AMZN - Amazon.com Inc.

[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?

 

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?"

 

What counts is the scale advantage over your next biggest competitor. A huge addressable market is music in my ears.

[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?"

 

What counts is the scale advantage over your next biggest competitor. A huge addressable market is music in my ears.

 

If you are 40 basis points of the global retail market, how can you possible have a scale advantage?  That means there is room for another 50+ equal sized competitors.

 

What is it that is unique to AMZN that a competitor can't do? 

[DCG]

-Amazon has an enormous about if data about its customers to be able to recommend products.

 

- It has a product selection and warehouse/distribution sytstem that would take an enormous amount of time and money to replicate.

 

- if had 2 decades worth of product reviews.

 

- it has 2 decades worth of trust from consumers.

 

- it has Kindle, which has an unmatched selection (and a selection that would take years to replicate.

 

-AWS

 

- they have a patent on one-click ordering.

 

The list goes on.

[FCharlie]

The AMZN faithful will hate me for this comment, but in my opinion, the number one threat to AMZN's business is the $300 billion of operating cash flow that Wal Mart will likely generate over the next decade.

 

The number one threat to AMZN as an investment is  the fact that AMZN's market cap is already larger than Wal Mart & Target combined and that they issue well over a million shares per quarter to keep their business going. They have authorization to issue another 130 million shares as of their most recent 10K. If you have AMZN with 130 million more shares outstanding at today's price, you have a market cap that is $350 billion. Ask yourself, how is someone supposed to do well holding AMZN shares long term when in order to double you would need to justify a $700 billion market cap?

 

 

 

[KCLarkin]

This should be a bit scary for the AWS bulls:

http://www.wired.com/2016/03/epic-story-dropboxs-exodus-amazon-cloud-empire/

 

H/t @bluegrasscap

[Picasso]

Doesn't that article just highlight the advantages AWS has? AKA one hell of a moat...  Dropbox did what 99% of other businesses would royally screw up.

[KCLarkin]

Doesn't that article just highlight the advantages AWS has? AKA one hell of a moat...  Dropbox did what 99% of other businesses would royally screw up.

 

That may seem odd. Why put the code onto thousands of machines only to change the code and put it onto thousands of other machines? But in the largest Internet data centers, this is just how things work. Machines get old quickly. Parts fail constantly. And then you replace them. You’re always upgrading what you have.

 

The capital intensity is almost unimaginable.

[Picasso]

Isn't that why a business would rather use Amazon than deal with all those headaches and capex issues on a local level? 

[KCLarkin]

Isn't that why a business would rather use Amazon than deal with all those headaches and capex issues on a local level?

 

That's great for customers.

 

I'm shocked that Dropbox, a relatively small startup, would even consider the move. Dropbox-scale companies should really be Amazon's core market. And despite the article's tone, it actually seemed pretty straightforward to me. And these skills will diffuse from Dropbox, Facebook, Amazon, Google, MSFT to other companies pretty rapidly.

 

I'm probably over-reacting but I never thought Dropbox would migrate off AWS.

 

 

[Picasso]

I'm sort of in your camp where this is clearly a capital intensive and maybe not-so-great business (AWS); maybe auto like with high barriers to entry because it's such a competitive, cut throat business.  But it reminds me a lot of the IBM saying where no one was ever fired for using IBM.  It also appears to be true in the AWS situation where someone is going to kill his/her career by creating their own cloud.  I don't think this was the equivalent of IBM losing the CIA contract. 

 

I also think Dropbox is under a lot of pressure to set themselves apart from competitors so this might be a bit of a publicity stunt.  In the eyes of a VC (when they need another round of funding) it may give them more clout.  But that's a speculative view of mine.

 

And being great for the customer is the entire Amazon business model.  All that said, I don't get all the "value investor" and "contrarian" love for AMZN stock.  It just seems like such a herculean task to get a decent return.  If I was a 20 year old Warren Buffett, would I buy AMZN here?  Even if I thought it could be trading at $2000 in twenty years?  No way Jose. 

[ni-co]

The AMZN faithful will hate me for this comment, but in my opinion, the number one threat to AMZN's business is the $300 billion of operating cash flow that Wal Mart will likely generate over the next decade.

 

The number one threat to AMZN as an investment is  the fact that AMZN's market cap is already larger than Wal Mart & Target combined and that they issue well over a million shares per quarter to keep their business going. They have authorization to issue another 130 million shares as of their most recent 10K. If you have AMZN with 130 million more shares outstanding at today's price, you have a market cap that is $350 billion. Ask yourself, how is someone supposed to do well holding AMZN shares long term when in order to double you would need to justify a $700 billion market cap?

