Two days ago I posted a link to a deep dive on Arista (post 17662). Today I read another one on Amazon’s Web Service (AWS). Both excellent. Both by the same author, Bert Hochfeld. I decided to follow him. Here’s a link to the article.
http://seekingalpha.com/article/3962601-amazon-web-services-…
Saul
I just happened across the following comment by Starrob on another board about the AWS article I just referenced:
The above post on AWS seems to be a “Must Read” for anyone looking to understand the “Cloud”.
Here’s a link to Starrobs comments:
http://discussion.fool.com/1081/the-above-post-on-aws-seems-to-b…
Saul
The link to Starrobs comments does not work for me, I suspect it might be a paid service. The knowledge base says that you invest in reasonable valuation companies. I have not calculated the “real” P/E for Amazon but Yahoo reports it to be 474 and even a quarter of that is way too dangerous for me.
Amazon has been a fantastic story which I missed. Every time I look at it it is enticing but I find it too rich. Truly a siren song. I’m no stranger to Amazon, I was selling books online in the year 2000 (I bought my first domain name in 1998). Being in the IP business I experimented with Amazon’s AWS early on. There is nothing proprietary about the cloud that would act like a moat, the business model is more like Dell’s. Dell had a terrific advantage while they were the low cost producer but that was transitory.
My question is, what do you estimate Amazon’s P/E to be that makes it low enough for you to buy the stock?
Thanks!
Denny Schlesinger
The knowledge base says that you invest in reasonable valuation companies. I have not calculated the “real” P/E for Amazon but Yahoo reports it to be 474 and even a quarter of that is way too dangerous for me.
Hi Denny, I discussed that in my Mid-Quarter Review of Amazon in February, post #16723, http://discussion.fool.com/amzn-my-mid-quarter-review-32125155.a…
Hope you find it useful,
Saul
Hi Denny, I discussed that in my Mid-Quarter Review of Amazon in February, post #16723, http://discussion.fool.com/amzn-my-mid-quarter-review-32125155.a…
Hope you find it useful,
Saul
Yes, thank you. I’m not used to using cash flow to value stocks. I get a ratio of Price/Cash-flow of 24 and I don’t know if that is good or bad. On the other hand, Price/Sales (Yahoo) of 2.61 is pretty good.
I have Amazon on my fast growth wish list and it is very enticing. Bezos’ business model has been working very well for two decades and I see no reason for it to stop. I like off price retail very much because there are more poor than rich, the ongoing global economy is squeezing working wages, and the Fed is screwing savers and pensioners with NIRP and ZIRP policies forcing people to become more frugal.
My calculated AMZN growth rates:
**Years Rate**
15 27.9%
10 31.6%
5 25.4%
I’ve calculated that a ten bagger in ten years is the equivalent to a CAGR of 25.9%. Only 12 stocks on my list have 20 year growth rates of 25% or more topped by AAPL (Apple) and 20 have 15 year growth rates of 25% or more topped by MNST (Monster Beverage).
One issue with AMZN is that the stock price is so high that I can’t apply my options strategy to it (one contract would need almost $60,0000. But at such a fantastic growth rate it might as well be a buy and hold position. I’m going to have to work out a plan to accumulate it.
Thanks again,
Denny Schlesinger
My current AMZN position is very small. There are many that say their cash flow is an accounting illusion. Possible some day many may see that the king has no clothes.
???
JT
Possible some day many may see that the king has no clothes.
JT
Why? In one of my previous lives I was a management consultant. One of the techniques I use to select investment opportunities is to evaluate the business model to see if I understand it and to see if it makes sense. Amazon is no longer a pure retailer, it has become a conglomerate by investing the cash flow into new ventures. The distinguishing feature is that they all seem to fit together synergistically.
Bezos starts with an online bookstore.
From books they expand to varied consumer products.
When they improve warehousing with robots, they buy the robot company.
When they expand their cloud usage they offer cloud computing.
When delivery grows significantly they play with drones and shipping services.
The old style (19th century) business model was vertical integration. As processes required more brain power than brawn vertical integration gave way to horizontal value chains, a model used very successfully by Dell, for example, relying on technologies like just in time inventory. Conglomeration like Litton and ITT were doing fell by the wayside. Even GE is shedding some of its components. But Buffett and Bezos have been very successful at conglomeration because their methods match their business model which is not crass empire building.
Denny Schlesinger
We might see Amazon developing their own ARM based server chips one of these days…
I experimented with Amazon’s AWS early on. There is nothing proprietary about the cloud that would act like a moat.
There is a huge moat. AWS provides services using a specific interface, abstracting away a lot of potential complexities of cloud application implementation. For instance, it includes things like queuing, database functionality, load balancing, and a content delivery network. So, if you build your cloud application on top of AWS, you really don’t want to move it somewhere else and deal with both the learning curve and the costs of redesign.
Saying there’s no moat is akin to saying that Windows doesn’t have a moat because anyone who wants to can build their own operating system.
Richard
Thanks Saul for your end of March report.
I am encouraged that you own AMZN.
When I got in it was because I had gotten tired of watching this company keep growing while I stayed on the sidelines because they seemed to have an impossibly high PE, were not profitable and had a way too high share price.
Finally I came to believe that Jeff Bezos was going to relentlessly keep growing his company and the stock price was going to keep going up whether I owned it or not.
Your recognition and purchase of shares in this company surprised me at first. But after reading your reasons why, I am encouraged to keep holding shares that I have. might even add a more on dips.
The Bert Hochfeld links are great.
Thanks for your investing discussions and thanks also to all who contribute here.
