Amazon - sum of all fears?

Investment Analysis Clubs Saul’s Investing Discussions
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We’ve discussed this before but here’s some new info with a lot to consider as the stakes are huge…

We all appreciate the genius of Bezos and the incredible success of Amazon…

https://www.bizjournals.com/bizjournals/how-to/technology/20…

…but that has consequences…

https://sg.finance.yahoo.com/news/apos-amazonification-apos-…

… and it looks like it could face paying the ultimate price for its ultimate success - anti-trust action…

http://www.marketwatch.com/story/amazon-is-getting-too-big-a…

This is in part why I am happier with my exposure to Apple mixed in with FB and PPAL etc via an ETF and look for the Apple like business model pure play exposure via companies nearer the starting line than the finishing line like MELI or BABA.

Ant

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Ant,

There is no doubt the feud between Bezos and Trump is real, and it is personal. That is a real risk if Trump pushes the justice department on it.

But the article lost any credibility when I read this quote from one of the two “experts” in the article (remember, the first expert said don’t buy Amazon before it tripled) and this is from the second one who said, “the most popular overpriced garbage including Amazon, Tesla TSLA, -1.85% Netflix NFLX, -0.34% Nvidia NVDA, -1.16% etc.,” Kaplan said.”

Two rules, one, when people start using gutter level adjectives, you now they are full of crap-o-la, and second, really, four of America’s greatest business successes in the last decade and they are “garbage”, I can’t wait to see what he thinks stinky sewage is!

I will admit though, on Netflix, I think they are losing their way to competition. I watch Netflix far less than I use to, albeit, I still subscribe. But you know, NVDA has 26% margins and leads multiple high growth product areas, Tesla has no real competition in its field (don’t even debate me on it, they don’t at this time), and Amazon, is such “garbage” that like Standard Oil, the government is thinking about breaking it up because it is too big and too successful!

In fact lets do rule number 3 when the epithets have no logical coherency, the article is full of crap-o=la.

Reminds me of an article wrote against Vertex pharmaceuticals. I made a ton in a week or so buying on that FUD event. The article cited an unnamed “medical intern” that Vertex’s lead drug was inferior to a competitors drug and would fall behind in clinical trials.

There were not facts to back this up mind you, and Schering Plough’s competitive drug was a flop in the end as it was inferior by far to Vertex’s drug, which was obvious to anyone following the situation, but sure enough, this short article was printed and caused an immediate dumping of Vertex stock. It was amazing to see!

I am far too busy at present to play that sort of investing game at the moment, to keep up with such things, but this article you listed made it too easy.

These experts have no better insight as to the next recession than we do, or Yellen has, but they do try to create dire circumstances to support their short positions. I suggest next time they short, they find sewage sludge because they are losing their shirts shorting garbage.

Tinker

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… and it looks like it could face paying the ultimate price for its ultimate success - anti-trust action…http://www.marketwatch.com/story/amazon-is-getting-too-big-a……

Ant, the only trouble with that is that if you read down to the end of the article you linked, you discover that the same Hedge Fund guy (Kass) who is shorting it now, also said in 2014 that investors should “avoid Amazon at all costs” and it’s up 300% since then.

Saul

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Yup - I agree Saul, he has an angle and a motivation.

However if Government and judiciary are considering anti trust action - I think that is an important piece of insight. The consequences of that represent a risk - which we have talked about it before.

I don’t know whether he has made it up or not, clearly it is in his interest but still. Its the biggest company on the planet, you and others hold it and this could be the biggest existential risk it faces so I thought it was worth sharing. I know nothing more than what I read on the internet sat here in Singapore - I know that wasn’t your intent but please don’t shoot the messenger, I merely passed on information with supporting or denying it.

Have a good one all.
Ant

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“I am shorting Amazon today because I have learned that there are currently early discussions…

Terrible timing.

Denny Schlesinger

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However if Government and judiciary are considering anti trust action - I think that is an important piece of insight. The consequences of that represent a risk

What I would be curious about, it what happened to investments in the last few dominant public companies that got broken up due to anti trust issues?

While I would prefer for Amazon to stay together than get broken apart, would the sum of the individual parts still make a really great investment over the next 5-10 years.

Does anyone know what an investment in AT&T did after it got split into the baby bells over the next 10 years? Would someone that held over that period still have made some great gains? I wouldn’t look at the values as of today, but I’m curious about the short term (5-10 year period) after the breakup.

So what I’m getting at is, if (and this is a really big unknown “if”) Amazon were to get split up, and the individual businesses that we retain separate ownership in continue to grow and do really well (albeit without some of the combined efficiencies and subsidization that is available to them by being part of the combined Amazon), who is to say that our investment won’t continue to grow at 10%, 15%, 20%, or more for years to come?

