Timothy Phillips

Timothy Phillips
Contributor since: 2012
This is a completely ridiculous response by the author - every tech company invests boatloads into R&D - and yet they still have earnings. So what you are saying is that they spend a lot on R&D a few years ago to earn boatloads now, but then they spend all of that to make boatloads later ... so do they every have a return on anything (think dog chasing its tail)???
Truth is AMZN loses massive amounts of money in 1P retail as the economics of being a price leader with the added expense of shipping (with fulfillment centers) doesn't work. They barely make that up with 3P commissions and AWS, but AWS is what drives that massive R&D you are touting. So, in the end there is zero cash flow after massive debt ($9B), massive investments in R&D, and in paying their employees with dilutive stock on the backs of shareholders.
Author: What do you mean by expense R&D? R&D has to be expensed in the quarter it is incurred - it is GAAP accounting for every company .. basic operating expense rules. Now, if you were debating them immediately expensing capex (like AWS servers into R&D), you might have an argument, but there is no evidence they do that.
If you want to remove this massive and growing expense for AMZN, you have to do that for every company.
Also - their R&D expense is not all over the place - it is very consistently growing with AWS and Prime Video growth in terms of $ (it only varies as a % of sales because of the seasonality of the business). You have to look at R&D% Y/Y to see the trend.
Really, then why did you say above "the model works, they will have no trouble meeting short-term liabilities"
Well - I was right - in the last sentence in the shareholder letter, they said they will have go out for additional capital next year.
They burned through another $248M in cash in the quarter.
Current Cash assets went from $2.8B --> $2.6B
Current liabilities went from $3.2B --> $3.3B
They went from $400M in the hole, to $700M in the hole ... nice.
They only place "known" obligations in the balance sheet, not "expected" .. the rest go off-balance sheet in that table. They are expecting to purchase more content that will impact the "current" window, but it is not a closed deal. These costs are largely offset by future revenue tied to this content so it is a guessing game to judge the impact on the balance sheet.
The point is - current ratio is well below 1.0 for known obligations and they have negative cash flow that only will push them further into a cash flow issue if they don't secure more short-term capital.
Show me how I am wrong .. all Balance sheet "Current Liabilities" are due within one year. The numbers come right from the June 30th Balance sheet and cash flow statement.
NFLX has a liquidity problem and will as long they continue to expand operations internationally in the least.
F1ydave - you will be proven wrong. They have $3.2B of current liabilities due over next twelve months, with only $2.8B of current assets available to service it. So, they are short $400M as of June 30. The 1st half of this year they burned ($391M) in Free cash flow, so they will have to go to the capital markets very soon for either more debt or an add on offering.
They are already paying $35.2M per Q in interest (47% of last quarter's operating income), so more debt will not help their negative cash flow.
Of course they know better, but any argument to support a thesis. Investment banks make boatloads off companies like AMZN through their debt offerings. All you have to do it track upgrades clusters to when Amazon goes to the debt markets and then track which banks underwrote the offerings ... very telling indeed.
In regards to FCF - read section "Free Cash Flow Less Finance Lease Principal Repayments and Capital Acquired Under Capital Leases" on page 32 of 2015 Q2 10Q ...AMZN comes clean and reports actual trailing 12 month Free Cash flow - which is $4.9B less than the headline they report! It is of course a negative number, as AMZN is burning cash right now, and has been for as far back as they reported their cash spend on capital leases (reported back to 2011).
All - its a fact that AMZN reports all service revenue (3P seller fees + AWS + digital content subscriptions) at 100% gross margin. This is why GM% increases each quarter, but net margin does not increase - it is mechanical and a simple shifting of cost from Cost of Sales to Operating Expense.
Right from the 10Q in the "Cost of Sales" section: "While AWS payment processing and related transaction costs are included in fulfillment, AWS costs are primarily classified as “Technology and content.”
The author does not have an understanding of Amazon financials - which is understandable because they obfuscate them in their reporting on purpose. Two keys areas of misunderstanding:
(1) R&D - the company does not report R&D - it reports "Technology & Content". This spending is largely COGS for their AWS and content sales. This spending cannot be reduced, or else their will be no revenue. Most other companies (e.g. Rackspace, Microsoft, Google, Apple, Netflix) all report these items above the gross margin line ... AMZN does not to show improving GM and leads you to believe they are spending on research which can be cut back. This is not the case.
