Amazon Coverage on the Washington Post

Investment Analysis Clubs Saul’s Investing Discussions
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As a true testament to Neil and others who have said the media has a tendency to sensationalize the news, tonight I’ve read countless articles on how Amazon delivered a lackluster quarter and how big a miss it was.

Well, in fact it wasn’t lackluster at all. It was absolutely record smashing by all accounts and in all lines of the business. On the e-commerce front, they were so busy with orders they had to overspend on some last mile transportation costs to meet commitments on 1 and 2 day deliveries - a cost that will be addressed in the future by insourcing their own logistical operations including airlines and freight. Goodbye UPS.

Details and context are frequently omitted in these articles - because they don’t get the clicks and without clicks you don’t sell ads.

All that said, I found one refreshing example of an article that bucked this trend. Here it is, told like is, from the Washington Post:

https://www.washingtonpost.com/news/business/wp/2016/01/28/a…

Amazon rings up strong sales and profit growth in the holiday quarter

Amazon reported Thursday that it rang up $35.7 billion in sales in the most recent quarter and turned a profit of $482 million, healthy growth in the crucial holiday season quarter.

With another profitable quarter on the books, Amazon is starting to chip away at its reputation as a company that is plowing money into long-term infrastructure without an earnings payoff to show for it. By comparison, the company lost $214 million in the same quarter last year. For the full year, the company reported a profit of $596 million.

There had been hints before the earnings report that Amazon had a robust holiday season: The company had announced in late December that it made a record number of holiday season shipments to Prime members, and that it signed up 3 million new Prime subscribers in the third week of December alone.

Meanwhile, the holidays generally shaped up to be much healthier online than in brick-and-mortar stores. The National Retail Federation reported that online sales grew 9 percent during November and December, far outpacing the 3 percent sales growth seen in the overall retail industry. And Amazon dominates that online retailing turf; according to an analysis from Slice Intelligence, Amazon captured nearly 40 percent of all online sales between Nov. 1 and Dec. 6.

Still, the results seemed to disappoint investors, who sent the stock down 12 percent in after-hours trading and perhaps had been expecting even stronger results after the e-commerce giant trumpeted back in December that it had a “record-setting” holiday season for its popular Prime subscription program.

Amazon’s chief financial officer, Brian Olsavsky, said on a conference call with investors that it was a “huge” quarter for its Fulfillment By Amazon service, in which items from a third-party seller are warehoused and shipped by Amazon. Olsavsky said that this unexpected boom put heightened demand on its warehouses, and in turn, pushed up costs.

The earnings report delivered fresh evidence that the company’s cloud computing division, Amazon Web Services, is an increasingly important pillar of a company that built its name in retailing. Consider this: Amazon’s North America division, which includes its retail arm, saw about $1 billion in operating income on $21.5 billion in sales. Amazon Web Services, or AWS, generated $687 million in operating income on much smaller revenue base: $2.4 billion.

Still, Amazon is hardly taking its foot off the gas in its quest to transform our shopping habits with its e-commerce business. The company this month launched its Dash replenishment program, in which a GE washing machine orders detergent from Amazon when you’re running low, and a Brother printer automatically orders toner and ink when they need refilling. It also continues to push into new markets with its Prime Now same-day delivery offering, which is now available in most major U.S. cities, including Atlanta, Chicago, San Francisco and New York. They are also expanding it to cities in Italy, Japan and Britain.

(Jeffrey P. Bezos, the chief executive of Amazon, owns The Washington Post.)

A refreshing moment courtesy of Jeffrey P. Bezos. Thanks Jeff.

Best,
–Kevin

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AMZN started trading today with a 920x p/e ratio. That type of valuation coupled with a mini-bear market does not bode well for share prices.

Some food for thought…If AMZN traded at the same earnings valuation that AAPL trades at, the shares would be selling for around $7.50 rather than $600+.

Yes, I know there are some wonderful growth expectations, but think about this…If AMZN grew earnings 15% per year for 33 consecutive years in a row, the stock would trade at a 13x multiple 33 years from now, if today’s share price staye flat until then.