 

WMT is valued at 0.45x sales while AMZN is valued at 2.5x sales. So, yes, it's expensive – I think that you're probably going to be able to get the shares at a lower multiple. If I could buy AMZN at a 1.5x sales multiple I would buy it hand over fist. I bought it yesterday but only half a position and it's more a hedge against other macro positions I have on. That said, I think it's highly probable that AMZN is going to outperform the market in the next 5-7 years (I just don't think that the market will be doing so well…).

 

The key question is what will AMZN sales likely be 5, 10, 15 years from now and what will WMT sales be? To me, AWS is just the cherry on top of the best retail model I've ever seen (better than Aldi's – which I regard as the second best retail model in the world). The larger AMZN grows the more categories they can add. Take groceries as an example. I know that today it's more or less a field of experimentation for AMZN and people say that delivering groceries is not doable on a country-wide scale. However, there is going to be a time when this AMZN truck will come to your street 3, 4, 5 times a day anyway. Then it suddenly will make sense to load it up with groceries as well – and, guess what, it will also be cheaper than the supermarket near you. We may reach this point in larger cities sooner rather than later. Today WMT and COST shareholders feel very safe from AMZN but they shouldn't. AMZN has the superior, lower price model and it will cannibalize them in the end. It's only a matter of scale.

 

Why did WMT fail in Germany and AMZN didn't? – Think about that for a minute.

[ni-co]

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?

 

It would take COST/WMT far more than you think (see my "WMT failed in Germany" argument). Plus I don't think they are institutionally capable to do it because it would cannibalize their own business model – it's a classic Clay Christensen disruption case. My best guess for how it's going to turn out is that they are going to lose one product category after the other to AMZN. It will always be the lowest-margin one and they will be glad to exit this part of the market because it hurts their profitability.

 

- they operate in retail, notoriously a super difficult business.

 

This is exactly what makes me so bullish. The lowest cost player will win in the end.

 

they've operated in retail for years, with not much profit to show for it.

 

While I think that this is by choice I don't think that the AMZN of today has the scale to "flip the switch" and suddenly become as profitable as WMT or COST. However, one day they are going to be because an AMZN at 10x or 20x the size of WMT will turn a profit at a price level WMT can't turn a profit. This is exactly how WMT became what it is today – WMT is going to be disrupted by its own model. Bezos's genius lies in recognizing that every other retailer is institutionally bound to make this profit today while he is not. – This is a very misunderstood concept and such a huge competitive advantage. I don't see how other companies are able to compete with him without following the same model. And I don't see any company out there doing it. Time is running out because of AMZN's growing scale. Even if you decided to replicate AMZN's model today you'd have to keep the lights on. I don't know whether that's possible – because AMZN exists.

 

- 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

 

What this shows me is that Bezos is willing to try everything; I don't know where it leads to but I'm very confident he'll cut it if it negatively affects AMZN's operating leverage long-term. If retail tastes changed away from online AMZN would be screwed. But be honest: What's the probability of that?

 

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"

 

Sensible position that I can't really argue with because it's the old value/growth debate. Maybe the only "argument" I could make is Buffett's CO purchase but I realize that he bought CO way cheaper. That said, I think the growth opportunity for AMZN is even larger than CO's was in the 1980s. When you will see a cheap AMZN stock the rest of the market will look so much cheaper that you wouldn't want to buy it. Which is fine with me. This is not for everyone and certainly not a traditional value investment.

 

I think that AMZN has two huge competitive advantages that can't be overcome by incumbent retailers:

1. Online retailing is less capital intensive than offline retailing – period.

2. Jeff Bezos is willing to operate his company at the zero profit level literally for decades just to build scale. Am I confident that he could switch to profitability today? No. Will he be able to do it when he has 5x or 10x the size of his next largest competitor? Yes.

[cmlber]

 

The larger AMZN grows the more categories they can add. Take groceries as an example. I know that today it's more or less a field of experimentation for AMZN and people say that delivering groceries is not doable on a country-wide scale. However, there is going to be a time when this AMZN truck will come to your street 3, 4, 5 times a day anyway. Then it suddenly will make sense to load it up with groceries as well – and, guess what, it will also be cheaper than the supermarket near you. We may reach this point in larger cities sooner rather than later.

 

 

AMZN will never be more efficient than UPS at delivering packages.  Ever.  So what advantage will the AMZN truck (that currently doesn't exist) have in delivering packages that a competitor can't match by simply using UPS like AMZN does today?

 

 

[Liberty]

10 years of AWS:

 

http://perspectives.mvdirona.com/2016/03/a-decade-of-innovation/

[Palantir]

The AMZN faithful will hate me for this comment, but in my opinion, the number one threat to AMZN's business is the $300 billion of operating cash flow that Wal Mart will likely generate over the next decade.

