Tag Archives: Amazon

once more on Amazon (AMZN)

May 6, 2014 By in Amazon, Current Market Thoughts, Industry Analysis, internet, Portfolio management, Recent Market Action, Stock ideas Tags: , , , , , , , Leave a comment

I’ve been doing a lot of thinking/daydreaming/musing about AMZN lately.  I don’t know quite why, since I’m probably not going to buy the stock.  But my mind apparently doesn’t want to let go.

The latest thing to pop into my head is something I’d seen on the Value Line page for the stock but hadn’t paid much attention to.  It’s that:

–during the bounceback from the 2000 collapse of the Internet Bubble, AMZN shares tended to trade at about 30x cash flow.  In the recovery from the Great Recession, its cash flow multiple expanded to 50x.  Both are mind-boggling figures, to be sure-the second more so.

What could cause this gigantic multiple expansion, particularly during a period when investors were scared out of their wits and therefore more cautious than usual?

…possibly a better appreciation of the transformative nature of the internet and AMZN’s premier position as online merchant.  Cash generation from operations continues to grow at about 25% a year, virtually the same as before the GR, despite the company’s larger size.  That’s both a plus and a minus.  It’s an heroic achievement to maintain growth in the face of ballooning size.  But that’s usually something that keeps the multiple from contracting, not that causes it to expand by 60%.

…so I can’t help thinking that a lot of the favorable move is due to the Fed’s super-accommodative money policy.

Which gets me to my point.

Let’s assume that the economy’s release from intensive care and a return to normal money policy cause AMZN’s cash flow multiple to shrink to a “mere” 30x.  In simple terms, this means the stock should lose 40% of its value–maybe not all at once, but ultimately.  Continuing relentless growth in cash flow could cushion the fall somewhat.

Since the end of January, when the Fed made it clear it would continue baby steps toward normal despite weakening economic indicators, AMZN shares have pretty much made the entire reverse movement already–they’ve lost 25% of their value in a flat market.  They haven’t been alone, either.  Every other story stock has fallen this much–or more.

This thought makes me want to speed up my efforts to dig through the rubble.

 

security monitoring services–another thought on Amazon (AMZN)

April 30, 2014 By in Industry Analysis, secuirty monitoring firms Tags: , , , , , 1 Comment

Security monitoring services have an interesting financial structure.  They wire up your home with anti-intrusion devices, which they monitor from a remote location.  They may charge an installation fee, which typically covers half or less of the actual installation cost.  And they charge a periodic, usually monthly, monitoring fee.

These companies have operating leverage in two ways:  a few employees can equally well monitor one or thousands of homes; and the company can charge for add-on services (like fire or medical monitoring) that cost almost nothing to provide.

A contract with a homeowner will work something like this (I’m making these numbers up):

–installation costs $2,000, of which the client pays $1,000

–the client signs a three-year contract to pay a monitoring fee of $50 a month

–monitoring expense (rent + equipment + salaries) is $10 a month.

On these figures, it takes the monitoring company about two years to recover its initial investment.  After that, a waterfall of money rains down into the monitoring company’s bank account.

This is a fabulous business to own, even though the initial negative cash flow may be daunting.

For the stock of a company like this,  however, it may not be the dream investment it may seem.

How so?

It isn’t that the early years look ugly from a profit and cash flow perspective.  It isn’t the issue of how to finance the initial investment in monitoring equipment.  Liberal accounting technique can pretty up the financials a bit, but–I believe–most holders see through this to understand the actual cash in/cash out relatively clearly.

Instead, investors concentrate on the asset value created by each new customer.  Let’s say a typical customer retains the monitoring service for 15 years (again, a made up number).  If so, and if both revenues and costs remain constant, each new customer adds something like $6,000 to the firm’s asset value.

For investors, then, the more new customers who sign up, the better.  The more existing customers who sign up for new services, increasing their asset value, the better.  That’s even though the more new customers, the uglier the near-term losses and negative cash flow will get.

Here’s the kicker:

–the fastest way for a company like this to show stellar earnings growth is to stop signing up new customers.  But that’s also the kiss of death–because it means the firm has gone ex-growth!!

…the stock fall apart.  Maybe it doesn’t go down in flames all at once.  But it suddenly looks an awful lot like a bond.  So PE contraction offsets the better earnings.

This is not how a startup works.  Usually incremental customers are profitable right out of the gate; the issue is getting enough of them to cover infrastructure costs.

It isn’t quite AMZN, either, which seems to require massive infrastructure spending just to tread water.  But I think holders take the large amount of spending on infrastructure as a proxy for future growth–just as holders of alarm companies do.

I wonder what would happen if AMZN suddenly entered the waterfall-of-money phase of its life that presumably owners are waiting for.  My guess is they wouldn’t find it as enjoyable as they thing they would.

