Category Archives: internet

big day for Amazon (AMZN)–why?

July 24, 2015 By in Amazon, cloud services, Current Market Thoughts, Industry Analysis, internet, operating leverage, Recent Market Action, software, Stock ideas, Technology Tags: , , , , , , Leave a comment

AMZN reported 2Q15 results after the close last night.  They were very good.

Sales were up 20% year-on-year; expenses rose by 17%, three percentage points less.  As a result, the company reported an operating profit of $464 million vs. a loss in the second period of 2014.

More than that, AMZN’s cloud services division, AWS, had revenue growth of 81% yoy and a quintupling of segment profits (basically operating profits less stock option expense) to $391 million.  AWS, broken out as a separate segment for the first time after 1Q15, remained a bit more than a third of the AMZN total.

 

AMZN posted an overall profit of $.19 a share for the quarter, vs. analysts’ expectations of a loss of $.13 a share and a deficit of $.27 per share in the year-ago quarter.

On the announcement, the stock immediately rose by 15% in aftermarket trading.

AMZN opened up by 20% this morning, before drifting down steadily during the day to close +9.8% in a market that was down just more than 1%.

 

Why the strong advance?

I have no good explanation, although I do have some ideas.

1. The obvious factor that changed overnight was the earnings announcement.

It contained a significant positive earnings surprise, one that makes it more likely that the company will earn, say, $1- a share in the current year. It makes the analyst consensus of $2.78 a share for 2016 more believable.   On the other hand, the stock was trading at $482 before the earnings report, or 173x the 2016 consensus.  Looking at the stock price another way, let’s say that at maturity for its businesses (whenever that may be), AMZN shares will be trading at 20x earnings.  To sustain the pre-earnings report price, that would imply a burst of rapid growth that shoots earnings up to around $24 a share.  That would be something like a doubling of earnings each year for the next five or six.

That’s already baked in the cake.  A buyer of the stock at this level must believe that $24 a share in eventual earnings is way too low.

I find it hard to believe that a $.32  per share earnings surprise during one quarter–when expectations were already sky-high=-would be enough to add 20%, or even 10%, to AMZN’s perceived market value.

2.  A second hypothesis…

What if investors are beginning to separate AMZN into two parts, AWS and everything else, and are doing a sum-of-the-parts evaluation.  To me, this sounds a little more plausible.  What would the numbers look like?

Let’s say that in 2016 AWS will comprise half of AMZN’s earnings and AMZN Retail the remainder.  To make the figures easier, let’s say each half earns $1.50 a share next year.

Let’s assume AMZN retail can grow in earnings at 20% a year for a long time, and that we’d be willing to pay 50x current results–a big number for a retail stock–for that future profit stream.  If so, AMZN Retail is worth $75.  To reach a sum-of-the-parts value of $482, AWS must therefore be worth about $400, or close to 270x its 2016 eps.  Ok, while I personally wouldn’t be willing to pay that much for AWS, I can see how someone else might.  However, I still don’t understand why confirmation that a holder at 270x earnings isn’t insane would cause the multiple to expand.  (Also, before I’d be comfortable valuing AWS as a separate company, I’d want to know more about how AMZN apportions revenues and costs among segments to ensure the published numbers don’t flatter AWS.  I’d also think long and hard about the possible effect of stock options.)

3.  The explanation for AMZN’s rocket ship ride that I’m leaning toward, however, is more technical.  Two factors may be involved.  At what Google Finance reports as 21+ million shares, today’s trading volume in AMZN was 7x normal.  The sharp opening spike suggests to me that algorithmic trading computers were at work reacting to the earnings report, not humans.  Humans, I think (?!?), would have a better sense of valuation.  I also suspect that the report and immediate upward move triggered a lot of short covering.

I’m partial to #3 because I think the whole reaction is a little  crazy.

Why is any of this important?  AMZN is a high-profile, large-cap stock with almost two decades of operating history.  There’s got to be a way to make money from the possibility that something like AMZN’s big move will occur with other similar names.

 

 

thinking about Amazon Prime Day

July 17, 2015 By in Amazon, Industry Analysis, internet, Retail, Stock ideas Tags: , , , , , 1 Comment

Yesterday was the first Prime Day for Amazon (AMZN).  The company’s press release indicates it was a very successful event, one that it will at least repeat in 2016.

