%. Minimum interest charge is $1.50.

which is why I thought that meant a minimum of $1.50 every month. If that's not the case, then my apologies but that's what their very own disclosure makes it sound like.

[rkbabang]

not AMZN investment related but a good deal for shoppers on Amazon:

 

https://www.amazon.com/iss/credit/storecardmember

5% cash back for Prime member

 

You gotta read the fine print - there is a minimum of a $1.50 charge per month for interest which is $18 per year. Not an insane amount, but you'd have to buy $600+ worth of goods every year just to break even with a normal credit card that pays 2% cash back.

 

If you buy everything off of Amazon, or have big ticket items lined up, it might make sense but the benefits are less clear for moderate purchasers who pay off balances every month.

 

That isn't true.  I've had this card since September and have paid no fees or interest.  You have the option of selecting 5% cash back as a statement credit or multiple "special finance offers".  It is these special finance offers that have the $1.50 charge per month for interest.  The 5% cash back option has no such charge.

 

I'm sure you would know more than me, but only taking that from their disclosure when they advertise "no annual fee". If you read the associated footnote, it reads

7. No Annual Fee: As of 3/1/15 variable purchase APR is 25.99%. Minimum interest charge is $1.50.

which is why I thought that meant a minimum of $1.50 every month. If that's not the case, then my apologies but that's what their very own disclosure makes it sound like.

 

It is a little confusing, I just went and looked at my statements.  I am definatly being given the entire 5% of my purchases back in statement credits and I am definitely not being charged a $1.50 fee or interest charge.

 

On this page (https://www.amazon.com/iss/credit/storecardmember) it says:  "The Amazon Prime Store Card will be governed by the same Synchrony Bank terms and privacy policy as the Amazon.com Store Card in addition to the 5% back benefit terms described below."

 

And if you click on "terms and privacy policy" it says:  "If you are charged interest, the charge will be no less than $1.50."

 

So it sounds like if you have the 5% statement credit option enabled (as I do), and you pay your balance in full every month (as I do), you will not be charged any interest or fees.  If however you carry even a small balance over from month to month you will be charged at least $1.50 in interest.

 

[Jurgis]

So it sounds like if you have the 5% statement credit option enabled (as I do), and you pay your balance in full every month (as I do), you will not be charged any interest or fees.  If however you carry even a small balance over from month to month you will be charged at least $1.50 in interest.

 

That is correct interpretation.

[Phaceliacapital]

http://davidstockmanscontracorner.com/amazon-and-the-fantastic-fangs-a-bubblicious-breakfast-of-unicorns-and-slippery-accounting/

 

I would like to introduce a meme before the sell side or buy side catches on.  As you know AMZN was up 100% this year as Bezos revealed the AWS business to the world.  The meme is this: AWS growth is unsustainable.  Not only is it unsustainable I predict that the sell side forward revenue growth rate for AWS will  go to zero or negative by Christmas next year.  It has come to my attention that 50% of AWS growth comes from start ups and my guess is that the majority of those dollars are Unicorns.  AMZN has been an indirect beneficiary of QE largess.  The Fed’s easy money created a bubble in VC funded start ups.  That funding peaked this year and is now in decline as the Unicorn bubble is bursting.  I expect this bubble to unravel fast as we are in the part of the cycle where the capital markets shut down for companies burning cash.

 

This set up reminds me of the easy money days of 1998-2000.  Then the investment world thought it was a good idea to fund a multitude of new telephone companies (CLECs).  These companies all rushed out and bought telecom equipment and helped to propel the stocks of Cisco, Nortel and Lucent.  These arms merchants were the must own large cap stocks of 1999 and 2000.  About 50% of their revenues came from the CLECs towards the end of the cycle.  The CLECs went away when the capital markets shut down and with it the revenues for these arms merchants went the way of the Dodo bird.