 

 

 

 

 

thinking about Amazon (AMZN)–and concept stocks in general

April 29, 2014 By in Current Market Thoughts, Portfolio management, Recent Market Action Tags: , , , , , , , 1 Comment

I’ve watched AMZN since its inception, although I’ve never owned the stock.  What I find especially fascinating is that it has been a “concept” stock–one where the possibility of spectacular earnings growth is always there, but the reality seems to somehow always be just around the next bend–for close to two decades.

I think the stock has particular significance for investors in general–owners or not–at present, for two reasons:

–Yesterday afternoon I happened to be home and noticed a small crossover SUV I didn’t recognize parked outside our house.  After a while, an unmarked white panel truck drove up.  The driver came to our door, rang the bell and left.  It was a package from AMZN, containing–unusually for AMZN–a bunch of different stuff (gummi bears and two kinds of SD card, if you have to know) in one box.

The driver then opened up the back of the truck and began transferring packages to the crossover.  Welcome to  the newest wrinkle in AMZN’s logistics system.  No uniforms, no big trucks, no handheld package control computers.  Just guys with cars stitched together into a (low-cost) delivery network.  I’d been seeing the panel truck for months.  This is the first on-the-fly transfer I witnessed, though.

I read this as AMZN’s response to the successful campaign by bricks-and-mortar retailers to have states enforce the sales tax laws with AMZN.  I don’t think this has helped the b&m people at all.  I think it’s been a windfall for smaller online retailers, though, and for companies that use AMZN for distribution, two groups that are so far flying under the sales tax radar.

AMZN’s competitive response has been to reduce delivery costs, with (presumably negative, if it’s successful) implications for the post office, Fedex and UPS.

–More important for me, AMZN shares fall into the group of “story” stocks that have been sold off very heavily since February.  So I think we can draw conclusions about the whole group by examining AMZN (not a rock solid premise, but, I think, the best we’re going to be able to do).

Two features stand out to me.

First, nothing much has changed with the company, even though the stock has lost a quarter of its value in the selloff.

Second, the list of major holders consists of the most prominent institutional money managers in the country. So the selloff is not being induced by a small bunch of crazy, risk-prone hedge funds.  In addition, most of the big names (ex Fidelity) had already been lightening their positions late last year.

As far as trying to figure out how far the selloff might go, we can look at a fundamental component and an emotional one.  On the fundamental side, pre-Great Recession AMZN shares tended to trade at about 30x cash flow.  In recent years, that figure has been closer to 50x.  A return to 30x cash flow would imply a price of around $300, or about where we are now.  Personally, I don’t see why I should pay 30x cash flow for anything but a startup.  But arguably most of the air has already been taken out of the AMZN balloon.

The emotional side is where looking at price charts and volumes traded comes in.  In the case of AMZN, there has been a sharp pickup in volume over the past couple of days,  That’s usually an indicator of the panicky selling that marks a bottom.

From my own perspective, the selloff has gone on longer, and has been deeper, than I would have thought.  But that’s par for the course for me.  And I’m not feeling very uneasy about stocks in general–which is my go-to indicator that I should be starting to buy.  Of course, this may be because the overall market has been holding up very well. Selling has been confined to a relatively small subset of stocks.

For now, my strategy remains to ride out the storm, not buying in a big way but not selling either.  To my mind, it’s way too late for me to do the latter.  But I’d like more confirmation before becoming more aggressive.

 

 

demise of the e-reader: implications

December 27, 2012 By in Current Market Thoughts, e-readers, Entertainment, Industry Analysis, Publishing, Stock ideas Tags: , , , , , , , , , , Leave a comment

e-reader sales

A Christmas Eve Financial Times article indicates that while e-reader sales in 2012 will still be robust, the category may be on the brink of a rapid decline in popularity.  Its source is IHS iSuppli.   I’ve found the data in a graph from emarketer.com (note the convoluted chain of attribution–PSI cites emarketer, which in turn cites CNET citing IHS).

The reason for the falloff?   …the rise of light, powerful cheap multi-function tablets, which can serve as e-readers as well as do a lot of other stuff, for within a reasonable distance of the price of a dedicated e-reader alone.  This development wouldn’t be surprising, since the multi-function smartphone has replaced the dedicated music player for many users.

(The above is what I see as the consensus view. It’s not a unanimous one, though.   The Market Intelligence and Consulting Institute, which presumably has special insight into the Taiwanese companies that actually make the e-readers, predicts a bounceback in sales for 2013.  So we should at least keep in mind that the consensus may not be correct.)

Implications, if the FT is right?

In a world where the decision on what merchant to buy an e-book from hinges on what dedicated e-reader you own, the firm with the largest number of e-readers in circulation (Amazon) should be the dominant factor.  Other, non-compatible e-reader makers, like Barnes and Noble, should have small relative market shares.  Other would-be booksellers are footnotes, at best.

The game changes substantially, I think, if the key decision becomes what app the potential buyer has on his tablet.  That’s because any customer can download a new book app with a couple of taps.  Unlike the case with music, where users may want to construct playlists, it probably doesn’t matter much whether one’s entire library is on one app or several.  So the key factor in the purchase decision probably comes down to price.

