New Position in AMZN

Investment Analysis Clubs Saul’s Investing Discussions
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I had said that although I buy almost everything from Amazon and love the company, I wouldn’t invest in it as they weren’t interested in making a profit. Well they recently started making a profit, if you will accept growing Free Cash Flow as a profit. So I will take a small position, in spite of the high PE. Here’s what I’m basing it on (besides loving the company):

Revenue


2013:  16.1  15.7  17.1  25.6  =  74.5    	(up 22%)
2014:  19.7  19.3  20.6  29.3  =  88.9    	(up 19%)
2015:  22.7  23.2

Trailing 12-Month (TTM) Operating Cash Flow


2013:  4.25  4.50  5.00  5.50    		(up 31% over 2012)
2014:  5.35  5.30  5.70  6.80 			(up 24% over 2013)
2015:  7.80  9.00					(last Q up 70%)

Note that Operating Cash Flow:
Stalled out in the first two quarters last year (actually fell from 5.50 to 5.35 to 5.30)
But has taken off in the last three quarters (from 5.70 to 6.80 to 7.80 to 9.00).

Trailing 12-Month (TTM) Free Cash Flow


2013:  0.20  0.30  0.40  2.00    		(up 400% from 0.40% in 2012)
2014:  1.50  1.00  1.10  1.95 			(down 2.5% from 2013)
2015:  3.20  4.40					(last Q up 340%)

Note that Free Cash Flow:
Was affected by large capital expenditures (buying new headquarters or something) in the first three quarters of 2013.
Also stalled out in the first two quarters of last year (actually fell from 2.00 to 1.50 to 1.00)
But has taken off in the last three quarters (from 1.10 to 1.95 to 3.20 to 4.40).

Note also that trailing capital expenditures for the past five quarters have been pretty stable at (I’m subtracting FCF from OCF here) 4.30, 4.60, 4.85, 4.60, 4.60. This gives a lot of leverage in FCF as OCF grows. (5.30 minus 4.30 leaves just 1.00, while 9.00 minus 4.60 leaves 4.40. Thus a 70% increase in OCF gave a 340% increase in FCF, without any slight of hand or magic).

Saul

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Saul,
Thanks for the write up. I think your analysis is spot on.

Although I mostly agree with your bias towards keeping analysis as simple as possible. In AMZN’s case, I think it is critical to break out the Amazon’s Web Services from their retail operations. AWS revenue was +81.5% to $1.8B. AWS provided provided 21% margin vs the retail side having about 5% What a wonderful side business!

I think Evan Niu’s break down of the AWS contribution is must read material for anyone who is long AMZN.

http://www.fool.com/investing/general/2015/10/09/amazoncoms-…

Best,

bulwnkl

Long AMZN since January of this year.

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AMZN has shown attractive price step ups the day after the each of the last 3 quarters earnings announcements.
Jan 29th Q4 2014 Jan 30th 14% price increase
Apr 23rd Q1 2015 Apr 24th 14% price increase
Jul 23rd Q2 2015 Jul 24th 10% price increase.

Next earnings will be announced Oct 22nd, but I suspect this may be priced in as AMZN has had a 15% increase in just the last 3 weeks. However, it went up 12% the 11 days prior to the last announcement too.

There was a great piece on the CBS Sunday Morning show today about how Drones will now be registered with the FAA and that Amazon is very ready to start their fleet of drones to deliver packages with a new top secret drone that hasn’t been shown publicly yet.

We are entering a new world of transportation very soon!

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Thanks Bulwinkl, useful post.
Saul

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(Then) I wouldn’t invest in it…(now) so I will take a small position

What?!! You changed your mind, AGAIN!!?

(Yes, that’s sarcasm)

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about how Drones will now be registered with the FAA and that Amazon is very ready to start their fleet of drones to deliver packages with a new top secret drone that hasn’t been shown publicly yet.

I predict that “drone delivery” will be a vanishingly small part of Amazon’s business. It might be good for a few TV appearances, but as a percentage of business it’s likely to be in the hundredths of a percent and completely immaterial to the company’s results.

Amazon has about three dozen fulfillment centers, which puts them within 20 miles of 30% of the population. (Piper Jaffrey: http://www.businessinsider.com/how-many-fulfillment-centers-…) But 20 miles (40 miles roundtrip) is a very long flight for a drone, so the “30%” is likely a small fraction of what is actually serviceable.

Now drop all deliveries that are too heavy or too bulky, and likewise drop all that are too urban, because while you might drop a package on the front lawn of someone in the suburbs (front lawn?), you can’t do that at an apartment building, at least until landlords enable rooftop delivery, make security changes to allow people on the roof, and designate a drop area, all of which costs the landlords size dollars and doesn’t increase their rents a dime.

I suppose they could cross ship to “drone centers” to get even closer to customers, but somehow I can’t see that doing anything but increasing delivery costs substantially. I’m sure this “drone delivery” will be good for a few more TV appearances, but in the long run, nothingburger.

