Amazon: King of the Retailers - Barron's

Amazon.com (AMZN) is the world's best retailer, writes Barron's Mark Veverka, and it's winning over both customers and shareholders.

The benefits of Amazon's business model are even more apparent when times are tough. Its operations are cheaper to run than those of traditional retailers, allowing the company to pass on significant savings to customers. Products are shipped directly from warehouses to customers' houses, bypassing the time and expense of first shipping merchandise to thousands of individual stores. The absence of stores also means the company has fewer layers of expense for real estate, employees, inventory and utilities. Amazon's ability to carry customer payments on the balance sheet for up to 26 days before it has to pay suppliers can help lower pricing and gives Amazon room to grab more market share.

Despite spending-wary consumers, Amazon had a strong Christmas season and free cash flow rose 16% in 2008. It carries more product categories than ever before, both through its own operations and through third-party retailers on the site, and offers more brands per category. Amazon has become the first stop of cybershoppers and with less than 10% of all retail sales done online, there's plenty of upside for growth. Customers also like its low-cost shipping and its 'Prime Program' which offers free two-day shipping on most items for $79 a year.

Amazon is growing overseas too. It ships in six foreign countries, including Japan, China and Germany. In Q4, international sales of $3.07B made up 46% of total revenue.

Ever pragmatic in finding ways to leverage its operations by running parts of other companies' businesses, Amazon is now pushing into cloud computing, allowing third parties to outsource their IT and data-sourcing operations through Amazon. Having spent over $2B on its systems in the last decade, Amazon offers several services, including Amazon Simple DB (databases), Amazon Elastic Compute Cloud (computing capacity) and Amazon Simple Storage (data storage). The market for cloud computing is projected to reach $150B in 2013.

Aside from Amazon's strong e-tailer business model, the company now has e-book reader Kindle as well. It recently released a new version of the Kindle which has been selling well. Analysts estimate the company has sold 350,000 of the devices so far, and at $359 it generates not just revenue but book sales as well. Kindle is arguably better than a similar gadget developed by Sony (SNE), and is broadening its base with an application available for the iPhone (AAPL).

With Friday's close of $70.52, the shares sell at roughly 20 times the company's free cash flow of $1.36B in 2008. Profit for 2008 was $1.49 per diluted share, up 36% from the year before, on $19.17B in revenue, up 28% from the year before.

• Walter Price, of Allianz Global Investors, expects free cash flow to grow around 20% annually going forward, without taking into account potential growth from Kindle or cloud computing. He thinks "it isn't unreasonable to expect that revenue could double over the next three years," and believes shares could break $100 in 2-3 years.
• Gene Munster, of Piper Jaffray, has a 12-month price target for the stock of $81. He upgraded Amazon to Buy in early March, partly because of a survey his firm conducted which showed 81% of Amazon's customers are satisfied with the retailer and 94% would recommend the site to a friend.

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• Last week Amazon (AMZN) said it will close distribution centers in three states, and either lay off or transfer around 210 employees to other nearby facilities.
• Discovery Communications (DISCA) alleged Amazon's (AMZN) Kindle book reader violates a patent it registered in 2007. It plans to sue for damages and future royalties, but won't seek an injunction to halt Kindle sales.
• Amazon.com (AMZN): Q4 EPS of $0.52 beats by $0.13. Revenue of $6.7B (+18.2%) vs. $6.44B. "We're particularly grateful for the unusually strong demand for Kindle in the fourth quarter." (PR)

Comments

[Leftfield:]

Amazon has done an amazing job since a near-death experience at the dot-com boom. There they had made the mistake of financing via bonds rather than issuing stock and they were really on the hook.

Great execution and decisions since. I have the misfortune of doing lots of my business on Ebay and they wish they could somehow copy Amazon. So, they have eradicated countless small sellers and thereby lost buyers as many do both, favoring large purveyors of Chinese dreck.

Jeff Bezos is the founder of Amazon. He deserves the rewards he gets. Ed Donohoe (Ebay) is a typical MBA manager milking a company for hoped-for short-term gains for himself. Arrogantly pursuing stupid policies with his unwise use of power. Calling small sellers, "noise."

Ebay is going the opposite direction of Amazon because Donohoe didn't recognize Ebay's unique model and strengths. He is doing damage to the company and many others livlihoods until a compliant board wakes up. Small sellers could be raising needed cash selling to strapped buyers needing to save.

This illustrates what's gone wrong with American business. You can't justify paying obscene compensation to management that is just hired hands. They, unlike a founder who has his all invested, are just playing with other people's money.

The results in the entire economy are now evident: Obscenely paid management takes risks and plays games with OPM to satisfy its greed and eventually gain enough power to bring everything down.

Mar 28 05:56 PM

[TopViet:]

One thing I like Amazon over Ebay is I can list my book for sale with NO CHARGE until I sell. Amazon got my commission. I thought it's fair. With Ebay, you must pay the listing fee, if you cannot sell, you still pay to Ebay.