 

The problem for Amazon is that the Fortune 500 are not putting large portions of their business on the cloud yet nor will they soon.  Therefore there will be a big growth chasm that AMZN needs to cross.  I suspect the $150 billion in market cap being assigned to AWS is not anticipating such a growth hiccup.  Additionally,  I question how profitable this whole business is in the first place but for now lets just focus on the fact that revenues in the AWS division will roll over this year.  I am not short the stock but I will be stalking this and I predict my meme will come true and that AMZN will be one of the worst performing large cap growth stocks next year.

 

 

Here’s a funny fact on AWS [Amazon Web Services] that again everyone seems to ignore or miss. I have a company and our AWS bill is coming up for renewal and the prices have dropped 90%+ in 3 years. And yet, a hyper deflationary commodity, that is being sold in mass quantity to profit-less start-ups, is worth perhaps $150B or more of AMZN’s market cap.  Epic.

 

Cloud computing services is the contemporary version of fiber-optics.  Remember that business, which drove a large portion of the late 1990’s tech bubble?  Level-Three Communications (Warren Buffet), Qwest (Phil Anschutz), Global Crossing (A JP Morgan sponsored Ponzi business). The cost of accessing fiber optic networks dropped like a rock as fiber-optic overcapacity and technological advances invaded the business model.  The same dynamic has invaded cloud computing.

 

Global Crossing went bankrupt and reorganized into Level Three; Qwest renamed CenturyLink is a quasi-utility phone/communications company and survived the fallout from the fiber-optic bubble but its then-CEO, Joe Nacchio, was prosecuted for insider trading and financial fraud and spent six years in prison;  Level Three still operates but it’s stock, on a split-adjusted basis, dropped from a peak of $1,769 on Jan 31, 2000 to a current price of $53.

 

These examples show the type of hype, fraud and malfeasance which belie extreme financial bubbles.  I am highly confident that the same type of activities are occurring behind the “curtain” at Amazon.

[KCLarkin]

This set up reminds me of the easy money days of 1998-2000.

 

It is a good theory. I don't think fiber is the best analogy, though. Fiber only gets laid once. Cloud computing is an ongoing need (as long as you are still in business).

 

[dwy000]

As much as I dislike Amazon as an investment, I can't recall David Stockman ever being right on one of his predictions.  Ever.

 

His premise that all the growth at AWS is from startups and primarily unicorns and therefore growth will go negative is just ridiculous.

[intothebreach]

On the other hand, he did such a splendid job managing Collins & Aikman and Heartland Industrial Partners...  Oh, wait...

[Phaceliacapital]

http://uk.businessinsider.com/chamath-palihapitiya-on-aws-2016-1

 

Palihapitiya said:

 

AWS is a tax on the compute economy. So whether you care about mobile apps, consumer apps, IoT, SaaS etc etc, more companies than not will be using AWS versus building their own infrastructure. If you believe that over time the software industry is a multi, deca-trillion industry, then ask yourself how valuable a company would be who taxes the majority of that industry.

 

I don't see any cleaner monopoly available to buy in the public markets right now," he said.

[Phaceliacapital]

#2:

 

You could absolutely be correct. You seem very bullish on the energy business, and I just think it is very unlikely it will make any money. I see zero sales as of right now. And I see existing players with massive economies of scale making razor thin margins. And thus I value such business at zero. If Tesla starts demonstrating actual sales/profits from such business, I will revise my analysis. In my humble opinion however, I think it is very difficult to believe a brand new company with no experience manufacturing batteries will suddenly displace existing manufacturers and create a massive new market. I have also not seen any analysis showing that battery storage is far more economical at utility scale than existing solutions when peak power is needed. But yeah, if I'm wrong I could lose money.