(2) Free Cash Flow - AMZN does not count its capital lease cash spending as capEX. it hides it as a footnote and therefore does not include this massively growing cash expense in its FCF. The author (and AMZN) reports FCF as +$784M in Q2, while it was actually -$753M due to $1.537B cash spent on capital leases (which you find in the 10Q if you dig really hard). All you have to do is ask yourself why AMZN has had to acquire $9B of new debt over the last couple of years if their FCF has been so positive as reported? It is because they are running a severe actual cash deficit each quarter - and this will continue.
If you want to own AMZN for revenue growth, fine. But don't think they are actually growing margins and FCF to support the stock price. The stock price is what it is, but it is not supported by current or future fundamentals.
AMZN R&D (Technology & content) spending includes normal operating costs (including depreciation of the cloud servers and content costs) .. for most companies these would be above the line, not below. Netflix places this above the line, and so does Rackspace for example .. otherwise those two companies would be 100% GM. Take that out, and AMZN R&D spending is quite small as a % of sales.
Dana - they always have positive operating cash flow in every Q2 ... this is not new. But, this means nothing as you need to subtract out capex and P&E leases to find out free cash flow (which is the actual cash they have earned for the quarter). When you do that, AMZN did not have positive cash flow last quarter. They burned $753M in cash on operations last Q.
Q2 Cash Flow
OCF: + $1,997M
CapEx: -$1,213M
P&E cash leases: -$1,537M
Total Free cash flow: -$753M
Staux - I made an honest mistake .. wow, you hold a grudge! Let's see if they go back to the debt markets over the next 12 months. Upgrades in the past have typically been a prelude to a significant debt offering.
Amazon must be gearing up for another debt offering, as the upgrades are coming. They are burning through cash at an unreal rate ($2.6B burn down in last 8Q when capital leases are included) - hence the cuts recently to the consumer devices team as well. Amazing how people flock to the stock right after seeing how fast the bloodbath can be on stocks like this .. still no fear of losing money in this market when the FED has its back.
Unearned revenue also includes gift cards which is a huge piece of the total.
Another way to look at this - they already have nearly 50% of US households, and still they are not profitable. Sounds like they have already saturated the market.
You cannot compare the pricing for cable vs. Netflix (or even other streamers) because the content is completely different. Local programming + sports + news + Live TV vs. re-runs mixed with some good original content. You might be right that NFLX underprices to grow, but you have not proven it in this article.
Your thesis is that the Tampa Bay Rays should be able to charge the same amount as the Boston Redsox for tickets because they both offer a baseball experience. Not even close.
Gary - of course you are right. You cannot short this stock on valuation - it is predetermined to rise as a self-fulfilling prophecy. The analyst community, big money and CNBC are all in strong support. It really has been an easy ride for those that get how the market works on stocks like this (at the end of the day, a stock is worth what the last buyer was willing to pay - not its amount of earnings)
Even though it should continue to go up based on this environment, I have a hard time buying the stock at this point, as don't you fear one-day that 175x 2-yr forward multiple will not hold up? As easily as that last buyer feels it is worth this now, they can quickly change their mind and 25x is a long way from 175x. But here again - that is no reason to short, but maybe a reason not to buy or hold at this level.
PT is 175x 2016 EPS with a 30% EBITDA CAGR for 2015-2018?
All of that great stuff amounts to $2.46 in EPS 2 years from now. Wow. Hard to miss that EPS estimate, but I am sure they will figure out how.
I guess you are trying to be controversial to drum up readership, but this truly laughable. Let's compare the metrics that really matter:
In CY14, FB had $3.5B in free cash flow (up from $2.8B or +25% from CY13), while AMZN netted -$2.1B (down from+ $0.2B in CY13)
Facebook forecast
CY16 EPS: $2.57
CY16 P/E: 32
CY16 Revenue growth: 32% (PE/RG = 1.0x)
Amazon forecast
CY16 EPS: $2.27
CY16 P/E: 163
CY16 Rev Growth Rate: 17% (PE/RG = 9.6x)
With the S&P CY16 PE/RG at about 1.5x, Facebook is still undervalued, while AMZN is > 6x the market.
AMZN is almost 10 times more expensive than Facebook on an earnings/rev growth.
mshapiro99: R&D cannot be slowed down without crushing AMZN's number one growth driver: AWS - R&D is almost completed correlated to growth in AWS. All AWS costs are capitalized in R&D, and part of why GM% goes up while OM% drops. Slow down spending in R&D, and AWS goes bye-bye .. then goodbye $300's for the stock.
Dana - "not taking inventory risk"? Have you looked at Amazon's Inventory Days Ratio over the past several years .. it has increased 20 straight quarters, and is now 48.8 days.