-mekong

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Amazon may be a really big company, but it is also many businesses and every one of those businesses has meaningful competition. E.g., things might be tough for brick and mortar, but it isn’t as if that is due to Amazon alone … it is more internet shopping as a whole that creates the issue. Amazon has a dominant role, but lots and lots of competition. Even in cloud infrastructure, where they are particularly dominant, there are substantial competitors holding their own.

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I did some searching and couldn’t find the exact answer to my question above, but the following article:

http://www.investopedia.com/articles/markets/020216/if-you-h…

suggests that shares of AT&T immediate post-breakup in the early 80’s would be worth 12x times as much today compared to then. And that is not even factoring in what all of the share of the split out baby bells (some of which became part of verizon, comcast, vodaphone) would be worth today, or the later spinoff of Lucent from AT&T, as well as the dividends you would have received over the years.

another article (can’t tell how long ago it was written):

https://www.globalfinancialdata.com/gfdblog/?p=2974

says

To get straight to the point, according to our calculations, if you held 1 share of AT&T in 1983 before the company was broken up into Ma Bell and the seven Baby Bells, you should currently hold the following (ignoring any cash dividends that were paid along the way): 0.25304479 Alcatel-Lucent S.A., 0.125 NCR Corp., 0.125 Teradata Corp., 3.14472 Comcast Corp., 1.644525 Verizon, 0.4772727 Vodafone plc, 6.0785677 AT&T Inc., 0.1151035 CenturyLink Inc., and $16.27 in cash.

when I have some time I’ll have to do the math to figure out what that means for the performance over the years, but I’m guessing if you looked at certain points in time (lucent’s highs during the '90s), we would have seen some market beating returns post-breakup

-mekong

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Does anyone know what an investment in AT&T did after it got split into the baby bells over the next 10 years?

I do. We had T in the portfolio. After the breakup T went nowhere and the Baby Bells went up and up and up.

Denny Schlesinger

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Does anyone know what an investment in AT&T did after it got split into the baby bells over the next 10 years?

I do. We had T in the portfolio. After the breakup T went nowhere and the Baby Bells went up and up and up.

that’s what I’m getting at. If holding all of the spun off parts resulted in some great gains overall, then an anti trust breakup isn’t, by itself, a reason why that wouldn’t still be a great investment.

-mekong

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When Standard Oil was broken up into multiple oil companies, those subsequent companies were terrific stocks to hold for the long-term.

As Denny says, when AT&T was broken up, the Baby Bells were excellent investments.

In the case with Amazon, although I don’t have a detailed look into what makes Amazon tick as it does, it seems to me that the thing that minimally would need to be done is to have Amazon spin off its cloud business from the retail business. Amazon can operate at long-term retail losses, with the intent to put competitors out of business (as they appear to be doing in spades) because the market will continue to fund them, and they are making big profits from their cloud.

The question becomes, can amazon uncouple its retail business from its cloud business. I don’t know how integrated they are.

But I would wager that would be one proposal by the government if it ever came to a break up. I actually don’t see it playing out though, despite rumors and leaks.

How many of these leaks actually were true? Not so many.

Tinker

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This just out on Seeking Alpha…

House Democrat wants antitrust panel on Amazon’s acquisition of Whole Foods
http://www.seekingalpha.com/news/3278720

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The question becomes, can amazon uncouple its retail business from its cloud business. I don’t know how integrated they are.

I know nothing about antitrust breakups, but hypothetically if one came that would one require AMZN to spinoff into Retail and Cloud silos, what would prevent Retail from continuing to use Cloud for its cloud services? Surely an antitrust ruling wouldn’t require Amazon.com to use what it would consider an inferior cloud service as part of how it runs its business…

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But I would wager that would be one proposal by the government if it ever came to a break up. I actually don’t see it playing out though, despite rumors and leaks.

I still can’t imagine on what legal basis the feds would have to stand to break up Amazon. They don’t control the cloud computing market, they don’t control the retail market, they don’t control the grocery market (for sure). There are myriad competitor and big ones too in all of these markets. How on earth could Amazon be considered a monopoly?

I’ve certainly been wrong before, but I just don’t see it.

That said, my company tried to buy a company at one time and it was blocked by the Feds. We must have had terrible attorneys arguing our case. This was an instance where I said to myself, “I can’t believe that just happened. The Feds were totally wrong.”

Amazon won’t have bad lawyers on their side.

Take care,
A.J.

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Amazon may be a really big company, but it is also many businesses and every one of those businesses has meaningful competition. E.g., things might be tough for brick and mortar, but it isn’t as if that is due to Amazon alone … it is more internet shopping as a whole that creates the issue. Amazon has a dominant role, but lots and lots of competition. Even in cloud infrastructure, where they are particularly dominant, there are substantial competitors holding their own.

