AMZN - Amazon.com Inc.

[DTEJD1997]

AMZN pays relatively little in terms of corporate (income) taxes.  For example, the show said that WMT paid about 30X more in corporate taxes since 2008. 

 

Breaking news: Taxes are paid on profits. If you don't make much profits, you don't pay much taxes!

 

Now for the weather...

 

btw, it would be interesting to see if WMT paid much taxes during it's hyper-growth phase, when they were constantly investing their cashflow in opening lots of new stores.

 

The government doesn't really lose, it's just deferred. If you have good reinvestment opportunities that help you grow much faster, you might not pay as much tax now, but you'll be much bigger later, so when you do ease off the gas and turn on the profit tap, the government will likely get much bigger absolute numbers of tax dollars than if you had shown profits much earlier and foregone growth opportunities. This makes sense as long as the growth gives good ROIC. Otherwise, it'll be customers and vendors capturing most of the value, not the corporation or the government...

 

I very much doubt the government will get much more in taxes later....

 

What about all the merchants/workers run out of business due to AMZN?

 

What happens if AMZN suddenly blows up?  For example, what if their data-base is hacked, or there is some type of calamity?  Chipotle and the banks and Experian can be examples of seemingly well run companies blowing apart.

 

OR

 

What if AMZN in the future decides that they want/need to make a profit?  Will they be able to maintain sales?  What if the business model of AMZN is to ALWAYS simply sell items for a loss/break even/very small profit and they can only keep their scale by having essentially free capital?

 

That business model seems to be dependent on the good graces of Wall Street.  Good while it lasts, terrible when it comes apart.

[Guest Cameron]

I'm trying to figure out how their income statement is effected because of investing for the future, could you explain for me because the numbers don't add up for me. 

 

In terms of their P&L, since I got their report in front of me, I get 117B of revenue with 115B in operating expenses for nine months ended, these are aren't R&D, these are expenses I have to incur and aren't reinvestment unless someone can explain in a way that refutes what I've said. Technology and content is what they consider their R&D, its stated in their report that T&C are payroll and AWS infrastructure expenses, but the capital financing is done in an off-balance vehicle through capital leases so are these expenses from prime video? if so that would be a real expense.

 

But since they don't want you looking at GAAP measures and rather they want you to look at the cash flow statement lets do that. First I see depreciation at 60% of OCF, last year it was 50%.

Either way FCF is around $8 billion in the latest report without doing any adjustments. But luckily for me Amazon breaks down FCF minus capital lease principle payments and assets acquired under capital leases which for a twelve month period stands at negative one billion dollars. 

 

Turning to the golden child, AWS is paraded around for its margins but how do I know how capital intensive it is?

 

Lets say Capital lease obligations are 2.5B capitalize that by 3x because thats about how long I guesstimate a server to last I get 7.5B. Operating leases at 1 billion this year capitalized at 8x equals 8 billion dollars. 24 billion in debt and 24 billion in equity, I get 63 billion in invested capital and equity increased 30% of the twelve month period more than half came from paid in capital.

 

For a company that is consider a cash machine they have a negative net cash balance, they don't do dividends and they aren't buying back stock they just issue equity and debt as a company worth 531 billion doll hairs.

 

Maybe I'm wrong and someone can enlighten me.

 

Walmart paid taxes when they were going through their growth phase.

 

 

[Guest Cameron]

I didn't even mention the $4 billion in SBC.

[clutch]

Amazon just bought three domain names related to cryptocurrency

 

https://www.cnbc.com/2017/11/01/amazon-buys-crypto-domains-bitcoin-ethereum.html

 

Either a marriage of two greatest bubbles of our time or this is the future!! :)

[Liberty]

I very much doubt the government will get much more in taxes later....

 

That remains to be seen. At some point finding reinvestment opportunities for so much cashflow will be impossible and/or Bezos will want to start taking a profit, possibly to fund other ventures like Blue Origin or to start his own philanthropy (which will very likely be quite innovative and results-based).

 

What about all the merchants/workers run out of business due to AMZN?

 

What about them? What about all of Amazon's customers who feel they're getting more value from Amazon than from legacy stores? You have to win people's business, you're not entitled to it. Otherwise, all the stores with 40% gross margins that existed before the discounters (Target, Walmart, etc) would still be around.