Mar 28 06:38 PM

[optionboy:]

I love how everybody talks about free cash flow. Does anybody realize that this years Net income growth is going to be zero to negative an that Amazon is selling at nearly 50 times 2009 earnings, 11 times book, an a PEG over 2 ? This company guided down as much as 37% in the first quarter net income.
Everyone distracts by using free cash flow because if they used earnings it be embarrassing. Look at free cash flow, the reason that its growing is that thei Accounts Payable ae ballooning and their taking longer to ay them. Amazon is a good company but are you willing to pay 4 times the PE of Wal Mar or 50 times earnings in a consumer led recession ? The Kindle is a joke and besides getting sued for patent infringement it has stiff competition. What is to supposed to add to the bottom line 1 cent earnings. This is reminiscent of the stock bubble where earnings did not matter but other nebulous metrics did. Amazon is a good company but their margins a very poor, hoe come this article does not mention that? Amazon can produce sales, but they cannot deliver hefty profits that's why all the analyst mention FCF. When do you hear FC flow for companies like Intel, Microsoft and Google. This stock makes a $1.47 a year and sells for $ 70 that is ridiculous. Even if sales double in 2 to 3 year , you got be joking right? we are in a depression, at the same margins Amazon would make $2.94 a share or a PE of 25 which is more reasonable but still expensive compared to Google, Apple and Wal-Mart. So earnings according to this article don't matter, what os important is that they can give the merchandise way. I thought you bought stocks because of future earnings. When did that change ? When the company cannot generate reasonable return on its sales other metrics must be used to fool the unknowing investor.

Mar 28 07:54 PM

[optionboy:]

Amazon.com (AMZN): Q4 EPS of $0.52 beats by $0.13. Revenue of $6.7B (+18.2%) vs. $6.44B. "We're particularly grateful for the unusually strong demand for Kindle in the fourth quarter." (PR)

Did somebody forget to mention that analyst estimate were originally .62 cents for the quarter and analyst brought them down to .39 cents. With that kind of help any company can look good and make estimates. Amazon also bought back 100 million shares to boost EPS. And how was Kindle such a big seller when they were out of stock since the Middle of November.

Mar 28 07:57 PM

[optionboy:]

Gene Munster, of Piper Jaffray, has a 12-month price target for the stock of $81. He upgraded Amazon to Buy in early March, partly because of a survey his firm conducted which showed 81% of Amazon's customers are satisfied with the retailer and 94% would recommend the site to a friend.

So you recommend a stock based on the fact that customers are happy, not sales, not income. He surveyed 300 people, how accurate can that survey be? The fact that 19% of the people are not satisfied is very high number and more important that the 81%. So you have an analyst basing his buy rating on a faulty survey that does not tell you anything about current sales trends. Sounds like an attempt to manipulate the stock, something that is very common for analyst in this stock. Look at Mark Mahaneys inferences about Kindle sales, just as laughable as this joker.

Mar 28 08:02 PM

[optionboy:]

With Friday's close of $70.52, the shares sell at roughly 20 times the company's free cash flow of $1.36B in 2008. Profit for 2008 was $1.49 per diluted share, up 36% from the year before, on $19.17B in revenue, up 28% from the year before.

You cant invest looking back we have a different economy now. Sales growth for 2009 is supposed to be 10% and profit growth zero to negative. Would you pay 50 times earnings for that? Give me a break. FCF is questionable in this environment also. Since when did investors start buying companies based on FCF not earnings ? When a company does not have or will not have earnings. I thought stock prices are based on future earnings not future FCF.

Mar 28 08:05 PM

[optionboy:]

This stock with a PE of 50,11 times book and a bag of accounting tricks to boost earnings and FCF is a ticking time bomb. Who is going to respond to investors when it blows up?

Mar 28 08:15 PM

[optionboy:]

You conveniently forgot to mention that Amazon's margins are the worst in the industry and are deteriorating. How good will those margins be in this environment ?

Mar 28 08:19 PM

[optionboy:]

You can't talk about traditional metrics because they all suck for Amazon such as margins, net income, book value and PEG. So you need to tout FCF and conveniently forget to mention that is also distorted. This is reminiscent of the tech bubble were traditional measure did not matter anymore. Buy on hype.

Mar 28 08:25 PM

[igggy:]

Hey User 358964, you make valid points but stop it already!

Mar 28 11:43 PM

[ksmithdc:]

Interesting read, thanks.

Mar 29 02:52 PM

[optionboy:]

I guess we are back to the bubble days were PE doesn't matter and some other self serving measure is used. The stock sells for a PE of close to 50, what is reasonable for zero to negative growth in 2009, 80, 90 or 100. Of course we are in a severe recession something which the author of the article chose to ignore.

Mar 29 06:44 PM

[LongAAPL:]

Right on! Right On!!
Excellent and timely analysis. Leftfield is worth reading.


On Mar 28 05:56 PM Leftfield wrote:

> Amazon has done an amazing job since a near-death experience at the
> dot-com boom. There they had made the mistake of financing via bonds
> rather than issuing stock and they were really on the hook.
>
> Great execution and decisions since. I have the misfortune of doing
> lots of my business on Ebay and they wish they could somehow copy
> Amazon. So, they have eradicated countless small sellers and thereby
> lost buyers as many do both, favoring large purveyors of Chinese
> dreck.
>
> Jeff Bezos is the founder of Amazon. He deserves the rewards he
> gets. Ed Donohoe (Ebay) is a typical MBA manager milking a company
> for hoped-for short-term gains for himself. Arrogantly pursuing
> stupid policies with his unwise use of power. Calling small sellers,
> "noise."
>
> Ebay is going the opposite direction of Amazon because Donohoe didn't
> recognize Ebay's unique model and strengths. He is doing damage
> to the company and many others livlihoods until a compliant board
> wakes up. Small sellers could be raising needed cash selling to
> strapped buyers needing to save.
>
> This illustrates what's gone wrong with American business. You can't
> justify paying obscene compensation to management that is just hired
> hands. They, unlike a founder who has his all invested, are just
> playing with other people's money.
>
> The results in the entire economy are now evident: Obscenely paid
> management takes risks and plays games with OPM to satisfy its greed
> and eventually gain enough power to bring everything down.

Mar 29 06:45 PM