 

Regarding Amazon, you're right that some people who short Tesla might also make similar arguments to short Amazon. I thought about it and ran the numbers, and I actually would not short Amazon at this level. Amazon trades at a high Price-to-Earnings ratio because it has little earnings. However, Amazon trades at a very LOW ratio of Enterprise Value-to-Revenue. Basically Amazon breaks even because they reinvest everything in the business. I suspect they could aggressively cut overhead and ramp up profits. Tesla, on the other hand, trades at an Enterprise-Value-to-Revenue ratio of 7.5x which is sky high compared to F and GM. Yes, it's true their revenue is growing 50% annually, which suggests they deserve a higher multiple. Tesla also loses a lot of money using normal accounting and not their subjective accounting. And as Tesla has grown, their losses grow faster -- possibly because they are "investing" but possibly because their sales/overhead spending is just way too high relative to revenue. I just think it is far more likely than not that Tesla fails to ever make meaningful profits that justify anything near the current stock price.

 

From the Tesla thread.

[rkbabang]

http://uk.businessinsider.com/chamath-palihapitiya-on-aws-2016-1

 

Palihapitiya said:

 

AWS is a tax on the compute economy. So whether you care about mobile apps, consumer apps, IoT, SaaS etc etc, more companies than not will be using AWS versus building their own infrastructure. If you believe that over time the software industry is a multi, deca-trillion industry, then ask yourself how valuable a company would be who taxes the majority of that industry.

 

I don't see any cleaner monopoly available to buy in the public markets right now," he said.

 

While I agree with you in that AWS is going to be huge, the word "tax" is a poor way of describing it.  A tax is involuntary money extracted under threat of violence whether you wish to use any service or not.  With AWS you can always buy your own servers, and buy/develop your own software, and host your own website/app/etc.  Or you could choose to use a competitive cloud service.  The only reason you <b>choose</b> to use AWS is because it is cheaper and/or easier than doing it yourself or using the competition.  The market is huge and AWS will always have competition, but Amazon seems to be willing to throw as much resources as necessary at it to keep it the best service at the best price.

[Guest Grey512]

KCLarkin - mea culpa on FCF.

 

True FCF on AMZN appears to be closer to 2%, after the price drop of the past 2 weeks. Not exactly eye-watering levels of value.

 

 

[ni-co]

Pardon me in case I repeat thoughts given in the last 88 pages of this thread–which I haven't read…

 

What's "value" about AMZN? Nothing. AMZN is a "classic" Phil Fischer/Peter Lynch growth stock with a proven business model on the way to build/deepen a giant logistical/infrastructural moat. Valuing it on TTM cash flow or revenue simply doesn't work. AMZN has been looking more or less expensive since the 1990s and it's also been growing like crazy since I can remember. Bezos clearly is an entrepreneurial genius and not a "pie-in-the-sky"-guy.

 

I like the company as a long-term investment because I can easily imagine AMZN as the retailer for a globalized world 10x the size, one or two decades from now. Scale is everything in retail – everything. Of course, Bezos not only knows this but he has optimized the whole company to serve this single goal. It doesn't really matter when he's finally going "expand" margins because at this point in time he will have such a huge competitive advantage that no other competitor will be profitable at the same prices. If you want to see what AMZN is doing to the world look what ALDI/LIDL did in European retail. Everything in their business model is built for scale and they destroy their competitors in every country they enter because they can operate profitably at a price level competitors can't even dream of.

 

AMZN is exactly the company I'd be happy to buy more of if it went down 50% tomorrow.

 

What I'm curious to hear from you guys, AMZN bulls and bears alike, is what exactly are the threats to AMZN's business model?

[rpadebet]

I have argued the bull side of AMZN for sometime now. I am still invested in this and believe they will be Donald Trump like "huge" one day

 

But let me try to take shot at the risks AMZN faces. I have given it some thought and I believe in someways their strength (aggressiveness) is their weakness as well. As part of their business strategy they take on all competitors and with their single minded focus on delivering the best value to their customers, they sometimes take on their suppliers as well! This has caused some of their suppliers to sour on them. In retail, given the fragmentation that exists among suppliers and the intense competition, it might appear in the short term that these suppliers have no choice but to still sell on Amzn, but it is quite conceivable that if a right sort of competitor comes along with sufficient scale (like say BABA) who values these supplier relationships more than AMZN does, AMZN might start losing their moat.