 

What happens if AMZN suddenly blows up?  For example, what if their data-base is hacked, or there is some type of calamity?  Chipotle and the banks and Experian can be examples of seemingly well run companies blowing apart.

 

What happens if any company blows up? Good question.

 

What if AMZN in the future decides that they want/need to make a profit?  Will they be able to maintain sales?  What if the business model of AMZN is to ALWAYS simply sell items for a loss/break even/very small profit and they can only keep their scale by having essentially free capital?

 

That's not how Amazon operates. It's basically a conglomerate with dozens of P&L, the profitable and mature ones fund the faster growing but loss-making startups. This has been explained many times in many places. We only see the aggregate numbers, so it only looks like the whole think is breaking-even.

 

That business model seems to be dependent on the good graces of Wall Street.  Good while it lasts, terrible when it comes apart.

 

Oh yeah? You mean they're constantly raising lots of equity? Or lots of debt? Or that by slowing investment a bit they couldn't pay employees with cash rather than with stock?

[Liberty]

I'm trying to figure out how their income statement is effected because of investing for the future, could you explain for me because the numbers don't add up for me. 

 

In terms of their P&L, since I got their report in front of me, I get 117B of revenue with 115B in operating expenses for nine months ended, these are aren't R&D, these are expenses I have to incur and aren't reinvestment unless someone can explain in a way that refutes what I've said. Technology and content is what they consider their R&D, its stated in their report that T&C are payroll and AWS infrastructure expenses, but the capital financing is done in an off-balance vehicle through capital leases so are these expenses from prime video? if so that would be a real expense.

 

But since they don't want you looking at GAAP measures and rather they want you to look at the cash flow statement lets do that. First I see depreciation at 60% of OCF, last year it was 50%.

Either way FCF is around $8 billion in the latest report without doing any adjustments. But luckily for me Amazon breaks down FCF minus capital lease principle payments and assets acquired under capital leases which for a twelve month period stands at negative one billion dollars. 

 

Turning to the golden child, AWS is paraded around for its margins but how do I know how capital intensive it is?

 

Lets say Capital lease obligations are 2.5B capitalize that by 3x because thats about how long I guesstimate a server to last I get 7.5B. Operating leases at 1 billion this year capitalized at 8x equals 8 billion dollars. 24 billion in debt and 24 billion in equity, I get 63 billion in invested capital and equity increased 30% of the twelve month period more than half came from paid in capital.

 

For a company that is consider a cash machine they have a negative net cash balance, they don't do dividends and they aren't buying back stock they just issue equity and debt as a company worth 531 billion doll hairs.

 

Maybe I'm wrong and someone can enlighten me.

 

The model has been explained often and in many places, I'm sure you can find them. They run a lot of things through the income statement that others might capitalize, and lots of growth expenses go into things like headcount. They basically target break even in the aggregate, but it's run as a conglomerate with mature profitable P&Ls funding startup P&Ls. What if they targeted 10% growth a year? Do you think profits would stay the same? Do you really think they need all this headcount growth and R&D and growth in leases and massive investments in places like India just to serve their existing customer base growing at 10%? Do you really think their retail operations are less efficient than Walmart and Costco (with the secular tailwind of e-commerce at its back), and that their cloud is a worse business than the cloud business of MSFT and GOOG (despite much bigger scale)?

 

It's clear that the aggregate numbers hide all this, and that's why the market has underestimated Amazon for many years (if it hadn't, you wouldn't have gotten this much outperformance out of it, right?).

 

Personally, I tend to think the people who are betting that Bezos is stupid and doesn't know how to make money are mistaken.

 

Walmart paid taxes when they were going through their growth phase.

 

Yeah, that's not surprising. Malone hadn't taught the world how to optimize growth vs tax efficiency back then. Still, I bet they'd have paid a lot more taxes if they had opened half as many stores each year, right?

[Guest Cameron]

I'm trying to figure out how their income statement is effected because of investing for the future, could you explain for me because the numbers don't add up for me. 

 

In terms of their P&L, since I got their report in front of me, I get 117B of revenue with 115B in operating expenses for nine months ended, these are aren't R&D, these are expenses I have to incur and aren't reinvestment unless someone can explain in a way that refutes what I've said. Technology and content is what they consider their R&D, its stated in their report that T&C are payroll and AWS infrastructure expenses, but the capital financing is done in an off-balance vehicle through capital leases so are these expenses from prime video? if so that would be a real expense.

