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André Fernon

 
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  • Amazon Needs Another $3 Billion Cyber Monday Bond Offering [View article]
    No bond offering materialised. I can only read one of two things in to that:

    1. They had a great quarter and don't believe that they need the cash in the short to medium term (quite possible)
    2. They still need the cash but are waiting until Q1 2014 to raise funds
    Dec 30, 2013. 11:34 AM | Likes Like |Link to Comment
  • Amazon Needs Another $3 Billion Cyber Monday Bond Offering [View article]
    Shorty2hops, The table is trying to address a number of relatively interlinked issues in as straight forward a manner as possible. I have somewhat simplified (or potentially over simplified) the analysis but the numbers are correct and stem from the respective 10-Q SEC filings each quarter.

    The points you raise are also broadly correct. They can use operating cash to fund capex or for working capital purposes. Much of last years cash flow did go towards paying suppliers. Equally, long term debt does not need to be paid off every quarter.

    The key issues I am trying to highlight in the table are that:
    a. The balance sheet is deteriorating (shown by the negative number). At some point that debt will need to be repaid even if it is 2,4, and 9 years out. That's why I used the total debt figures including long term debt. It's a figure I track every quarter as to me it illustrates the liquidity challenges they have irrespective of whether they can fund this through long term debt or short term debt. Earlier in my career I would have come across very similar issues (on a smaller scale) in other retailers who take on long term debt, long term lease obligations or other long term liabilities and end up with real issues once the counter parties lose confidence usually due to a down turn or even flat lining of sales.
    b. There is insufficient cash to fund both the capex and growth of assets (including working capital) if they are to reach a turnover of >$90 billion in 2014.
    c. The real drain on the cash proceeds from any new bond offering (assuming my assumption is correct that they actually do a bond offering) will be to fund paying creditors in Q1 2014.

    Hope this goes some way to addressing your points.

    Andre
    Nov 28, 2013. 04:34 AM | Likes Like |Link to Comment
  • Amazon Needs Another $3 Billion Cyber Monday Bond Offering [View article]
    AmazonBull,

    Your comparison between Apple iPod and Amazon is nonsense. Jobs himself always advocated putting "more wood behind fewer arrows" (see comments from Larry Page and the Jobs biography from Walter Isaacson).

    The iPod succeeded because they were pursing a strategy of creating a closed ecosystem between the iPod and the Mac which tied people in. This was a very coherent strategy which created large and sustainable barriers to entry. I see none of this in Amazon's case.

    With respect to Rackspace, on what basis are Amazon "driving them out of business"? Rackspace deliver better margins than Amazon in this space.

    Andre
    Nov 27, 2013. 05:48 PM | Likes Like |Link to Comment
  • Amazon Needs Another $3 Billion Cyber Monday Bond Offering [View article]
    Momintn, Don't misinterpret my comments as too negative on IBM. I think IBM has a phenomenal business in comparison to Amazon. In fact, I would not even waste my time comparing the two as they are so far apart. IBM has so many strengths including one of the strongest patent portfolios in the industry alongside everything you have mentioned above.

    I was extremely long IBM for a quite a while and averaged in just above where Buffett bought. My comments above are not forming an opinion on fair value of the IBM stock per se in the long term. Originally, I felt that IBM could go to $300 if not $400 by 2015 (I took my position in 2012). I had hoped to see free cash flow pushing $18-20 billion next year and that is where I feel my personal investment thesis was wrong. $10-12 billion FCF is not a bad investment. I think IBM will however get trapped in a range of $160-200/share for quite a while until the longer term visibility gets resolved and they prove they can maintain growth and margins. That could take 2-3 years to play out and I see other opportunities to deploy capital given my own requirements. Leaving it to the children is a great way to think about it, I just don't have that luxury.

