Amazon's Financial Pressures May Force AWS Spin-Off [View article]
Krk,
Very interesting. My back of the envelope did not take account of data intensive businesses like Zynga and Tumblr so my estimates are probably a little on the low side as they would clearly pay more for the processing power of AWS than a normal SME. That could add another $2-3 billion to the market size. Andre
Amazon's Financial Pressures May Force AWS Spin-Off [View article]
For what it's worth, here is my take. It's a somewhat back of the envelope calculation but it will give you a sense of where the issues are.
There are approx. 6 million firms (SMEs) with under 500 employees in the US employing in total about 60 million. In reality only about 2 million of these firms will use the cloud (SMEs with staff above 10 which in total employ 50 million). See census http://1.usa.gov/YsiEfT
This is Amazon's and Rackspace's target market. IBM dominate the market for large companies with >80% market share so it will be difficult for Amazon to break in to this market, particularly as large firms go for hybrid hosting solutions.
From personal experience a business will not pay more than $100-150/employee for hosting per annum as buying a server and maintaining it onsite becomes a cheaper alternative at that level. In other words the total potential US market size is $5-7.5 billion per annum assuming every SME company migrates to the cloud over time. Amazon's sales are approx. $2 billion and RAX are about $1 billion in the US. EQIX have a lot of international sales so let's assume their US sales are about $1 billion plus there are other providers and other companies in the value chain taking a share too. That means that this market is already highly penetrated.
In other words, growth is going to slow dramatically over the next 18-24 months and that is already showing up in RAX's figures. EQIX is benefiting somewhat from international growth but the margins are a lot lower as there is more competition internationally.
So while Amazon may well be at the head of the pack in the US, the market is slowing and it's position is largely due to the fact that it undercuts RAX on pricing so it's margins are also going to be lower. I would put a $10 billion value on the AWS business but in reality the market will probably value it at double that or more.
Amazon's Financial Pressures May Force AWS Spin-Off [View article]
I look forward to getting my hands on the AWS prospectus. This business is not bad but not anywhere as sexy as all the analsysts believe. Check out Rackspace's (RAX) results yesterday. Shares are down nearly 20% today.
Amazon's Earnings: Holiday Retail Competition And Sales Tax In Focus [View article]
Bear in mind Bezos started his career as a programmer with DE Shaw, a quantitative hedge fund. In my view, the quants are the ones fuelling a large part of the share price growth. The question is whether Bezos knows who is actually doing the trading in the stock. The 13-F filings of DE Shaw and the other main quant funds do not show any long positions in the stock at quarter end but that is not to say that they are not actively trading it.
Amazon's Financial Pressures May Force AWS Spin-Off [View article]
Bartenis,
This is very typical of a retailer overtrading and I have seen it first hand dozens of times. Keep trying to grow sales unprofitably just to bring in some cash. It may well work for another 6-12 months but it all comes crashing down in the end.
Amazon's Financial Pressures May Force AWS Spin-Off [View article]
Bartenis,
You can look at this a number of ways. I'm not a fan of DCF at all but let's take a look anyway assuming 2% net margins on sales growing at about 20% per annum.
2013: $1.4 billion 2014: $2 billion 2015: $2.4 billion 2016: $2.9 billion 2017: $3.5 billion 2018: $4.2 billion Equity discount rate should be 8-12%. Let's say 10%. NPV of those cash flows, off the top of my head, will work out at about $12 billion. 2018 terminal value at a P/E of 20x will be approx. $50 billion. Total NPV is $62 billion. 50% of today's value.
Now let's look at it another way, which I personally prefer. Take a stablised net profit which may be defendable of 2.5% on 2014 sales of $100 billion. $2.5 billion. Now assume that a reasonable investor is hoping for a 10% return. $25 billion is what you would pay.
A third way to look at this is the return on equity per annum that a company can expect to generate. Let's say its and ambitious 25% ROE. In this case profits would be less than $2 billion. Historically Amazon's return on equity has been in the single digits and they are now losing money. If they make a $2 billion profit, again assuming you were targeting a 10% return as a reasonable investor, you would not pay more than $20 billion.
Maybe there are investors out there that are happy with a 1.6% return (60x P/E assuming $2 billion of profits) per annum before inflation which they may achieve at Amazon's current price. This however is fairy tale stuff in my opinion (both the $2 billion profit potential as well as investor target returns).
I suspect most of the investors are either short term investors who are buying in to hype or hedge funds who are trading momentum.
Amazon's Financial Pressures May Force AWS Spin-Off [View article]
As you rightly say, selling AWS at market value does not change the fundamental underlying value of Amazon stock. But on the basis that I believe fundamental value to be 10-20% of the current price, it does bring the motivation for an AWS sale in to focus. If they are essentially being forced to sell to raise cash to fund the rest of the business, clearly investor sentiment may change with respect to people's view of the fundamental value.