 

You mean there is $300B of operating cash flow for AMZN to start eating up? Hellz yeah!

 

Yours Truly,

AMZN Faithful

[ni-co]

 

The larger AMZN grows the more categories they can add. Take groceries as an example. I know that today it's more or less a field of experimentation for AMZN and people say that delivering groceries is not doable on a country-wide scale. However, there is going to be a time when this AMZN truck will come to your street 3, 4, 5 times a day anyway. Then it suddenly will make sense to load it up with groceries as well – and, guess what, it will also be cheaper than the supermarket near you. We may reach this point in larger cities sooner rather than later.

 

 

AMZN will never be more efficient than UPS at delivering packages.  Ever.  So what advantage will the AMZN truck (that currently doesn't exist) have in delivering packages that a competitor can't match by simply using UPS like AMZN does today?

 

How about UPS's margin? I didn't say they'd get more scale than UPS but as far as I remember UPS is not a retailer.

[FCharlie]

 

I think that AMZN has two huge competitive advantages that can't be overcome by incumbent retailers:

1. Online retailing is less capital intensive than offline retailing – period.

2. Jeff Bezos is willing to operate his company at the zero profit level literally for decades just to build scale. Am I confident that he could switch to profitability today? No. Will he be able to do it when he has 5x or 10x the size of his next largest competitor? Yes.

 

 

If being willing to operate at zero profit is a huge competitive advantage, how large can AMZN get before investors no longer accept this?

 

As I said earlier, AMZN has 130 million shares slated for issuance. They have been issuing about 1-1/4 million shares per quarter for years. Even if the share price remains flat, AMZN might still end up with a $350 billion market cap. What happens if investors stop being excited to own a profitless $350 billion company?

 

If they decide to seek profits, how much profits would they need to justify their current price? Or how much profit will they need to justify double the price with 600 million shares outstanding? Will AMZN be the first $1 Trillion company?

[ni-co]

If being willing to operate at zero profit is a huge competitive advantage, how large can AMZN get before investors no longer accept this?

 

As I said earlier, AMZN has 130 million shares slated for issuance. They have been issuing about 1-1/4 million shares per quarter for years. Even if the share price remains flat, AMZN might still end up with a $350 billion market cap. What happens if investors stop being excited to own a profitless $350 billion company?

 

If they decide to seek profits, how much profits would they need to justify their current price? Or how much profit will they need to justify double the price with 600 million shares outstanding? Will AMZN be the first $1 Trillion company?

 

Hard to say. During the past five years they have grown their share count by 3% while revenues grew 120%. I'd guess that investors will accept this for as long as AMZN is able to grow the top line in a meaningful way.

 

Malone has followed the zero earnings strategy for 30 years and investors have agreed to it because it made perfect sense. This may not be true for every company but I completely see the point in it for AMZN. First $1 Trillion company? I don't know. But I wouldn't be surprised. At least, I think that Amazon has a more robust business model than e.g. Google or Apple.

[ni-co]

Smart piece today by Ben Thompson on AWS and retail:

https://stratechery.com/2016/the-amazon-tax/

 

I'm fare less sure about the monopolistic qualities of AWS (which is at the periphery of my circle of competence) than about the retail business model but at least Stanley Druckenmiller shares Thompson's view by calling Bezos a "serial monopolist".

[FCharlie]

A lot of my skepticism on AMZN the stock actually stems from Wal Mart.  In 1999, Wal Mart had a $245 billion market cap, sales of $165 billion. They had less than 3,000 stores. They were in the beginnings of shifting away from discount stores and over to supercenters. In my mind, Wal Mart was going to achieve half a trillion in retail sales and the stock was going to go much higher.

 

Fast forward to today. Wal Mart now has 12,000 stores instead of less than 3,000. Wal Mart now actually has half a trillion in sales instead of $165 billion. The dividend has grown over 1,000%. Earnings and free cash flow have soared. The stock however, hasn't really done anything over the past seventeen years.  Wal Mart even repurchased 28% of their shares in the same time period and and the price still hasn't moved.

 

Wal Mart was priced for perfection seventeen years ago.  How does someone convince a skeptic that AMZN is not priced for perfection today?

[PatientCheetah]

A lot of my skepticism on AMZN the stock actually stems from Wal Mart.  In 1999, Wal Mart had a $245 billion market cap, sales of $165 billion. They had less than 3,000 stores. They were in the beginnings of shifting away from discount stores and over to supercenters. In my mind, Wal Mart was going to achieve half a trillion in retail sales and the stock was going to go much higher.