 

The other risk, which is more of a tradeoff, is Amazon wants to be a "Everything store". Other retail businesses which focus on niches (furniture or apparel or say industrial fasteners) could build scale and stronger relationships within those niches, which make it harder for AMZN to compete in. This is why when I read about threats to say a  FASTENAL kind of business model from AMZN, I find it difficult to comprehend how AMZN would breach that sort of moat built on deep knowledge of customers and strong relationships.

 

AMZN usually wins in businesses where price is the primary driver of transactions and scale helps lowering of prices. There are opportunities for everyone everywhere else.

 

And of course there is the Jeff Bezos being hit by a bus risk.

[ni-co]

I have argued the bull side of AMZN for sometime now. I am still invested in this and believe they will be Donald Trump like "huge" one day

 

But let me try to take shot at the risks AMZN faces. I have given it some thought and I believe in someways their strength (aggressiveness) is their weakness as well. As part of their business strategy they take on all competitors and with their single minded focus on delivering the best value to their customers, they sometimes take on their suppliers as well! This has caused some of their suppliers to sour on them. In retail, given the fragmentation that exists among suppliers and the intense competition, it might appear in the short term that these suppliers have no choice but to still sell on Amzn, but it is quite conceivable that if a right sort of competitor comes along with sufficient scale (like say BABA) who values these supplier relationships more than AMZN does, AMZN might start losing their moat.

 

The other risk, which is more of a tradeoff, is Amazon wants to be a "Everything store". Other retail businesses which focus on niches (furniture or apparel or say industrial fasteners) could build scale and stronger relationships within those niches, which make it harder for AMZN to compete in. This is why when I read about threats to say a  FASTENAL kind of business model from AMZN, I find it difficult to comprehend how AMZN would breach that sort of moat built on deep knowledge of customers and strong relationships.

 

AMZN usually wins in businesses where price is the primary driver of transactions and scale helps lowering of prices. There are opportunities for everyone everywhere else.

 

And of course there is the Jeff Bezos being hit by a bus risk.

 

Thanks!

 

Re. your #1: I see the disadvantage in that but I don't think it's a large one. I'd regard it as more dangerous not to put your suppliers under pressure and therefore not get the best deal and have the best prices. I think you can't have both targets simultaneously: have a nice relationship with your suppliers and have the best price available for commodity-like articles.

 

#2: Wouldn't it be very easy for AMZN to buy such stores, provide the backbone (logistics etc.) for them and let them run as their own thing, like they do with Zappos or Audible? I think this is kind of their strategy and makes great sense. 

 

 

 

 

[cmlber]

Pardon me in case I repeat thoughts given in the last 88 pages of this thread–which I haven't read…

 

What's "value" about AMZN? Nothing. AMZN is a "classic" Phil Fischer/Peter Lynch growth stock with a proven business model on the way to build/deepen a giant logistical/infrastructural moat. Valuing it on TTM cash flow or revenue simply doesn't work. AMZN has been looking more or less expensive since the 1990s and it's also been growing like crazy since I can remember. Bezos clearly is an entrepreneurial genius and not a "pie-in-the-sky"-guy.

 

I like the company as a long-term investment because I can easily imagine AMZN as the retailer for a globalized world 10x the size, one or two decades from now. Scale is everything in retail – everything. Of course, Bezos not only knows this but he has optimized the whole company to serve this single goal. It doesn't really matter when he's finally going "expand" margins because at this point in time he will have such a huge competitive advantage that no other competitor will be profitable at the same prices. If you want to see what AMZN is doing to the world look what ALDI/LIDL did in European retail. Everything in their business model is built for scale and they destroy their competitors in every country they enter because they can operate profitably at a price level competitors can't even dream of.

 

AMZN is exactly the company I'd be happy to buy more of if it went down 50% tomorrow.

 

What I'm curious to hear from you guys, AMZN bulls and bears alike, is what exactly are the threats to AMZN's business model?

 

Just being big isn’t a competitive advantage unless it lets you do something others can’t.  What is that for AMZN?