 

But since they don't want you looking at GAAP measures and rather they want you to look at the cash flow statement lets do that. First I see depreciation at 60% of OCF, last year it was 50%.

Either way FCF is around $8 billion in the latest report without doing any adjustments. But luckily for me Amazon breaks down FCF minus capital lease principle payments and assets acquired under capital leases which for a twelve month period stands at negative one billion dollars. 

 

Turning to the golden child, AWS is paraded around for its margins but how do I know how capital intensive it is?

 

Lets say Capital lease obligations are 2.5B capitalize that by 3x because thats about how long I guesstimate a server to last I get 7.5B. Operating leases at 1 billion this year capitalized at 8x equals 8 billion dollars. 24 billion in debt and 24 billion in equity, I get 63 billion in invested capital and equity increased 30% of the twelve month period more than half came from paid in capital.

 

For a company that is consider a cash machine they have a negative net cash balance, they don't do dividends and they aren't buying back stock they just issue equity and debt as a company worth 531 billion doll hairs.

 

Maybe I'm wrong and someone can enlighten me.

 

The model has been explained often and in many places, I'm sure you can find them. They run a lot of things through the income statement that others might capitalize, and lots of growth expenses go into things like headcount. They basically target break even in the aggregate, but it's run as a conglomerate with mature profitable P&Ls funding startup P&Ls. What if they targeted 10% growth a year? Do you think profits would stay the same? Do you really think they need all this headcount growth and R&D and growth in leases and massive investments in places like India just to serve their existing customer base growing at 10%? Do you really think their retail operations are less efficient than Walmart and Costco (with the secular tailwind of e-commerce at its back), and that their cloud is a worse business than the cloud business of MSFT and GOOG (despite much bigger scale)?

 

It's clear that the aggregate numbers hide all this, and that's why the market has underestimated Amazon for many years (if it hadn't, you wouldn't have gotten this much outperformance out of it, right?).

 

Personally, I tend to think the people who are betting that Bezos is stupid and doesn't know how to make money are mistaken.

 

Walmart paid taxes when they were going through their growth phase.

 

Yeah, that's not surprising. Malone hadn't taught the world how to optimize growth vs tax efficiency back then. Still, I bet they'd have paid a lot more taxes if they had opened half as many stores each year, right?

 

I don't think Bezo's is stupid, telling people to look at Free Cash Flow and then stuffing your capex in financing activities is genius so long as people keep buying into the dream. I wouldn't call it immoral because at least they break down what their FCF is when you factor in capital leases but how many of the retail investors that buy Amazon because they use the service actually read the reports?

 

I just don't see how anyone can say that they are funding this or that and their P&L would be this is this if they didn't do that. You really can't tell anything from the accounting, I have to guess how much invested capital they have and after I did that I couldn't get a real ROIC.

 

Not calling Amazon, Enron but you got some pretty great outperformance from them for a while I could give you a couple other accounting manipulators that operated for years, I don't know what Amazon is worth because their numbers are so messed up that I can't value anything but based on what I can pull together I don't get $531 billion. The messing with the numbers started with the formation of AWS.

 

Cloud seems to becoming a worse and worse business, lowering prices something like 50 times in a year doesn't sound like complete domination.

 

I know you like tech and I've learned a lot from your posts about it in the past but you can't tell me people buying at this valuation are getting a good return.

[rkbabang]

you can't tell me people buying at this valuation are getting a good return.

 

That question can only be answered in 10 years.

 

[Guest Cameron]

you can't tell me people buying at this valuation are getting a good return.

 

That question can only be answered in 10 years.

 

I should have said return on invested capital but yes no one knows what the stock will return in 10 years.

[Liberty]

Feel free to short it if that's your analysis of the situation ¯\_(ツ)_/¯

[KCLarkin]

I know you like tech and I've learned a lot from your posts about it in the past but you can't tell me people buying at this valuation are getting a good return.

 

I think Ben Graham's concept of the "speculative component" of an investment is a good way to think about Amazon. In Graham's mind, there is a certain portion of the stock price that can be justified by the current dividend (or earnings) or liquidation value. Anything above that, is the "speculative component". The "speculative component" can either be a reasonable estimate of future cash flows. Or could just be the price gamblers are willing to pay to play a hot stock.