That to me is truly mind boggling.

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Some food for thought…If AMZN traded at the same earnings valuation that AAPL trades at, the shares would be selling for around $7.50 rather than $600+.

Yes, I know there are some wonderful growth expectations, but think about this…If AMZN grew earnings 15% per year for 33 consecutive years in a row, the stock would trade at a 13x multiple 33 years from now, if today’s share price staye flat until then.

SteveSox,

The thing with AMZN that you have to remember is that “earnings” are a fairly arbitrary thing for them. At any point in time, management could probably easily increase earnings by a factor of 5x simply by cutting back on its investments in world domination, or once again show losses just be speeding up its investments. I’m not trying to say that it is necessarily undervalued, but I am trying to say that the traditional measures of financial performance don’t apply.

To be honest, I haven’t the slightest idea what it’s really worth, and I’m not sure if anybody else really does either. In fact, I’m confident that any analyst that relies on measures of profitability is completely wrong. Others who do not, who knows?

as always, i am full of carp

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I’m not trying to say that it is necessarily undervalued, but I am trying to say that the traditional measures of financial performance don’t apply.

I hear this argument that AMZN can turn a couple wrenches and the profits will flow like milk and honey…what is this based on? Amazon already has high gross margins for a retailer (pushing 35% or something, right?) WMT is at like 25%, TGT 29%. What do you forsee that approaching? AAPL’s is 40%…is AMZN going to do better?

Maybe you think they can turn off the R&D outflow? Then they’re just a retailer.

Maybe you envision them one day becoming something completely different than a retailer, but that’s quite a reach. Just because you’re good at growing doesn’t mean you can compete in every industry.

One of the things I like about this board is the way Saul & Co have typically taken a very conservative approach toward valuing a company. It’s patently impossible to do that with AMZN and then buy it. Same with NFLX. Or FB. You’re buying the future. Sure these companies will grow over the next 10 years. Everyone knows that. But what else will happen? SWKS will grow too, and you don’t have to pay 1000x earnings to buy it today.

And there’s plenty others like SWKS to buy. I have no need for stocks currently trading at a reasonable 2025 price.

  • Bear
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Maybe you think they can turn off the R&D outflow? Then they’re just a retailer.

With instantaneous delivery to your door.
With better prices that saves you a trip to Walmart.
With proprietary reading gizmos.
With tablet doo-hickies.
With a digital assistant named Alexa that wakes you up nice and sweetly and tells you the weather and who won last night’s game.
With an upcoming music streaming service that will play ball with apple and spotify.
With award wining original tv and movie shows.
With Web Services that has over 1 million accounts and over 7.8 billion in revenue (Ask Netflix if Amazon is just a retailer to them.)
With impending disruption to the delivery industry (I wouldn’t want to be UPS or FedEX).
With whatever the hell the drones will do.
With more data and reviews about products than any other place on earth.
With more information about customers than most other places. And isn’t information worth lots of bananas in this digital advertising world?

As though the Research and Development billions and billions, once turned off, vanish along with all the outcomes that money helped initiate. They’re just a retailer, is myopic at best and willfully disingenuous at worst.

Monkey likes bears as much as the next primate, so no disrespect, but let’s not show teeth without proper cause, please.

Humbly Yours,

Monkey
Long SWKS and AMZN

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Amazon has been on my buy list for a long time. I was preparing to go to the gym while watching the earnings report live and saw the stock plunge onscreen while I was digesting the news. I quickly got back into my account and figured out how to trade after hours so I could scoop up some shares at $560.

This was the first time I ever made good money while the market was closed. There are only a few companies I would take the risk for.

-Wes

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+1 for “whatever the hell drones will do”

But you’re missing the point. They’re just a retailer now.

What they will become (spending billions per Q on R&D) is anybody’s guess, but they’re trading at a price that’s as if they’d already done it!

You know who else is spending on R&D? AAPL, IBM, CSCO, ORCL…and 10,000 start ups. Why is everyone ceding the world to AMZN? Some of their ventures…dare I say it?..might not work!