My thoughts (I don’t own the stock, except maybe in a sector ETF):

the name  

It’s Amazon Prime Day.  If it sticks, it’s an incredible plus for Amazon.   Unlike Black Friday, which is when we’re all supposed to run amok buying stuff from anyone willing to sell, Prime Day is when you’re supposed to go to AMZN to buy.

sales volume

The company said that it sold “more units” on Prime Day than “the biggest Black Friday ever.”  I read this as meaning that AMZN sold lots of low-priced stuff yesterday.  If dollar volume were through the roof, I suspect AMZN would have said that.

sales composition

We know that a quarter of AMZN’s operating income comes from cloud services.  Let’s say that the company strives to break even overall on things it sells itself, but makes most of the rest of its money by selling for third parties (Fulfillment by Amazon).

–“Hundreds of thousands” of new customers signed up for trials of Prime, making it the biggest day of its kind ever for AMZN.

–It either sold, or sold out of, a lot of AMZN eco-system devices.

–Fulfillment by Amazon had its biggest unit sales day ever, nearly quadrupling worldwide unit volume from July 15, 2014.  Third parties had to commit in advance to having enough inventory in the AMZN distribution system to enable Prime delivery of items bought yesterday.  My guess is that this was a significant limiting factor for FbA sales, implying that 2016 sales could be a lot higher.

where did the sales come from?

Wal-Mart probably knows, but no one else.  The issue is whether AMZN redirected sales that it would have captured on other days of the month to the 15th, or whether AMZN took sales for itself that would have gone to other merchants if not for the Prime Day promotion.  My guess is that it’s primarily the latter.

stockouts and social media

The media focus I’m seeing this morning is on customers who are unhappy because they weren’t able to buy merchandise before deals were sold out. This is being portrayed as bad.   It seems to me, however, that this is free publicity doing two good things for AMZN:  in reinforces the idea that Prime Day is all about AMZN, and it highlights that the sale wasn’t all just random junk but did include a significant amount of desirable merchandise.

 

None of this is enough to make me a buyer of the stock.  Still, the first Prime Day seems to me to be a significant coup for AMZN.

Etsy (ETSY)

May 22, 2015 By in internet, Stock ideas, Trading Tags: , , , , , Leave a comment

ETSY debuted on Wall Street on April 16th at an offering price of $16 a share.

The initial trade was at $31.  The stock fluctuated between $28.22 and $35.74 before closing at $30.

Since then, the stock has been steadily drifting back toward the IPO price.

The stock dropped by 18%, to $17.20 on Wednesday, after the company reported a disappointing March 2015 quarter.  The consensus estimate of (three) Wall Street analysts was that the company would report non-GAAP earnings of $.03 a share.  The actual was a loss of $.12.

Revenue for the quarter rose by 44.4%, year on year.  Adjusted EBITDA (earnings before interest, taxes and depreciation/amortization), which is arguably the most flattering possible way of presenting profits, rose by 9.3%.  Also, in ETSY’s case, the adjusting removed both a $20.9 million foreign exchange loss and a $10.5 million yoy increase in income taxes.  On a GAAP basis, ETSY had a loss of $0.5 million in 1Q14 and $36.6 million in 1Q15.

Media comment about the sharp drop in the stock price after the earnings report puts the blame for the decline on the narrow slate of IPO underwriters and on ETSY’s “authentic” counterculture philosophy/image.

I don’t think that’s the case, at least not directly.

To my mind, the central fact is that ETSY’s March quarter ended more than two weeks before the IPO priced.

The stock’s price action since then says to me that on the first day of trading investors weren’t aware of how weak 1Q15 results would be.  The steady decline in following sessions suggests that the bad news was gradually making its way into the market.  The 18% drop on announcement implies the actuals were worse than the rumor mill had been whispering.

Where was ETSY management while all this was happening?

I can only see two possibilities:  either the company has terrible financial controls and was unaware during and after the quarter how weak the quarterly results would be; or it did know and decided–presumably at the urging of the underwriters–not to disclose this plainly to potential investors during the road show.  Neither one makes me want to run out and buy the stock.

Note:  I haven’t studied ETSY carefully and I didn’t see the roadshow.  My picture of what’s happened is based on reading the earnings report and observing the stock’s trading history.