 

Cameron is clearly saying is that the speculative-to-investment ratio on Amazon is very high. Liberty is saying that the high speculative component is justified. And rkabang is saying that it will take at least 10 years for the speculative-to-investment ratio to converge. You are all right. Either the investment value of the company will increase to justify the current speculative price. Or the price will drop to match the investment component. And nobody will know who was right for 10-20 years (though it will seem obvious in hindsight).

 

 

 

[Liberty]

I think it's more about adding to Graham's framework some of the learnings of Buffett, Munger, and Fisher to take into account more of the business quality, industry dynamic, qualitative aspects (culture, management, etc), and understanding how real value is created even if GAAP doesn't always capture it well because it was designed for different kinds of businesses. Other frameworks are also useful, like Ben Thompson's "aggregator" framework, which explains why some of the big internet businesses are very different from legacy businesses.

 

Buffett has actually praised Bezos quite a bit in recent years, so he doesn't seem to think it's all a mirage of smoke and mirrors and no profits.

[KCLarkin]

I think it's more about adding to Graham's framework some of the learnings of Buffett, Munger, and Fisher to take into account more of the business quality, industry dynamic, qualitative aspects (culture, management, etc), and understanding how real value is created even if GAAP doesn't always capture it well because it was designed for different kinds of businesses. Other frameworks are also useful, like Ben Thompson's "aggregator" framework, which explains why some of the big internet businesses are very different from legacy businesses.

 

Buffett has actually praised Bezos quite a bit in recent years, so he doesn't seem to think it's all a mirage of smoke and mirrors and no profits.

 

No. All of that is factored into Graham's thinking. Actually, a lot of his lectures were about recognizing the difference between GAAP accounting and real "earning power". He clearly recognizes that the speculative component is warranted in many cases. It's just that the speculative component is based on FUTURE VALUE which is inherently unpredictable.

 

What I am saying. Which is undeniably true. Is that as a shareholder, you are not getting a single current dollar out of Amazon today. Every dollar (and more since they are issuing stock and borrowing money) is being reinvested into the business. So strictly speaking, 100% of the stock price is based on the future. Your investment performance is going to be based on whether you are able to better predict the future than Mr. Market. "Aggregration theory" might give you sufficient confidence that you can predict the future better than the Market. Or Bezos' track record. Or Malone's track record. Or the size of the moat. Buffett clearly doesn't agree since he bought Apple not Amazon. The interesting thing about Buffett's Apple purchase, is that it arguably had a negative speculative component. The market was expecting a future much worse than the present.

 

But it is not worth arguing about Amazon since the future is unknowable.

 

There are some things worth discussing. Like how much FCF does Amazon really produce. Or what is the underlying profitability of each business. Or what are the real "owners earnings". But these are also unknowable because Amazon doesn't provide enough disclosure to go beyond mere guesses.

 

--

BTW, I'm on record as saying that you should hold Amazon as long as it stays above its 200 day MA.

 

[Liberty]

I guess I wasn't clear. What I'm saying is that this aspect of Graham's thinking has been fleshed out and explained in more detail by these other people. Of course it's true that the value is from that aspect. I'm saying that to understand it you can use these other frameworks.

[Guest Cameron]

I guess I wasn't clear. What I'm saying is that this aspect of Graham's thinking has been fleshed out and explained in more detail by these other people. Of course it's true that the value is from that aspect. I'm saying that to understand it you can use these other frameworks.

 

Genuine questions,

 

Do you think twice about the off balance sheet capitalization?

 

What would you consider a fair value of Amazon right now given their numbers?

[KCLarkin]

I guess I wasn't clear. What I'm saying is that this aspect of Graham's thinking has been fleshed out and explained in more detail by these other people. Of course it's true that the value is from that aspect. I'm saying that to understand it you can use these other frameworks.

 

These frameworks can be used to quantify how much of the speculative component is justified. Its my experience that Amazon is just too devilishly difficult to VALUE. I did an exercise much earlier in this thread, where I found fair value to be between say $100B - $1.4T (not the actual numbers too lazy to look it up). It is like valuing a pre-revenue startup. You can do it, but you are literally picking a number out of the air.