All that said, I’m still not bearish on Amazon the company. I’m bearish on AMZN the stock. Amazon will grow and grow in the future. But AMZN is overvalued today.

  • Bear
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Bear,

I hear this argument that AMZN can turn a couple wrenches and the profits will flow like milk and honey…what is this based on? Amazon already has high gross margins for a retailer (pushing 35% or something, right?) WMT is at like 25%, TGT 29%. What do you forsee that approaching? AAPL’s is 40%…is AMZN going to do better?

The “problem” with Amazon has never been their gross margin. It is the net margin that drives people up the wall (and drives the PE ratio to the stratosphere). The assumption that Amazon can ratchet up their earnings (net profits) at will is based upon the ability to cut back on the enormous amount of money they have chosen to spend to build distribution centers to support Amazon’s internet commerce business, and on data centers to support AWS. This spend may or may not dwindle over time, and of course, Amazon is now starting to look at entering the package delivery field, which (if they do it in a big way) would entail even MORE capital expenses.

Personally, I am very happy that Bezos focuses on growing his business, takes risks, and is a relentless innovator. Amazon is a growth company, one with an amazing history and a vast upside. It is NOT a mature, dividend paying company that you value using traditional DCF methods. I don’t think that the market still fully appreciates what Amazon is doing.

Amazon has three huge costs: Distribution centers, data centers, and shipping. Investing billions in ever more (and more efficient) distribution centers creates a moat that is nearly impossible for competitors to overcome.

Investing billions in highly efficient data centers spawned AWS, which has turned out to be the dominant player in cloud computing. AWS began as a way to make some money off of their huge investment in data centers, which was money that they had so spend anyway. Now, AWS has over a million clients, and is generating close to $2 billion in profits per year. It is the first-mover and top dog in a rapidly growing industry, and their revenues are growing at over 70% per year.

Now, a similar scenario is about to play out with the third big expense, shipping. Bezos is looking to replicate the success of AWS by building a more efficient, less expensive package delivery service. He could lower his biggest expense (shipping), AND make money by providing the same service to other companies. Just like AWS, he could turn an expense into a profit center.

So, he took his three biggest expenses and turned one of them into a dominant moat, another into a huge profit maker, and is about to try to do the same with the third.

But, back to valuation. The only way to value a company that generates huge cash flows, but opts to divert the fire-hose back to reinvesting in the business, is to look at operating cash flow (even better, Free Cash Flow) as your primary metric instead of earnings. Very few Wall Street analysts do this, so you get all sorts of strange results. Somebody here recently calculated the ‘free cash flow yield’ to be around 6%, which inverts to a price/FCF ratio of about 16. Overvalued? I don’t think so.

Tiptree, Fool One guide, long AMZN

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Tiptree, thank you for that insight into Amazon. I’ve been completely uncertain how to evaluate the company but this helps me out a lot.

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Somebody here recently calculated the ‘free cash flow yield’ to be around 6%, which inverts to a price/FCF ratio of about 16. Overvalued? I don’t think so.

I get more like 2 or 2.5% and I can’t find the post you’re referring to, so that would put the ratio at more like 40 or 50.

But my real argument is with the idea that the stock has anywhere to grow from here. Sure the company will make more FCF next year, and the valuations will look a little more reasonable. But growth rates for the already huge company will settle down a little. That’s all I’m saying.

As that happens, instead of stock price going up, multiples will come down. (That’s what’s happened with AAPL in the last several years.)

Companies that trade at reasonable multiples today have room to grow rapidly AND show net income now, and these are just better investments.

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Hey Bear, “Just a retailer…” Let’s see. Here’s a part of what I’ve bought in the past two months from amazon.

a box of pens,
make-up for my wife,
books (gifts for friends)
Citracal,
Neosporin ointment,
Hair color
Pollen face mask for allergies
Two air purifiers (for different rooms)
filters for the air purifier
printer cartridges
glove liners
a cook book
snow goggles
cutting boards
socks
Gillette Blades
Blueberry and raspberry conserves
Malabar Milk Digestant (for the lactose intolerant)
underwear pants
tee shirts
a calendar
a Cuisinart Food Processor

plus untold numbers of Kindle books.