    The only point I would really challenge you to think about is the China issue. Cisco, Qualcomm and others are all seeing similar issues and China are clearly concerned about the NSA matters.
    Nov 26, 2013. 09:53 PM | Likes Like |Link to Comment
  • Amazon Needs Another $3 Billion Cyber Monday Bond Offering [View article]
    There certainly seem to be plenty of fools out there. I would love to know who is actually buying the stock (aside from the obvious ETF's, mutual funds etc.) . As soon as the music stops, most of these guys are going to be dumping shares faster than a speeding bullet.
    Nov 26, 2013. 07:48 PM | 1 Like Like |Link to Comment
  • Amazon Needs Another $3 Billion Cyber Monday Bond Offering [View article]
    PSalerno, With some optimism, I think you could defend that 2022 scenario. For AmazonBull's benefit, if we apply a discount rate of 6% and discount that back today, you should get a valuation of let's call it $200/share to be really generous (just over 50% of the current share price). Andre
    Nov 26, 2013. 05:12 PM | Likes Like |Link to Comment
  • Amazon Needs Another $3 Billion Cyber Monday Bond Offering [View article]
    Steveto,

    In our business, we have traditionally used our own inhouse servers. At present, we are reevaluating our IT strategy. Due to the sensitive nature of our work (which involves quite a lot of IP), we don't want to go fully to the cloud, notwithstanding all the assurances from third parties. The most likely option for us is to use a hybrid solution (part public for non-sensitive data) and private cloud (hosted by the third party on our dedicated servers) for sensitive data. IBM can provide this and I see Softlayer as a bolt on to this strategy. Softlayer are somewhat more than just a service provider but I understand what you mean. IBM do provide public clouds but not to the retail market. They are also supporting Openstack. IBM also announced last quarter that they are setting up a dedicated "cloud" unit to focus on the current opportunities in the market.

    AWS span everything from retail to corporate users although (as far as I am aware) they have not done hybrid solutions up until recently (I would imagine the CIA deal is a hybrid solution).

    Overall, I agree with most of your points above. I simply think IBM have a wider offering than you might be aware of which has been strengthened by the Softlayer acquisition.
    Nov 26, 2013. 05:03 PM | Likes Like |Link to Comment
  • Amazon Needs Another $3 Billion Cyber Monday Bond Offering [View article]
    AmazonBull,

    Cash is king! Agreed. Done. We don't need to go "deeper in to the accounting" if you don't want to.Throw GAAP accounting out the window. No problem with that.

    Where we seem to be running in to a problem between our 2 views is the "present value of future cash flows" and the enterprise value ("EV") of the business. FUTURE CASH FLOW being the main issue in your argument.

    EV is calculated by the total amount of shares outstanding by the market price of those shares plus net debt. If the diluted share count rises (which it does when you issue RSU's), then the share price will fall (all else being equal). That's not GAAP accounting, it's high school arithmetic. I hope we can agree on that.

    So the issue is future cash flows which I still don't see any argument from you on how Amazon is going to generate growing levels operating free cash flow given that it produces just over a $1 billion per annum at present. On the "Present Value" basis you refer to above, if all the surplus cash was distributed to shareholders, the value of the business using a 10% discount rate (use 5% if you want) would only be between $10-20 billion (not $174 billion).

    We can debate this all day long but "Present Value of Future Cash Flows" is a pretty simply calculation and I don't see how you get within half of the current value. Feel free to enlighten me. Are you assuming Future Free Cash Flows increase to over $10 billion per annum or are you using a discount rate of less than 1%?
    Nov 26, 2013. 04:51 PM | 3 Likes Like |Link to Comment
  • Amazon Needs Another $3 Billion Cyber Monday Bond Offering [View article]
    12322561. When you look at the available data from SEC filings, which Paulo summarised in an article a couple of months ago, there is a clear correlation between increases in the electronics segment revenue (versus media and other) and diminishing margins. Amazon used to break out the margin mix in the early days and stopped doing it, obviously realizing that it does not necessarily tell a very good story. The evidence is pretty compelling and beyond reasonable doubt even if we can't prove it because Amazon fail to give us the detailed numbers. Most successful businesses I have seen start with good margins and those margins fall with time and competition. It is virtually impossible to start with low margins in a highly competitive sector and grow them thereafter.
    Nov 26, 2013. 03:06 PM | 1 Like Like |Link to Comment
  • Amazon Needs Another $3 Billion Cyber Monday Bond Offering [View article]
    Mark, In theory, you are probably correct. However, to make $30 in 2015, they would need to post profits of nearly $14 billion. At $100 billion of revenue, that would equate to 14% net margin and they would be, by far, the most profitable retailer of any comparable size in the industry by a long way. Industry net margins, in retail, are less than 5% and unfortunately I don't think Amazon will get anywhere near there either.