Frank
Saying there’s no moat is akin to saying that Windows doesn’t have a moat because anyone who wants to can build their own operating system.
Richard
OK. So you say there is first mover advantage, AWS has lock-in. But Windows has more moat because to read a Windows file requires the reader to also to have a Windows interface. To get stuff from the cloud any HTTP capable browser will work. Am I missing something?
Thanks!
Denny Schlesinger
Two days ago I posted a link to a deep dive on Arista (post 17662). Today I read another one on Amazon’s Web Service (AWS). Both excellent. Both by the same author, Bert Hochfeld. I decided to follow him. Here’s a link to the article.
I had the same conclusion: good writing/analysis, so I too decided to follow him, and I just noticed this when looking at Bert’s bio on SA:
Bert Hochfeld is a convicted felon and former hedge fund manager. He was convicted of mis-appropriating funds from his hedge fund in 2012…Bert also ran a small hedge fund. After his arrest and conviction, Bert closed both of those ventures and have been on a sabbatical the past few years.
“Things that make you go hmmmmmmmmmmm.”
Cheers,
MJ
lucky he didn’t get assigned to Leavenworth for his sabbatical 
excellent writing skills, though.
Cosmid
OK. So you say there is first mover advantage, AWS has lock-in. But Windows has more moat because to read a Windows file requires the reader to also to have a Windows interface. To get stuff from the cloud any HTTP capable browser will work. Am I missing something?
People often talk about cloud computing as if it is just storing data on someone else’s servers on the Internet, but it’s far more than that. It’s running applications on a platform, similar to running applications on Windows.
As such, AWS has an application programmer interface (API), just like Windows has APIs. For instance, if you want to grab a computer somewhere in Amazon’s cloud and run something on it, you might start that by using a RunInstances request. e.g.
[https://ec2.amazonaws.com/?Action=RunInstances](https://ec2.amazonaws.com/?Action=RunInstances)
&ImageId=ami-31814f58
&InstanceType=m1.small
&MaxCount=1
&MinCount=1
&KeyName=my-key-pair
&SubnetId=subnet-b2a249da
&AUTHPARAMS
The request is going over HTTP (like web pages), but the types of requests that are supported and the effect of each request is Amazon-specific. So, if I wanted to use Google cloud instead, I’d have to use completely different requests that would do completely different things. And much of the functionality in AWS might not even be in Google, or would have different implementations.
So, just like you couldn’t take the code for a Windows application and recompile it to work on a Mac (because they have different APIs), you couldn’t just take the code from one cloud service and recompile it to make it work on another cloud service. You’d have to think it all through, all over again, taking into account all the ways that the services are different.
For instance, Google probably has a call to request a new machine, but maybe it does different authentication. Maybe it takes 4 different parameters, 2 of which don’t even have any meaning in your AWS-derived application. So you’d have to rethink the design and debug it all over again.
Richard
Thanks Richard! How is a cloud API conceptually different from a php framework that runs on a LAMP platform? I initially created a procedural
framework which I have been converting to an OOP framework. I use it to create my web-apps.
Denny Schlesinger
PS: I find defining OOP objects difficult and confusing. Maybe I’ve worked on procedural programming too long.
PPS: By now I’m pretty much sold on investing in AMZN
How is a cloud API conceptually different from a php framework that runs on a LAMP platform?
I haven’t done anything with LAMP, so take this comment with a grain of salt.
But I think I’d mostly consider it orthogonal. For instance, you could have your LAMP application exist on the cloud. The Linux bit would be a server supplied by Amazon, running Apache, grabbing stuff from a database (which could be a MySQL database) stored in the cloud.
Or, you could take components of the LAMP architecture and replace them with cloud equivalents. For instance, you could still run it on a could machine, but replace the MySQL database with a relational or non-relational database that’s in the cloud managed by AWS accessed over its own API.
Or, you could run the entire LAMP system on your own server, but just store the data on AWS (e.g. things like images, or a non-relational database replacing MySQL.)
So, I’d think it’s mostly orthogonal. You could have a “regular” LAMP solution that just happens to be running in the cloud, or a LAMP solution where only a few individual bits are implemented with bits in the cloud, or anything in between. The right solution probably depends to a large degree on the problem you’re trying to solve.
By now I’m pretty much sold on investing in AMZN.
LOL, FWIW, I don’t actually own Amazon and never have. I’m a value investor, so it doesn’t fit my methodology. 
Richard
I haven’t done anything with LAMP, so take this comment with a grain of salt.
I’ve experimented with AWS as data storage. Back then AWS was just starting to provide database service and I needed much more complex relational stuff so I quickly lost interest. From an investor’s point of view the question is whether the cloud paradigm will take over code writing or how much market share it will carve out. Next we would have to figure out what share of the server / data-center industry it will carve out. For me these are imponderables. Which brings me to…
LOL, FWIW, I don’t actually own Amazon and never have. I’m a value investor, so it doesn’t fit my methodology.
At one time I invested heavily in high tech as I knew something about it. In time I came to realize that high tech is not the best area to put my money into because it changes too fast. The fantastic returns I had during the tech bubble were a one time happening. In the long run high tech has not outperformed for me. I believe Saul is much more successful with it because he is much more nimble than I am.
Amazon is not “high-tech,” it’s a retailer that is a savvy user of high-tech! In a sense it is a close cousin of Walmart. Walmart is a savvy user of management technology.
Retail is heavily influenced by population development. Sears was railroads. The Great Atlantic & Pacific Tea Company (A&P) was urban living. Malls were suburbia. Walmart is off-price. Amazon is Internet.
Amazon might just be a value investment.
Thanks for your time. I think we have talked out this subject for now.
Denny Schlesinger