 

So I'm not saying don't buy Amazon. You just can't buy it on a valuation basis. There are many people who naively take the reported FCF to justify the valuation. This is a terrible idea, as I've repeatedly stated in this thread.

 

Two approaches that might work:

- momentum investing

- VC-style (buy a basket expecting a couple big winners)

 

History suggests that VC-style investing DOES NOT WORK in public markets. "Aggregation Theory" suggests that it might. The winners are just so big that they can pay for the many losses growth investors face. But only time will tell if it really is different this time.

[UK]

Is it possible to answer if this could be any real threat?

 

MR. ANDERS: When we polled audience members about which company they think is going to dominate e-commerce in five years, they didn’t pick Wal-Mart.

MR. LORE: It will be interesting to ask that question 50 years from now, or 20, because Wal-Mart has some really unique assets that no one else has. To date, we haven’t fully leveraged the scale of Wal-Mart, specifically its 4,600 stores within 10 miles of 90% of the population. Fresh, frozen, over 100,000 general-merchandise SKUs are in that proximity. That product gets there in full truckloads—not cases and pallets—and those 4,600 warehouses are profitable. They’re already covering their entire fixed expense. So each marginal dollar that ships out of there comes out at an incredible profit. Already, [customers can pick up online orders] of fresh grocery at 1,000 stores. We’re rolling that out to over 2,000 stores next year. And from each of those stores, we will have the ability to deliver. We are testing grocery deliveries now in 22 stores, using a combination of our own associates, Uber drivers, Deliv, and a bunch of other players.

MR. ANDERS: There is a big arms race under way right now with groceries. Certainly, Amazon and Whole Foods are getting a lot of attention. Up to now, Wal-Mart has been banking heavily on its vast physical store network and making that better.

MR. LORE: The hard part is done. We have forward-deployed inventory, full truckloads, warehouses making money. We have pickup capability for online orders at 1,000 stores, which will be 2,000 stores by the end of next year and eventually 3,000 and 4,000 stores. Now, it’s just about that last-mile delivery piece, and there are plenty of partners we can work with to do that.

MR. ANDERS: Amazon has plowed a ton of money into the logistics side. Are you saying that Wal-Mart can go head-to-head with Amazon and offer the exact same services that they’re offering?

MR. LORE: We have a little bit of a second-mover advantage. We were able to build a logistics network from scratch. We’ve got the warehouses in place at the right size, with the right amount of automation. And today, we can hit 87% of the country overnight and 99% in two days, via ground shipping. Over the next two years, you’ll start to see dramatic improvements. You’ll see the new design rollout at Walmart.com. You’ll start to see more same-day and two-hour delivery. You’re going to see a lot of changes. And I think two years from now, it will be interesting to ask the same question to see how people think.

[KCLarkin]

Is it possible to answer if this could be any real threat?

 

MR. ANDERS: When we polled audience members about which company they think is going to dominate e-commerce in five years, they didn’t pick Wal-Mart.

MR. LORE: It will be interesting to ask that question 50 years from now, or 20, because Wal-Mart has some really unique assets that no one else has. To date, we haven’t fully leveraged the scale of Wal-Mart, specifically its 4,600 stores within 10 miles of 90% of the population. Fresh, frozen, over 100,000 general-merchandise SKUs are in that proximity. That product gets there in full truckloads—not cases and pallets—and those 4,600 warehouses are profitable. They’re already covering their entire fixed expense. So each marginal dollar that ships out of there comes out at an incredible profit. Already, [customers can pick up online orders] of fresh grocery at 1,000 stores. We’re rolling that out to over 2,000 stores next year. And from each of those stores, we will have the ability to deliver. We are testing grocery deliveries now in 22 stores, using a combination of our own associates, Uber drivers, Deliv, and a bunch of other players.

MR. ANDERS: There is a big arms race under way right now with groceries. Certainly, Amazon and Whole Foods are getting a lot of attention. Up to now, Wal-Mart has been banking heavily on its vast physical store network and making that better.

MR. LORE: The hard part is done. We have forward-deployed inventory, full truckloads, warehouses making money. We have pickup capability for online orders at 1,000 stores, which will be 2,000 stores by the end of next year and eventually 3,000 and 4,000 stores. Now, it’s just about that last-mile delivery piece, and there are plenty of partners we can work with to do that.