Amazon's Financial Pressures May Force AWS Spin-Off [View article]
I don't recommend everyone shorting it! There is a subtle difference. Firstly, I am convinced the stock is fundamentally overvalued by about 80-90% based on my own (not a third party's) detailed analysis. There is a big difference between identifying fundamental value and being able to make money from that view point. Secondly, timing a short (or a long for that matter) is next to impossible. I take a 1-2 year view on a short. I have a specific allocation which I usually allocate over a 3-6 month time period. Thirdly, I assume that a short can move up to 50% against me (Amazon has moved up to 20% against me as you point out). This is not material in the scheme of things and I would not be bothered or surprised if the stock went to $300. Provided the underlying fundamentals continue to deteriorate my investment thesis remains intact and I monitor this on an ongoing basis. Most investors I know have lost money on shorting due to lack of conviction and staying power, hence I don't think it suits everyone.
Amazon's Financial Pressures May Force AWS Spin-Off [View article]
John,
If you have to ask the question, I would recommend not shorting. Shorting is not for everyone and you need to have the stomach and the staying power for it. I am short (and have been for 7 months), I believe Paulo is also short and I am assuming krk is short. Personally, I would only short if you feel you really understand the business and you can defend your position to the 99% of people who will tell you that you are crazy. Otherwise you will be having quiet a few sleepless nights if you have not absolutely convinced yourself that this is going to come crashing down. As luck would have it, I actually sleep quite well at night.
Amazon's Financial Pressures May Force AWS Spin-Off [View article]
As Andy Grove would say, "Only the paranoid survive" so happy to be paranoid too, especially when I am short. Let's assume an extreme example whereby the free float of AWS Newco is 10% and they float on the same multiple as RAX of 108x. The valuation would be circa $22bn with Amazon still holding 90% of the stock or $20 billion based on the above market cap. Now let's assume a third party makes a bid for the whole AWS Newco at a 20% premium but has already optioned the whole 10% free float and everyone gets squeezed. The value jumps by 200% to $66 billion. Amazon's stake is now theoretically worth $60 billion. Will the value of Amazon's shares jump by $40 billion ($60-$20bn)? It's a valid question but, for this to happen, there would also have to be a squeeze on Amazon's actual shares. It would be obvious that Amazon could not monetise their 90% stake at the "squeezed" value of $66 billion. As soon as they start selling shares in AWS Newco, the AWS Newco value would drop back to the bid price. At least that would be my view. I have seen so many "strange" things happen when shorting that I am very happy to test any theoretical scenario like this. Hope it helps.
Amazon's Financial Pressures May Force AWS Spin-Off [View article]
InvestingInvestor
I am not an expert on all the companies you mention below. Here's my brief view:
Netflix: no, Amazon won't be able to get rid of them, at least not in markets where they are well established. Lovefilm is a distant number 2 in most markets and is unlikely to catch up. Barnes and Noble: Yes, it could kill them off but I suspect there is room for at least one bricks and mortar book retailer in the US market. I would be somewhat more sceptical about Nook. Pea Pod: no opinion Best Buy: they could definitely die off. Zip Car: no opinion.
Amazon's Financial Pressures May Force AWS Spin-Off [View article]
Krk, just to clarify, you mean that the AWS newco shares get squeezed? With Volkswagen, the shares were already optioned by, I think, Porsche hence they were able to hoover up all the liquidity rapidly. It really depends on what the AWS float is. A lot of the tech start-ups only float 15-20% e.g. Linkedin, Yelp. I am always reluctant to short these names. In the case of AWS, it's less of a risk provided there is a significant free float. If Amazon only spin off 20%, I would hold off shorting AWS.
ComScore Is Reporting A Severe Slowdown In Amazon.com Web Traffic [View article]
As always, a welcome analysis and one which no other research I have seen has picked up on.
Andre
Amazon's Financial Pressures May Force AWS Spin-Off [View article]
Very interesting. My back of the envelope did not take account of data intensive businesses like Zynga and Tumblr so my estimates are probably a little on the low side as they would clearly pay more for the processing power of AWS than a normal SME. That could add another $2-3 billion to the market size. Andre
Amazon's Financial Pressures May Force AWS Spin-Off [View article]
There are approx. 6 million firms (SMEs) with under 500 employees in the US employing in total about 60 million. In reality only about 2 million of these firms will use the cloud (SMEs with staff above 10 which in total employ 50 million). See census
http://1.usa.gov/YsiEfT
This is Amazon's and Rackspace's target market. IBM dominate the market for large companies with >80% market share so it will be difficult for Amazon to break in to this market, particularly as large firms go for hybrid hosting solutions.
From personal experience a business will not pay more than $100-150/employee for hosting per annum as buying a server and maintaining it onsite becomes a cheaper alternative at that level. In other words the total potential US market size is $5-7.5 billion per annum assuming every SME company migrates to the cloud over time. Amazon's sales are approx. $2 billion and RAX are about $1 billion in the US. EQIX have a lot of international sales so let's assume their US sales are about $1 billion plus there are other providers and other companies in the value chain taking a share too. That means that this market is already highly penetrated.