As the fulfillment centers build out, no one notices Inventory Days has gotten much worse. It is worse than Walmart and Costco, and shows that Amazon now manages it daily operations less efficiently than its competitors.
The myth that on-line retail is more efficient is BS - it can start out that way, as you ship from a small number of warehouses to the whole country, but they have already had to essentially build out "stores" to get two day shipping. Add up inventory costs, fulfillment costs and shipping expenses, and AMZN is inherently less efficient than its comp .. hence the much lower net margin.
If you included lease expenditures - which you need to (even the company now admits), FCF over past 5 years is a miserable $1.5B only.
Company trades at 107x past 5-YR's of FCF!
Dana - there is a difference between GROSS margin and NET margin. Gross margin for CY14 was 29.5%, but NET margin was -0.3%. That operating expenses were 29.8% of sales.
In CY13 GM% was 27.2%, NM% = 0.4%, OpEx = 26.8%
So, while GM% rose 2.3% Y/Y, OpEx rose 3.0%.
In fact OpEx has grown faster than GM five straight years (2010 through 2014). I would say that is a trend. The reason this is happening is that AWS and 3P sales are accounted for at 100% GM - all COGS are counted as OpEX (unlike eBay and Rackspace, etc..) If they were counted as COGS you would see Amazon GM% be flat and net margin still decreasing. It is an accounting trick to fool those who don't pay attention, or chose not to.
BTW - they do not have guaranteed net profit on 3P sales - they only have guaranteed gross profit - they have plenty of fulfillment, admin and T&C costs on that 3P sale.
It is not a matter of "making money" .. the question is "how much?" Is the bar that low that they just need to break even to be worth almost $200B?
No one debates AMZN has value, the question again is how much and the quality of it.
BTW - they reported $2.2B in negative free cash flow for the past 12 months - good to see they are coming clean with their new total FCF measurement.
Amazing - the author has taken the NEED for debt as a positive. This debt adds $240M annually in interest payment to a company with a current ratio well under 1.0, and significant negative real free cash flow (including capital leases) for the past few years.
This debt is meant to keep the company financed for the next couple of years (as they are burning through $3B per year right now) .. not for a higher ROI.
Paulo - it happens with straight debt as much as equity (sometimes even more so). The marketing commitment with the debt underwriting contract leads to trading desks pumping the stock along with analyst price target upgrades. This one played out just as predicted.
Jaremi - that sounds about right. It has already started it sideways trade for about a year now in a very up market. AMZN was at $335 in Oct '13, while the S&P500 is up over 18% since then. While the net will be sideways, there will be lots of ups and downs (high Beta) ... a good trading opportunity for the next few years.
Paulo - I did track since 2011 the forward earnings projections for AMZN in 2013.
Here was the consensus estimate for 2013, followed by the stock price in that month (they actually did $0.59 in 2013)
Jan 2011: $5.75, $180
Jan 2012: $3.20, $173
Jan 2013: $1.76, $250
Apr 2013: $1.48, $262
Jun 2013: $1.29, $267
Sep 2013: $0.87, $317
Nov 2013: $0.73, $358
Jan 2014: $0.73, $398
So, EPS was reduced 87% over 2 years, and that wasn't enough as they fell 90% short. And yet the stock more doubled, up 121% over that time frame.
I am sure 2014 was a similar track, as 2015 has been as well, and every year after will be.
Sakelaris - a company is only valuable if they offer a unique value proposition and distinct competitive advantage. Low price is not a value proposition unless it is coupled with lower cost - and they don't have this. Borrowing money and selling shares to buy lots of content and offering it back up at cost to consumers is something any company in the business can do. Only AMZN has been stupid enough to replicate this losing model so far.
NFLX's game is to keep prices so low that they keep out competition and gather enough users until they have THE Brand and a near monopoly with scale. At that point, they can raise prices. The question is, will they run out of money first? Signs show it will be tough, as they had to raise prices recently to keep this puppy afloat, and look at the impact on new subs. Clearly they have a long way to go before they can raise prices enough to make a difference.
Very misleading ... you mention Free Cash flow has been growing as proof of profitability, but then you point to a chart that is of Operating cash flow. FCF = OCF-CapEx. If you put a chart up a FCF, you would see it has been declining for the past 5+ years. TTM FCF is just $1B, down 65% from 5 years ago.
Amazon is valued at 150x FCF ... that is a return on sales of 1% and a return per share of 0.7%. Not very good at picking investments are they? Fire Phone is another example.