All delivered to my door. Can you IMAGINE the time and effort that would have taken finding all that stuff at retail stores and lugging it home?

Just saying…

Saul

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My ownership of Amazon today is simply based on my expectation that they can grow to be the biggest strongest company in the world. I look at today’s market cap around $250 billion and focus not on whether they will be the first company to hit $1 trillion dollar cap, but when they might be able to reach $2 trillion.

I’m sure that sounds nuts to some people, but ten years from now, it won’t surprise me to see them there

-mekong

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Some Companies like AMZN while having a high PEs are able to carry the multiple forward. Amazon’s business is certainly great and I think the market values it accordingly. I don’t think in this instance the PE says much about how great this business really is.

Another one is UnderArmor. Scared of a >X60 PE? well you should not be apparently if they continue on producing good business results and their potential is in reach. The market cheered it by pushing it up 20% in one session.

Contrast UA with SKX: SKX looks like a great value…it may be but it does not look like a company defines an era like an UnderArmor or an Amazon. That’s why the market does not value it as much. But we don’t know it could become something. We hope it does.

I don’t think a few numbers can really frame the extent of these great businesses. For the rest, yes look at the PE and don’t pay too much for them, and make money.

tj

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Except for groceries I rarely go to B&M stores any more. For some things I find eBay to be a better deal, but Amazon is amazing.

Some of the things I buy I used to get at Wal Mart. Who have their own on line store but they are not even close to catching up to Amazon in making it easy to find and compare items. So in fact except for small merchants on eBay most of the time they have limited competition.

Love the store, but always thought the stock was too expensive. My mistake…

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Its a mirage run by a flim flam man.

sw

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My go to online shopping site is Amazon. Do a search for a product and many times they will include Ebay vendors. Likely AMZN is eating Ebay’s lunch based on Ebay’s recent quarter.

Rob

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Somebody here recently calculated the ‘free cash flow yield’ to be around 6%, which inverts to a price/FCF ratio of about 16. Overvalued? I don’t think so.

I get more like 2 or 2.5% and I can’t find the post you’re referring to, so that would put the ratio at more like 40 or 50.

Check the stats a Finviz

http://finviz.com/quote.ashx?t=amzn
Amazon: Price to FCF is about 50.97 and Price/Sales is about 2.74

For Apple
http://finviz.com/quote.ashx?t=aapl&ty=c&ta=1&p=…
P/FCF = 9.27
P/S = 2.31

So P/S pretty close, but P/FCF much better for Apple

1 Like
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My ownership of Amazon today is simply based on my expectation that they can grow to be the biggest strongest company in the world. I look at today’s market cap around $250 billion and focus not on whether they will be the first company to hit $1 trillion dollar cap, but when they might be able to reach $2 trillion.

I disagree, but good for you considering the market cap potential. This is a very interesting exercise and one I do with every stock I buy, and it’s the main reason I don’t buy FANG stocks. I don’t short them or anything, or think they will implode. I actually think the companies are great, and I’m a customer. But everybody knows they’re great. Therefore the value just isn’t there. They’re the “story” companies I thought Saul avoided. They will grow, but will they be market beaters? Their best days as companies are ahead, but their best returns as stocks are behind them.

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Also, before anybody says it, I know these companies have beaten the market in the last 2 or 3 years (or more). And I don’t know that it will end today. But I know it will end soon.

If you bought AAPL in mid-2012, you’ve held it for almost 4 years and you’re basically flat, or maybe even down, and you’re trailing the S&P by 30+%. I don’t know how many people realize that. And I think that will be the story for the FANG stocks a few years from now.

Maybe I’m wrong, but I still like my chances better with other stocks.

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So P/S pretty close, but P/FCF much better for Apple

Good point, Pete.