Amazon has been profitable before, and will flirt with it again. But if Bezos has shown anything over his (now) long career, it won’t last. He may build another great business, or two, or three, and naysayers may be proven wrong again, but if you’re basing things on “Amazon” and “profit”, prepare to be disappointed.

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The year is 2032, the Amazon warehouse is literally humming with drone activity.

A second floor was long ago added to the warehouse as a drone parking lot, they enter at one end and at the other end they hover down to the ends of the conveyor belts to pick up orders and are swiftly off to make delivery.

Every new house built of any note has a special drone drop off pad that works something like an automatic horizontal dumb waiter…

JT – stares at his 8mm thick cell phone

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“Amazon has been profitable before, and will flirt with it again. But if Bezos has shown anything over his (now) long career, it won’t last. He may build another great business, or two, or three, and naysayers may be proven wrong again, but if you’re basing things on “Amazon” and “profit”, prepare to be disappointed.”

Goofyhoofy would you care to expand a little on that statement.

Thanks

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But 20 miles (40 miles roundtrip) is a very long flight for a drone, so the “30%” is likely a small fraction of what is actually serviceable.

Perhaps the drones can be launched from a truck driving down arterial street or truck routes and fly to the most out of the way/time consuming cul-de-sacs or businesses. As the truck makes its return trip the drone flies back to the truck.

The truck still makes a route, but a much more time and energy efficient one. Drones fly shorter routes to the places that take up the most time and fuel consumption from the delivery driver’s point of view.

Could happen.

4wheel.

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"Amazon has been profitable before, and will flirt with it again. But if Bezos has shown anything over his (now) long career, it won't last. He may build another great business, or two, or three, and naysayers may be proven wrong again, but if you're basing things on "Amazon" and "profit", prepare to be disappointed."

Goofyhoofy would you care to expand a little on that statement.

Not Goofy, but I’m fairly fascinated by Amazon. It is abundantly clear that Bezos is flat not interested in making a profit. Every time the shareholders start to seem disgruntled, Amazon pumps out some profit for a few quarters until the natives settle down and it goes back to reliably losing money.

That is not a knock on Bezos! He has a long term vision that spans decades. Compare that to most companies which are only concerned about next quarter. But that makes the stock price very tricky to evaluate. What is the P/E if there is no E? Kind of makes it hard. Bezos wants to expand the company in world changing ways, and profits are just a bother.

Back to the drones. I don’t know if drone delivery will ever be huge, but I think it will be bigger than Goofyhoofy does, and even if it isn’t big there are still reasons why it is a good idea. Amazon already has one hour delivery to many markets, and is presumably expanding to more. From that I conclude that Amazon believes that fast delivery reduces the barrier to buying. The faster they get it to you, the more stuff you buy. If one hour delivery makes sense with a driver bringing you stuff, then it makes even more sense with a drone bringing you stuff. Let’s say only 2% of Amazon customers can accept drone delivery, but if it is available, they buy twice as much stuff.* Right there, you’ve made a several billion dollar increase in sales. That’s not nothing.

*I don’t think this is a bad assumption. How many times do you need just one or two items for a project, but don’t want to run to the store? Same for dinner. Amazon delivers beer and wine in my neighborhood. So yeah, I could see buying more stuff if I could get it now instead of two days from now. And if you are invested in Amazon ecosystem, you tend to buy lots more stuff in general from them, like Kindle books and music. So if you have a reason to sign up for Prime Now–like fast delivery, you become a bigger customer for them in general. Bottom line is I don’t think a lot of customers need to be able to accept drone delivery for this to be a good idea for Amazon.

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Now I have a cartoon bubble picture of drones circling a truck like seagulls following a fishing boat. ;).

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Saul, now I’m lost. I’ve been following this board for a few months, have been very impressed with your track record (who wouldn’t be), duly read the Knowledgebase and thought that it boils down to (ok I simplify now) investing into companies that with strongly growing earnings, YPEG generally below 1 and REASONABLE P/E. The very appeal to this board (apart from the extremely interesting posts and friendly, cooperative atmosphere) is the promise that here’s a set of rules that when diligently applied, will lead to superior returns.

Where does Amazon come into the equation here? It’s an intriguing company any way you look at it, but reasonable PE? I don’t think so. Not by any normal measure.

And yes I fully understand Saul you can buy and sell what you want and you don’t owe us an explanation. But then again, discussing the philosophy is the professed purpose of this board. So I would love to hear the reasoning how AMZN is supposed to fit into the above described investing philosophy.

This board has led me to exciting new investment opportunities like SKX, gave me comfort in some others like AMBA and more. And I’m greatful for that. But then there are companies like AMZN where I just don’t understand the rationale. Same goes for PAYC by the way although I have to admit I didn’t do a full search for articles. Very tempted to buy PAYC, but then I stopped, thinking - wait a minute, this really doesn’t sport a reasonable PE.