MR. ANDERS: Amazon has plowed a ton of money into the logistics side. Are you saying that Wal-Mart can go head-to-head with Amazon and offer the exact same services that they’re offering?

MR. LORE: We have a little bit of a second-mover advantage. We were able to build a logistics network from scratch. We’ve got the warehouses in place at the right size, with the right amount of automation. And today, we can hit 87% of the country overnight and 99% in two days, via ground shipping. Over the next two years, you’ll start to see dramatic improvements. You’ll see the new design rollout at Walmart.com. You’ll start to see more same-day and two-hour delivery. You’re going to see a lot of changes. And I think two years from now, it will be interesting to ask the same question to see how people think.

 

Walmart can and should be a real threat. The question is whether Walmart waited too long to respond aggressively. Even 5 years ago, Walmart had scale advantages over Amazon and could have crushed them. Now, they are much more equal competitors. Both have roughly equal arsenals. But Amazon has top-of-mind and Prime lock-in. Glad to see Walmart finally get aggressive but I think it is way too late. Walmart wins grocery but Amazon runs the rest of the table.

[dwy000]

The problem for Walmart is they need to show the same amount of online growth but are still expected to show a profit.  Amazon doesn't have to show a profit while it grows.

[Jurgis]

Anecdotally, WalMart online is for me 2nd or 3rd destination to check prices if I decide to do price check vs Amazon.

I've mentioned before that Amazon had some stuff (specific coffee, specific granola) at way inflated 3rd party prices and then I bought them from Walmart online.

Amazon has gotten these items at better prices since then so Walmart online purchases are gone.

 

For groceries physical stores are still the go-to place for us. So no comment on grocery purchases from Amazon/Walmart online. We don't visit Walmart or Whole Foods stores, but that's mainly since they are not close by. And they are not "important"/"distinctive" enough for us to drive to them (unlike Trader Joes or H-mart or Russian grocery store or Wegman's).

 

Disclaimer: None of this is significant from investing standpoint I think.

[KCLarkin]

For groceries physical stores are still the go-to place for us. So no comment on grocery purchases from Amazon/Walmart online. We don't visit Walmart or Whole Foods stores, but that's mainly since they are not close by. And they are not "important"/"distinctive" enough for us to drive to them (unlike Trader Joes or H-mart or Russian grocery store or Wegman's).

 

Walmart is aggressively rolling out order-and-pickup services. Loblaws (biggest grocer in Toronto) is too. I don't see how Amazon and Whole Foods can possibly compete in grocery, especially if Walmart uses Uber-like service for last mile.

[Jurgis]

For groceries physical stores are still the go-to place for us. So no comment on grocery purchases from Amazon/Walmart online. We don't visit Walmart or Whole Foods stores, but that's mainly since they are not close by. And they are not "important"/"distinctive" enough for us to drive to them (unlike Trader Joes or H-mart or Russian grocery store or Wegman's).

 

Walmart is aggressively rolling out order-and-pickup services. Loblaws (biggest grocer in Toronto) is too. I don't see how Amazon and Whole Foods can possibly compete in grocery, especially if Walmart uses Uber-like service for last mile.

 

I've said this before, but IMO order-and-pickup is mostly idiocy (not a critique to you, but rather to the model  8)). It mixes the worst parts of online and physical: you have to online-pick the product which is worse than physical since you can't really see it and touch it; and then you have to go to the store to pickup which is bad since the whole point of online ordering is avoiding going to the store. I've maybe done order-and-pickup once in my life and only because it was expensive purchase with large discount was not available otherwise (they just forced me to use it).

But then there are people who do order-and-pickup from restaurants which I never understood either (why just not order for delivery? unless restaurant does not deliver...), so apparently there's some subset of population who'd do it.