 

Off the top of my head, AMZN retail sales in 2015 were $100B and global retail sales were $24,000B (I may be slightly off).  So AMZN’s share of global retail is currently about 40 basis points, doesn’t scream “scale advantage” to me.  Even if they grow 10x and the global retail market is flat in that time, they’ll only have 4% market share.  What business can you point to that dominates its market with that kind of market share?  Just being big doesn’t do you any good if there are a lot of other big companies selling the same commodity service.  GM has “scale,” how has that worked out for them? 

 

If you're an AMZN bull, you'll probably turn this around on me and say that just shows how huge the TAM is.  But I'm skeptical of AMZN ever having a scale advantage that would justify this price.

 

Also, isn’t one of Phil Fisher’s 15 questions for evaluating a business “Does the company have a worthwhile profit margin?”  So I’m not so sure this is a “classic” Fisher stock.  If 0-5% is "worthwhile" he might as well have made the question "Does the company have a profit margin?"

 

[dwy000]

 

AMZN is exactly the company I'd be happy to buy more of if it went down 50% tomorrow.

 

 

I don't think anyone has questioned the growth or the quality of the business.  It's a matter of valuation.  If it went down 50% tomorrow, why is that level a buy and today's price is not?  The argument that the company will be bigger in 10 years is great but that doesn't mean it is a smart buy at absolutely any price today.

 

It is very difficult to pick the price 10 years from now that is underpinned by a revenue and profit figure that is realistically achievable and still makes it a good risk/return on the investment today.

[LC]

What's "value" about AMZN? Nothing. AMZN is a "classic" Phil Fischer/Peter Lynch growth stock with a proven business model on the way to build/deepen a giant logistical/infrastructural moat. Valuing it on TTM cash flow or revenue simply doesn't work. AMZN has been looking more or less expensive since the 1990s and it's also been growing like crazy since I can remember. Bezos clearly is an entrepreneurial genius and not a "pie-in-the-sky"-guy.

 

What I'm curious to hear from you guys, AMZN bulls and bears alike, is what exactly are the threats to AMZN's business model?

 

Threats to business model:

- perhaps their giant logistical/infrastructure moat isn't so deep and wide as you think. How much would it take Costco/Walmart to develop what Amazon has in terms of warehouse technology?

- they operate in retail, notoriously a super difficult business. they've operated in retail for years, with not much profit to show for it.

- lone data point: they started selling books online. now they'e building bookstores. perhaps retail tastes are changing AWAY from online shopping. what will that do to amazon? answer: leave them with a bunch of underutilized operating leverage. #cutsbothways

 

Threats to investment:

- i see a giant red flag when i hear things like, "valuing it on TTM revenue/cash flow simply doesn't work"

[rpadebet]

Also I have noticed when things fall by 50%, the circumstances are such that most people forget the "good" in the business and are primarily worried about the "bad" thus making buying at those prices emotionally impractical  :).

 

One way to avoid that and be forced to accept the bargain price you feel comfortable with today is to keep selling Puts at prices you are willing to buy. In this case one can sell the $300 puts and hope to be assigned. If you are unlucky and price never gets there, at least you make a little bit of premium income.

 

[ni-co]

 

AMZN is exactly the company I'd be happy to buy more of if it went down 50% tomorrow.

 

 

I don't think anyone has questioned the growth or the quality of the business.  It's a matter of valuation.  If it went down 50% tomorrow, why is that level a buy and today's price is not?  The argument that the company will be bigger in 10 years is great but that doesn't mean it is a smart buy at absolutely any price today.

 

It is very difficult to pick the price 10 years from now that is underpinned by a revenue and profit figure that is realistically achievable and still makes it a good risk/return on the investment today.

 

No, that's right. But it would mean that dollar averaging into a position might be a smart move. I'd compare the price/sales ratio to other successful retailers that build their business on price—like Costco. Then I'd look at the potential market and the average growth and project from that. On that calculation I'd want to pay a huge discount which is kind of my MOS.