All I’m saying it’s easy to find a ton of companies with little earnings but full of promise, and skyhigh valuation in terms of PE. Rule Breaker is full of them, but as the statistics show, returns are average. But like so many of us, I’m trying to find a rational approach to investing that limits risk and maximizes opportunity - with emphasis on ‘rational’, i.e. following a set of rules. This board ostensibly has those rules, but then again, they don’t always seem to apply. To me, the ‘reasonable PE’ rule seemed to be pretty essential to your success.

For a company like AMZN that falls so far out of the ‘reasonable PE’ range, I’d just really like to understand. Would you be able to explain your take this component? Like I said, I understood it to be fairly essential, hence my confusion.

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For a company like AMZN that falls so far out of the ‘reasonable PE’ range, I’d just really like to understand. Would you be able to explain your take on this?

Hi lucluse,

AMZN is really an odd choice as I mentioned. They do have some little things going for them though. Like:

consistently growing revenue
which is very recurring, and
a huge moat, which happens to be
the dominant position in internet commerce,
and probably the dominant position in the cloud management part of its business as well
and free cash flow which was up 340% last quarter…

and things like that. It’s not just an exciting little story stock with little revenue but great promises. I didn’t want to buy it because money keeps getting plowed back into growing the business (which they do very well, by the way). However, I felt that the exploding free cash flow was enough to keep me happy enough to take a small position (although Bezos may pull that rug out from under me again at any time). I DO occasionally take small positions which are somewhat inconsistent with my general approach. At any rate, it’s just a 1.0% position (compared for instance with my biggest positions at 20.8% and 19.6%), so I don’t feel I’m really going out on a limb with it.

I hope that that helps.

Saul

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syke6, you summed up my position better than I could :wink:

Then this:

Amazon already has one hour delivery to many markets, and is presumably expanding to more. From that I conclude that Amazon believes that fast delivery reduces the barrier to buying.

There is no question that it does. Prime customers (two day “free” delivery) buy about three times as much as regular customers. I’m one of them, and the two-day wait is wonderful (compared to the more traditional 4-5 days). If they could make it one-day, I would probably buy a little more, but not that much; the two day wait rarely impedes me.

If it could be “one hour”, yes, that would be another incentive, and I would probably buy a little more - but not really that much. I certainly wouldn’t “double”. There are things I will not buy at Amazon. Anything from Home Depot/Lowe’s. Flat screen TV’s. Clothes. Most food. Cars. etc. Amazon has already captured a significant part of my discretionary business; the UPS driver knows me well :wink: Am I perfectly typical? Obviously not, but I think I’m not an outlier, either.

Let’s say only 2% of Amazon customers can accept drone delivery, but if it is available, they buy twice as much stuff.* Right there, you’ve made a several billion dollar increase in sales. That’s not nothing.

I don’t argue that “drone delivery” won’t add sales, but I dispute that it will be twice as much per customer. I suspect that most heavy users are already in the Prime game, and that further increases will be, uh, incremental, not doubles. No way to know, of course, but it’s hard to imagine that their already heaviest users can double again - without adding lots of heavy, bulky, non-drone-deliverable stuff.
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However, I felt that the exploding free cash flow was enough to keep me happy enough to take a small position .

By the way, that $9 billion in TTM free cash flow comes out to $18.40 PER SHARE, “which ain’t hay” as they say. (Of course I have to admit that the share price is $570, which gives you a price-to-free-cash-flow ratio of 31, and the free cash flow isn’t taxed, but still… it’s a nice start).

Saul

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Saul,

Over the past weekend, I finally finished reading through the “Knowledgebase” and came across the (relatively) small section that mentions the exception to your rule about using the 1YPEG. I didn’t disagree with your AMZN that I had read a couple of days before, since I’ve owned a little of it for a couple of years now, but it was very helpful to have seen that real world example when I read that section near the end of your tome.

Perhaps the next time that you update it, you can include a few more examples of exceptions to your rules, or of consistently applying them. (E.g., I would argue that your use of historical adjusted earnings data depends solely on your confidence in management to be presenting adjustments in a completely fair way, and therefore you never invest in any company for which you have any lingering doubts about its total integrity. BOFI may be an example: you aren’t saying that you believe that they’re in the wrong, just that you no longer have complete faith in them.)

For anybody else upset or confused about BOFI or AMZN, I suggest that you read (or reread) the Knowledgebase. (If nothing else, it will keep you busy for a few hours and give your subconscious some time to absorb all that has happened in the market lately.)

as always, i am full of carp

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Now I have a cartoon bubble picture of drones circling a truck like seagulls following a fishing boat. ;).

Now envision a driverless truck, with an internal rack that presents packages to an elevator bay on the roof. A pair of drones pluck the packages from the roof bay, quickly places it on the residence drop point, return to the roof charger… the robot truck just keeps plodding along its route.

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fyi to the board, mungo would rather short it…

http://discussion.fool.com/hard-to-pick-a-short-for-an-18-month-…

Personally, I made some $$ speculating with AMZN in the past but no longer have any position in it.

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