 

Now, I know you said "if Walmart uses Uber-like service for last mile", so you seem to not really talk about order-and-pickup, but rather real deliver. From what I know bigger local stores (Wegman's, Stop&Shop in our area) do that already via Instacart, Peapod, whatever. I can't really say much about how useful this is or going to be. As I've said, we are still 100% physical stores for groceries (also near 100% physical for clothes/shoes for similar reasons). Maybe this will change for us at some point, but I really don't know. Maybe we are just laggards in this area and at some point when everyone does it, we'll start doing it too. Not sure. So I can't really comment about who will win grocery delivery. I'd say it's early innings and neither Amazon, nor Walmart IMO are guaranteed to win. Walmart does have the store penetration and large number of SKUs and that helps I'd say. Amazon has the non-grocery delivery infra + 1st online destination capture, but they may have issues with grocery SKUs and geo penetration. If I was forced to buy groceries via delivery, I don't really know what I would use. It would depend a lot on website convenience, on specific brand/product availability, potentially on prices (especially if we talk huge markups), potentially on delivery costs. So, sorry, but probably not much of a conclusion.

 

Take care.

[rkbabang]

For groceries physical stores are still the go-to place for us. So no comment on grocery purchases from Amazon/Walmart online. We don't visit Walmart or Whole Foods stores, but that's mainly since they are not close by. And they are not "important"/"distinctive" enough for us to drive to them (unlike Trader Joes or H-mart or Russian grocery store or Wegman's).

 

Walmart is aggressively rolling out order-and-pickup services. Loblaws (biggest grocer in Toronto) is too. I don't see how Amazon and Whole Foods can possibly compete in grocery, especially if Walmart uses Uber-like service for last mile.

 

I've said this before, but IMO order-and-pickup is mostly idiocy (not a critique to you, but rather to the model  8)). It mixes the worst parts of online and physical: you have to online-pick the product which is worse than physical since you can't really see it and touch it; and then you have to go to the store to pickup which is bad since the whole point of online ordering is avoiding going to the store. I've maybe done order-and-pickup once in my life and only because it was expensive purchase with large discount was not available otherwise (they just forced me to use it).

But then there are people who do order-and-pickup from restaurants which I never understood either (why just not order for delivery? unless restaurant does not deliver...), so apparently there's some subset of population who'd do it.

 

Now, I know you said "if Walmart uses Uber-like service for last mile", so you seem to not really talk about order-and-pickup, but rather real deliver. From what I know bigger local stores (Wegman's, Stop&Shop in our area) do that already via Instacart, Peapod, whatever. I can't really say much about how useful this is or going to be. As I've said, we are still 100% physical stores for groceries (also near 100% physical for clothes/shoes for similar reasons). Maybe this will change for us at some point, but I really don't know. Maybe we are just laggards in this area and at some point when everyone does it, we'll start doing it too. Not sure. So I can't really comment about who will win grocery delivery. I'd say it's early innings and neither Amazon, nor Walmart IMO are guaranteed to win. Walmart does have the store penetration and large number of SKUs and that helps I'd say. Amazon has the non-grocery delivery infra + 1st online destination capture, but they may have issues with grocery SKUs and geo penetration. If I was forced to buy groceries via delivery, I don't really know what I would use. It would depend a lot on website convenience, on specific brand/product availability, potentially on prices (especially if we talk huge markups), potentially on delivery costs. So, sorry, but probably not much of a conclusion.

 

Take care.

 

My wife and I loved Peapod, we used it for the majority of our groceries right up until Stop & Shop pulled out of New Hampshire a few years back.  We are back to grocery shopping in person and hate it.  These days when everyone is busy (2 income families with busy kids, etc) who has the time to go to the store in person?  Who would want to?  That seems like an antiquated thing that will be done by old retired people resistant to change with nothing but time on their hands to do things the old way. I still see old ladies paying with hand written checks sometimes and holding up the line while writing a log the transaction into the written ledger on the other side of the check book, which always amazes me.  But it's been a long time since I've seen anyone under 70 or so paying with a check in a retail or grocery store.  That is the type of thing that will die off with that generation of people. Home delivery will be the same.  I tend to think that home delivery is almost always superior if available and affordable.

 

[KCLarkin]

It mixes the worst parts of online and physical: you have to online-pick the product which is worse than physical since you can't really see it and touch it; and then you have to go to the store to pickup which is bad since the whole point of online ordering is avoiding going to the store.

 

This might be true for hard goods but not really applicable for grocery.

 

Anyway, I still don't see how Amazon/WFM competes with Walmart in grocery. Walmart already has all the elements for online ordering and delivery. And they have a massive scale advantage plus a dense store network.

[Liberty]

A few randoms thoughts:

 

With some businesses, everything's pretty clear, and that's always nice. With visa you can look at the earnings and FCF and ROIC and ROE and do your valuation.