It’s possible that AMZN can develop a tablet that’s the full equivalent of a Samsung or Google offering.  The performance of the Kindle Fire suggests that’s not likely.  But, if it can, perhaps AMZN can preserve its “ecosystem” with avid readers for a while longer.  And in doing so it would be able to bar the download of other booksellers’ apps onto its machines.

Personally, I doubt Barnes and Noble will be able to create a viable tablet.  Yes, it does have its alliance with MSFT.  But that only seems to me to guarantee that BKS can have the Zune of tablets.

AAPL is in an unusual position.  Its strategy has been to generate superior profits by selling up-market devices at premium prices.  Does it want to compete in the (eventual) $100 tablet market?  My off-the-cuff guess is that it doesn’t.  By default, this makes AAPL less of a player in the e-book market.

On the one hand, this would make the big publishers’ alliance with AAPL of a few years ago look extremely short-sighted.  On the other, it creates the opportunity for them to have a common app that bypasses both BKS and AMZN.

the stocks?

Any restructuring book distribution by cutting out dedicated e-readers is obviously not a reason for the companies that control the e-reader market to celebrate.  The biggest single loser, I think, is potentially BKS, since AMZN has 3x the market share in e-books that BKS has.  It isn’t that AMZN escapes the change unscathed.  But it already has lower prices than BKS; its large relative size gives it another big advantage in the price-drive. environment I think will develop.  Also, it’s not clear that AAPL will abandon the up-market strategy that snatched it out of the jaws of bankruptcy to become a serious competitor in the mass tablet market.

All in all, I score the situation as a net plus for AMZN.

The wildcard is potential new competitors who might be able do offer superior app performance.

why did Amazon (AMZN) just issue $3 billion in bonds?

November 29, 2012 By in Amazon, Industry Analysis, internet, Recent Market Action, Stock ideas Tags: , , , , , , , , Leave a comment

I’ve known about AMZN since its inception.  I’ve never owned the stock, however–which has, since 2006, been an embarrassing oversight on my part.  But as one of my former bosses used to say, in her characteristically non-PC way, “You can’t kiss all the pretty girls.”

AMZN is clearly a pivotal company in the transformation of US–and ultimately global–retailing.  But at its typical 100 times earnings or so, I’ve always found the valuation a bit too steep.  I am an Amazon customer, though, and an Amazon Prime subscriber.  I also use a Kindle (and an iPad) to read.

Anyway, several things about this week’s issue of $3 billion in AMZN bonds caught my eye:
–the interest rate, which is at only about a 60 basis point premium to Treasuries

–the stated purpose of the issue, namely the boilerplate “general corporate purposes”

–the lack of relevant commentary, although I really shouldn’t be surprised.  I’ve read some suggestion that part of the net proceeds will go to pay for the company’s new $1.16 billion HQ in Seattle.  AMZN does mention in a supplement to the original prospectus that it has agreed to buy the complex.  But it would be weird for the company to disclose that and not mention the buildings as a use of proceeds if that were so.  My assumption is that the new HQ will be financed separately with non-recourse debt.

looking at AMZN financials

–capital spending is up very sharply recently, from around $200 million a year in 2007 to $1.8 billion in 2011 and the current $23 billion annual rate (I’m taking all figures in this post from the Value Line Investment Survey, the industry bible for such data). That’s slightly more than the cash generated by operations, not counting working capital changes (see the second item below this one).

–operating margins are down.  They were more than 6% of sales a half-decade ago.  They’re under 4% currently.  I interpret this is the effect of selling e-books and kindles for little or no profit, or at a loss.

I don’t think this is necessarily bad.  I point it out only as further evidence of the dedication to expanding its digital footprint–even at the expense of profits–that has marked the company for the past few years.

–$5.2 billion in cash?…yes, and no.  The September balance sheet for AMZN shows that figure.  But look at Payables (the amount AMZN owes suppliers) and Receivables (the amount customers owe AMZN).  They’re $8.4 billion and $2.4 billion, respectively.  The difference is $6.0 billion.  In other words, all the cash on the balance sheet (plus another $800 million) is explained by the fact that customers pay AMZN very quickly and suppliers don’t get their cash very fast.

There’s nothing wrong with running a negative working capital business.  In fact, it’s great.  But the cash it generates is only there as long as sales are stable or rising.  If they start to shrink, so too does the cash level.  So spending this money on capital projects, where AMZN can’t get to it quickly, has some risk attached to it.

why the offering?

I think it signals AMZN’s belief that the current environment of intense competition for digital dollars, of low margins and of capital spending larger than cash flow isn’t going to change any time soon.

I wonder whether Wall Street realizes this.  I also wonder how many remember the long struggle toward profitability AMZN had up until 2002.  The average analyst earnings estimate for AMZN in 2013 is $1.80 per share, with one analyst projecting close to $4.  I haven’t done any numbers, but, to me, the just-completely bond sale implies even the $1.80 is probably much too aggressive.