 

 

 

ZipCap

May 21, 2015 By in Banks, Industry Analysis, internet, Investment firms Tags: , , , , Leave a comment

ZipCap, short for Zip Code Capital, is a San Diego-based startup alternative lender featured in the Business section of today’s New York Times.  It provides low-cost loans to local businesses that aren’t able to get credit from traditional banks–presumably either because they’re not (or not very) profitable or because they don’t have a good enough financial handle on their enterprise to know whether they make money or not.

ZipCap helps a client business form an “Inner Circle” of customers who pledge to buy a minimum amount of stuff from the client over a specified period.  ZipCap lends against that commitment.  In the case of the restaurant/coffee house featured in the NYT article, 130 entities pledged to spend $475 each ($61,750 in total) over the following year.  That got Beezy’s Cafe a $10,000 loan at 3.99%.

If all of this were new spending, my back-of-the-envelope guess is that it would bring in $40,000 or so in fresh operating income, far in excess of what would be needed to repay the debt.  For Beezy’s to be better off simply from forming the Inner Circle, a quarter of the pledges would have to be new spending, or about $2.50 a week per Inner Circle member.  That figure would need to be adjusted up if not everyone keeps his word.

 

It seems to me, from the limited data in the NYT and on the ZipCap website, that ZipCap isn’t really about lending.

It’s not a social service, either.  Chances are that Beezy’s would be better off getting, say, business students from a local college to create financial tracking to help figure out what makes money for the cafe and what doesn’t.

What ZipCap does do, I think, is provide a socially acceptable, non-toxic way for a struggling business to proclaim that, though it might appear to be thriving, it isn’t   …and, at least implicitly, that it won’t be around for long unless it gets more community support.

Of course, there may be unintended consequences of the Inner Circle creation.   Assuming the extra spending doesn’t come out of thin air, IC creation at Cafe A may force Cafe B to close its doors.  Or it may make it extra hard for a new Cafe C to get started.

It will also be interesting to see how ZipCap deals with rising interest rates, as and when they occur.

 

What Amazon (AMZN) said about its web services Thursday night

April 28, 2015 By in Amazon, cloud services, earnings conference calls, Industry Analysis, internet, software, Stock ideas, Technology Tags: , , , , , , Leave a comment

AMZN shares rose by 15% last Friday, after the company gave its first income statement details about Amazon Web Services (AWS), its cloud business.  In its quarterly reporting from now on, AMZN will break out three business segments:  US sales, International Sales and AWS.

IN the late Thursday earnings release, Jeff Bezos said that AWS is growing fast and “in fact, it’s accelerating.”

the data

operating income

–during calendar 2013, AWS had segment operating income of $673 million, according to the GAAP accounting rules used in financial accounting.  That was 35.3% of AMZN’s total segment income.

—for 2014, AMS had segment operating income of $660 million, or 36.5% of the total

–in 1Q15, AMS had segment income of $265 million, 37.5% of the corporate total

cash flow

–on GAAP principles, AWS had cash flow of $2.4 billion last year.

capital spending

–AWS represents over a third of AMZN’s plant and equipment of $17 billion.  With $4.3 billion in plant additions in 2014, AWS was almost half the company’s total capital spending.  Of the $4.3 billion in new plant, $3 billion was acquired using capital leases–meaning a kind of financing which looks like a loan but which allows AWS to buy the stuff cheaply at the end of the lease.

plant life

–if we divide last year’s depreciation into the average of 2013 and 2014 plant, we get an average plant life of 4 1/2 years.

–return on capital

–last year AWS earned $660 million, using capital of $4.6 billion, meaning a return of 14%.

what to make of this

It’s hard to make a lot out of two years’ data, especially in such a fast-moving and capital-intensive business as AWS’s.

The GAAP numbers look good. Nevertheless, AWS is cash-flow negative, which isn’t troubling if we’re certain that the company will continue to earn a significant return on the capital it is pouring into AWS.  Also, although there’s no way to tell for sure, it seems to me likely that on its IRS books, AWS is losing money.  How so?   …tax breaks for technology investment, including depreciation that’s heavily front-loaded (vs. spread out evenly over the assumed life of the equipment, as GAAP calls for).

Certainly, if Wall Street’s view has been that AWS is bleeding red GAAP ink, the reality is hugely better.  As time goes on, we’ll be better able to judge how insatiable AWS’s need for capital is–or whether, as one would hope, AWS will turn cash flow positive .  My guess is that before then, AWS will be more than half AMZN’s profits, as well.  So holders will have to figure out whether or not it’s an uptick to hold shares in an internet infrastructure business that happens to retail stuff online, too.