 

Fast forward to today. Wal Mart now has 12,000 stores instead of less than 3,000. Wal Mart now actually has half a trillion in sales instead of $165 billion. The dividend has grown over 1,000%. Earnings and free cash flow have soared. The stock however, hasn't really done anything over the past seventeen years.  Wal Mart even repurchased 28% of their shares in the same time period and and the price still hasn't moved.

 

Wal Mart was priced for perfection seventeen years ago.  How does someone convince a skeptic that AMZN is not priced for perfection today?

 

The main move in stock prices occurs before all the uncertainty is gone. WMT's intrinsic value became predictable over time hence investors who had the foresight when it was a much smaller operation reaped the benefit. Similar stories played out with Tesla/Cisco/Microsoft/Intel. I expect the same when it becomes obvious that AMZN has turned on its profitability switch - slowly growing into its valuation, while stock goes nowhere for years.

[Jurgis]

AMZN will never be more efficient than UPS at delivering packages.  Ever.  So what advantage will the AMZN truck (that currently doesn't exist) have in delivering packages that a competitor can't match by simply using UPS like AMZN does today?

 

Wait, you mean that the white van that I saw outside my house with letter A on it was in my imagination?

 

 

[ni-co]

A lot of my skepticism on AMZN the stock actually stems from Wal Mart.  In 1999, Wal Mart had a $245 billion market cap, sales of $165 billion. They had less than 3,000 stores. They were in the beginnings of shifting away from discount stores and over to supercenters. In my mind, Wal Mart was going to achieve half a trillion in retail sales and the stock was going to go much higher.

 

Fast forward to today. Wal Mart now has 12,000 stores instead of less than 3,000. Wal Mart now actually has half a trillion in sales instead of $165 billion. The dividend has grown over 1,000%. Earnings and free cash flow have soared. The stock however, hasn't really done anything over the past seventeen years.  Wal Mart even repurchased 28% of their shares in the same time period and and the price still hasn't moved.

 

Wal Mart was priced for perfection seventeen years ago.  How does someone convince a skeptic that AMZN is not priced for perfection today?

 

The main move in stock prices occurs before all the uncertainty is gone. WMT's intrinsic value became predictable over time hence investors who had the foresight when it was a much smaller operation reaped the benefit. Similar stories played out with Tesla/Cisco/Microsoft. I expect the same when it becomes obvious that AMZN has turned on its profitability switch - slowly growing into its valuation, while stock goes nowhere for years.

 

+1

The question is: From where will the stock go "to nowhere"? Certainly not from a 270bn market cap. The total addressable market is far too big for that.

 

 

AMZN will never be more efficient than UPS at delivering packages.  Ever.  So what advantage will the AMZN truck (that currently doesn't exist) have in delivering packages that a competitor can't match by simply using UPS like AMZN does today?

 

Another thought that popped into my mind: Who do you think is UPS's largest customer? What would happen to UPS's scale advantage if this customer grew so big that having its own logistics company would suddenly become a valid option?

[cmlber]

 

The larger AMZN grows the more categories they can add. Take groceries as an example. I know that today it's more or less a field of experimentation for AMZN and people say that delivering groceries is not doable on a country-wide scale. However, there is going to be a time when this AMZN truck will come to your street 3, 4, 5 times a day anyway. Then it suddenly will make sense to load it up with groceries as well – and, guess what, it will also be cheaper than the supermarket near you. We may reach this point in larger cities sooner rather than later.

 

 

AMZN will never be more efficient than UPS at delivering packages.  Ever.  So what advantage will the AMZN truck (that currently doesn't exist) have in delivering packages that a competitor can't match by simply using UPS like AMZN does today?

 

How about UPS's margin? I didn't say they'd get more scale than UPS but as far as I remember UPS is not a retailer.

 

Have you attempted to quantify that "advantage?"  DHL attempted to enter the US ground shipping market and exited after years of losing billions of dollars.  It takes A LOT of scale to be efficient at package delivery.  If AMZN shipping operations are one day as efficient as DHL was before they exited, their "advantage" would cost them compared to competitors willing to pay UPS enough to make its margin.

 

And even assuming AMZN is miraculously able to match UPS' costs to ship, UPS margin is only ~12-13%.  If shipping is ~10% of the cost of an order, you're talking about a 1.2% margin advantage over other retailers who don't have an internal shipping operation.  Good luck with that.

[rkbabang]

It isn't an either-or situation.  Maybe AMZN has certain densely packed markets with large customer densities where its own shipping makes sense, especially to offer products such as same day shipping where using UPS is cost prohibitive, and they could still use UPS for everywhere else.  I'm sure they have the data to see where doing thier own shipping could save them money and allow them to provide faster shipping to their customers.  It isn't like they have to do all of their own shipping and never use UPS again.