In other words, growth is going to slow dramatically over the next 18-24 months and that is already showing up in RAX's figures. EQIX is benefiting somewhat from international growth but the margins are a lot lower as there is more competition internationally.
So while Amazon may well be at the head of the pack in the US, the market is slowing and it's position is largely due to the fact that it undercuts RAX on pricing so it's margins are also going to be lower. I would put a $10 billion value on the AWS business but in reality the market will probably value it at double that or more.
Amazon's Financial Pressures May Force AWS Spin-Off [View article]
Amazon's Earnings: Holiday Retail Competition And Sales Tax In Focus [View article]
Amazon's Financial Pressures May Force AWS Spin-Off [View article]
This is very typical of a retailer overtrading and I have seen it first hand dozens of times. Keep trying to grow sales unprofitably just to bring in some cash. It may well work for another 6-12 months but it all comes crashing down in the end.
Amazon's Financial Pressures May Force AWS Spin-Off [View article]
Amazon's Financial Pressures May Force AWS Spin-Off [View article]
You can look at this a number of ways. I'm not a fan of DCF at all but let's take a look anyway assuming 2% net margins on sales growing at about 20% per annum.
2013: $1.4 billion
2014: $2 billion
2015: $2.4 billion
2016: $2.9 billion
2017: $3.5 billion
2018: $4.2 billion
Equity discount rate should be 8-12%. Let's say 10%. NPV of those cash flows, off the top of my head, will work out at about $12 billion. 2018 terminal value at a P/E of 20x will be approx. $50 billion. Total NPV is $62 billion. 50% of today's value.
Now let's look at it another way, which I personally prefer. Take a stablised net profit which may be defendable of 2.5% on 2014 sales of $100 billion. $2.5 billion. Now assume that a reasonable investor is hoping for a 10% return. $25 billion is what you would pay.
A third way to look at this is the return on equity per annum that a company can expect to generate. Let's say its and ambitious 25% ROE. In this case profits would be less than $2 billion. Historically Amazon's return on equity has been in the single digits and they are now losing money. If they make a $2 billion profit, again assuming you were targeting a 10% return as a reasonable investor, you would not pay more than $20 billion.
Maybe there are investors out there that are happy with a 1.6% return (60x P/E assuming $2 billion of profits) per annum before inflation which they may achieve at Amazon's current price. This however is fairy tale stuff in my opinion (both the $2 billion profit potential as well as investor target returns).
I suspect most of the investors are either short term investors who are buying in to hype or hedge funds who are trading momentum.
Amazon's Financial Pressures May Force AWS Spin-Off [View article]
Amazon's Financial Pressures May Force AWS Spin-Off [View article]
Amazon's Financial Pressures May Force AWS Spin-Off [View article]
I need to look at your numbers in detail but I am certainly on the same page as you with respect to your approach and your conclusions. Good analysis.
Amazon's Financial Pressures May Force AWS Spin-Off [View article]
If you have to ask the question, I would recommend not shorting. Shorting is not for everyone and you need to have the stomach and the staying power for it. I am short (and have been for 7 months), I believe Paulo is also short and I am assuming krk is short. Personally, I would only short if you feel you really understand the business and you can defend your position to the 99% of people who will tell you that you are crazy. Otherwise you will be having quiet a few sleepless nights if you have not absolutely convinced yourself that this is going to come crashing down. As luck would have it, I actually sleep quite well at night.
Amazon's Financial Pressures May Force AWS Spin-Off [View article]
Let's assume an extreme example whereby the free float of AWS Newco is 10% and they float on the same multiple as RAX of 108x. The valuation would be circa $22bn with Amazon still holding 90% of the stock or $20 billion based on the above market cap. Now let's assume a third party makes a bid for the whole AWS Newco at a 20% premium but has already optioned the whole 10% free float and everyone gets squeezed. The value jumps by 200% to $66 billion. Amazon's stake is now theoretically worth $60 billion. Will the value of Amazon's shares jump by $40 billion ($60-$20bn)? It's a valid question but, for this to happen, there would also have to be a squeeze on Amazon's actual shares. It would be obvious that Amazon could not monetise their 90% stake at the "squeezed" value of $66 billion. As soon as they start selling shares in AWS Newco, the AWS Newco value would drop back to the bid price. At least that would be my view. I have seen so many "strange" things happen when shorting that I am very happy to test any theoretical scenario like this. Hope it helps.
Amazon's Financial Pressures May Force AWS Spin-Off [View article]
I am not an expert on all the companies you mention below. Here's my brief view:
Netflix: no, Amazon won't be able to get rid of them, at least not in markets where they are well established. Lovefilm is a distant number 2 in most markets and is unlikely to catch up.
Barnes and Noble: Yes, it could kill them off but I suspect there is room for at least one bricks and mortar book retailer in the US market. I would be somewhat more sceptical about Nook.
Pea Pod: no opinion
Best Buy: they could definitely die off.
Zip Car: no opinion.
Andre
Amazon's Financial Pressures May Force AWS Spin-Off [View article]