 

With some others, things aren't as clear. You can either put them in the too hard pile, which I did with Amazon for a really long time (esp. considering I've been a customer since the late 1990s), or you can try to think things through and get a portrait that might be good enough to have an opinion. I think that's sometimes worth doing because there's usually little edge to be had by just looking at the same income statement and balance sheet that everybody's looking at and hoping to have a unique insight.

 

So here are some things that I think often get overlooked:

 

What are the chances that Amazon's mature retail businesses don't get margins comparable to WMT or COST? Is anything about the amazon model inherently less efficient or profitable? Their prices aren't that different. Seems to me like it should be even better, since all they need are huge increasingly automated distribution centers/warehouses with fewer employees, fewer niceties (customers don't see them), and a lot more throughput (rather than holding inventories on the shelves for people to see), and secular tailwind from the shift to e-commerce. And it seems to me like Amazon is at least getting as good a deal from suppliers as WMT and COST. Over time as you have more and more FCs close to big population centers, you can start to offer 2-day and 1-day shipping (very hard to match for most competitors) and cut into your shipping costs by leasing your own planes and ships and create your own last mile network (you first cherry-pick the highest-return routes, leaving UPS and Fedex with the rest).

 

And if the mature retail P&Ls within amazon are getting margins at least as good as WMT and COST for equivalent merchandise (maybe with higher turnover, so better ROIC), then what are the chances that the loss-making startup P&Ls are going to never grow into profitable mature P&Ls later on?

 

Then you have to consider third-party sales. This is a very large part of their sales (especially since in revenues they only recognize their cut and not the whole item price), and this is more of an eBay model. You connect to our APIs, list your product on our site. When you sell it we take a cut, ka-ching the money ends up in our bank account and we haven't touched anything. This seems to me a much better business than traditional retail. And on top of it Amazon is now offering FBA, so that people can pay even more just to hold inventory in amazon's logistics network. Amazon takes no inventory risk and gets even better utilization out of its fixed assets, and everything still takes place on their site, so they still own the customer relationship.

 

Thanks to the breadth of inventory that 3P permits, they now have so many things that to many people, Amazon is the main search engine for stuff. There's surveys down this thread showing how people increasingly don't use google to search for products but go directly to Amazon. How much is it worth to be the google of products and have people not even consider competitors most of the time? And with half the country and increasingly other countries paying for Amazon Prime, people have a sunk cost that pushes them to use Amazon even more (same as a costco membership).

 

Once you're the Google of products, you can start selling targeted ads in search results, which they're increasingly doing. Seems like another great business to be in.

 

Then there's AWS. On-premise IT is a trillion dollar business, and over time most of it will move to the cloud because it's simply better in almost all aspects. Utilization is better, scalability is much easier, security is better unless it's a core competency of your company, etc. So I think there's a huge secular tailwind there, and scale matters a ton. There's probably going to be 3-4 big winners, and Amazon has a big lead. They keep cutting prices because they're riding Moore's Law and hard drives and ram getting cheaper, and the "economics of scale shared" model creates a nice flywheel. If you share the benefits of scale with your customers, you grow faster and are much harder to compete with, making you bigger, leading to more scale benefits which you can then use to keep growing, etc. Hard to catch up with the giant in an industry where scale matters a ton.

 

Then there's the fact that most people seem to think AWS is just IaaS, a bunch of dumb servers, but they've actually been going up the stack pretty quickly. They sell a bunch of software as a service: Databases, all kinds of ML modules and lambdas, serverless stuff, etc. This is up the value chain and also a very good business, especially once other companies build their backend on your platform. They tend to stick around for that stuff.

 

With a lot of these things, it's a flywheel where the bigger you get, the more you can do the things that makes you even bigger and keeps smaller competitors from being able to keep up with you. So you become an ever better value for customers, so they're even more sticky (Amazon Videos might make it even more likely that you'll renew your Amazon Prime, which keeps you buying more on Amazon because you don't worry about shipping, etc).

 

There's a bunch more stuff, but this is some food for thought when you compare Amazon to Walmart or whatever. How much is that worth? Well, there's not one good answer. If there was, someone would've given it and there'd be no more debate about it. But I think too many people don't think things through enough to have an opinion. Looking at the numbers in filings isn't the same as understanding the business.