Ok - you need to get the lawyers in the house to work through this but just because Amazon has competition doesn’t mean that it isn’t transgressing anti-trust law.

There was a neat article recently on the subject that defined the monopoly issue. Basically there were 3 potential violations or considerations - something like… being a monopoly, acting like a monopoly and monopolistic abuse.

It could be said that Amazon is using AWS to cross subsidise loss making businesses in core commerce that is killing competition. It could be dumping underpriced goods on the market, or it could be greater than 25% in certain markets - depending on how you define them etc.

Whole Foods got done for becoming a monopoly when it bid for Wild Oats - because they defined the market as natural organics not grocery retailing or retailing. That was back when they were nothing. I can imagine Amazon falling foul to certain definitions. In the mean time it could be argued that they are killing a lot of businesses and replacing low quality jobs with even lower quality jobs - not that it breaks any laws or is making consumers unhappy but it doesn’t help their PR in Washington that carries the can for (un)employment etc.

US has usually sided with consumers in respect to anti-trust but occasionally they have sought to protect or balance a market and protect competitors.

Ant

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Whole Foods got done for becoming a monopoly when it bid for Wild Oats - because they defined the market as natural organics not grocery retailing or retailing. That was back when they were nothing.

Your points are certainly valid. When I referenced my company who had a purchased blocked, the reasoning was very similar to the Whole Foods/Wild Oats deal. I think both were examples of where the government stepped in with a decision that was anti-competitive in and of itself. But my thoughts aren’t really what are important. What the government may do is important.

I still believe breaking up AMZN would be a big stretch. Surely, the AWS business is allowing them to make moves in other areas. But it isn’t necessarily subsidizing losses from those businesses or allowing them to undercut competition when and where ever they choose. Their retail prices are not the lowest in the industry. One can find better deals. The ecosystem and service is why people flock to AMZN.

On-line retail is the disruptor here. AMZN has by and large created it and is the biggest presence, but there are many more and will be many more. It would be unwise for the government to step in here, but that is also just opinion on my part.

Take care,
A.J.

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and the 7 Sisters oil companies did much better after the breakup of Standard Oil

But one wonders whether Amazon comes even close to the vast lethargic bureaucracy in the old AT&T

In any case Amazon is clearly not a monopoly . There are multiple other merchants for e commerce, I use some of them very month in preference to Amazon. And there are the B&M merchants -probably those behind anti-Amazon moves.

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I haven’t read this yet, but it looks intriguing and might back up my dystopian thesis - New Yorker article on the ramifications of the Whole Foods merger:

http://www.newyorker.com/business/currency/what-amazons-purc…

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However if Government and judiciary are considering anti trust action - I think that is an important piece of insight. The consequences of that represent a risk - which we have talked about it before.

I don’t know whether he has made it up or not, clearly it is in his interest but still. Its the biggest company on the planet, you and others hold it and this could be the biggest existential risk it faces so I thought it was worth sharing. I know nothing more than what I read on the internet sat here in Singapore - I know that wasn’t your intent but please don’t shoot the messenger, I merely passed on information with supporting or denying it.

There are a number of things that define anti-trust. One is having a large (usually 80%-ish) market share, and then using that market share enrich themselves by stifling competition or shafting consumers. Essentially anti-trust laws are at their core consumer protection laws.

Amazon has about 6% of retail market share and 40% of online. That’s big, but not anti-trust big. And who has been damaged? Companies who want to sell their products for more and ship it slower? Or consumers who got to buy stuff cheaper? It is hard to show Amazon is causing damage to consumers.

The other thing is that Doug Kass is one of the people like Peter Schiff who was sort of right once or twice, and earned guru status. Mostly of the time Kass is wildly wrong. And even when he makes a correct prediction, he hedges by making an equal and opposite incorrect prediction.

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There are some interesting complexities to the Amazon situation.

Firstly it is operating in digital space that crosses borders in a globalised economy. Either the definition to it being deemed a monopoly will be a grey zone or any potential break more harmful. Second with Standard Oil and AT&T - when they were broken up there wasn’t then any globalisation factor producing global competitors back in the US domestic gas or telephony space. In today’s world if Amazon gets broken up - AliBaba is probably going to eat them alive.

Also Amazon is multi faceted with its Hi Lo strategy across divisions (AWS/Core Commerce etc). It could be deemed to have started bundling with Siri ordering devices feeding etailing orders - like Microsoft with its operating system and office suite and browser.

It might not be close to being a monopoly in core ecommerce and which is certainly not predatory pricing with consumers however having all their server farms etc allows them to actually play in AWS with a lowered cost base but then price very high with AWS services which are really expensive and where cloud competition is few and far between. AWS could be seen as as an area of abuse either allowing product dumping in core commerce and anti competitive practices there or in the pricing of AWS services.

Ant