    Andre
    Nov 26, 2013. 12:46 PM | 2 Likes Like |Link to Comment
  • Amazon Needs Another $3 Billion Cyber Monday Bond Offering [View article]
    Michael, you are probably right. I was being too generous! Andre
    Nov 26, 2013. 12:42 PM | Likes Like |Link to Comment
  • Amazon Needs Another $3 Billion Cyber Monday Bond Offering [View article]
    Primary revenue growth (aside from AWS) is clearly coming from Electronics and related businesses. As you have so often said, this is clearly operating at a loss and, as far as I can tell, will continue to do so. The competition in this sector is getting hyper aggressive (Argos in the UK, Best Buy, WMT, Ebay and others). Revenue growth will therefore just lead to further losses.
    Nov 26, 2013. 12:40 PM | Likes Like |Link to Comment
  • Amazon Needs Another $3 Billion Cyber Monday Bond Offering [View article]
    Paulo, Unfortunately I suspect the money printing will go on for quite some time. Even if the Fed "taper" next year, they will still be printing, just in smaller amounts, and that money is still going to flow back in to equities directly or indirectly. Andre
    Nov 26, 2013. 12:36 PM | Likes Like |Link to Comment
  • Amazon Needs Another $3 Billion Cyber Monday Bond Offering [View article]
    Amazon don't fully break out AWS revenues but AWS forms a component of "Other Revenue". On the basis of "Other Revenue", at most, they are making slightly less than $1 billion per quarter in the Cloud. IBM hit this figure last month so they are roughly neck and neck. IBM makes net margins of over 20% in their their Technology business (which incorporates cloud). Amazon, from local filings in certain countries, makes about 5-7% net margin (and falling) in cloud. Rackspace (the main competitor) makes about the same net margin. Rackspace and a recent acquisition by IBM trade at about 4-5 times earnings which would value AWS at $20 billion at most off of a profit of $100-150 million. I would value the rest of Amazon's business at about the same level or less.
    Andre
    Nov 26, 2013. 12:33 PM | Likes Like |Link to Comment
  • Amazon Needs Another $3 Billion Cyber Monday Bond Offering [View article]
    Momintn, Up to last month, I had the exact opposite trade on as Druckenmiller (i.e. long IBM and short Amazon). I was wrong! I agree with Druckenmiller on IBM but disagree with him on AWS.

    IBM, from my perspective, have 4 core business: Hardware, Software, Sevices and Technology (I'm simplifying!). As Mark Loughridge, the CFO, has said in the past, Hardware is a precursor for software sales. IBM are facing 2 major headwinds. The hardware business is changing dramatically as people move to the cloud (using services like AWS) and China was a huge growth market (China fell 40% last quarter, in my view off the back of Snowden).Buffett was interviewed a few weeks ago by Becky Quick of CNBC and, with respect to IBM, he was very happy "provided they kept the same level of share buybacks". I think Buffett has underestimated this secular shift both from emerging markets and from the cloud. Buffett likes IBM in my view as more than 50% of the revenues are recurring. Unfortunately all those business are under attack and the software revenues are also going to come under pressure (they currently generate 90% gross margin).

    In a nutshell, IBM's cash flow in the medium term is likely to decrease and I think Druckenmiller will be proven correct on IBM. On AWS, I think he is totally wrong. AWS is a commodity business. IBM have actually walked away from business that AWS is winning in some cases because the margins were too low. The problem for AWS is that they are locking in these long term, unprofitable, contracts. Druckenmiller will see this with time once (and if) there is some transparency on AWS margins .

    Andre
    Nov 26, 2013. 12:19 PM | Likes Like |Link to Comment
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