Seeking Alpha

Timothy Phillips

 
View as an RSS Feed
View Timothy Phillips' Comments BY TICKER:
Latest  |  Highest rated
  • Amazon: Profit Is Not In The Dictionary [View article]
    Its been 20 years of "short-term investments" that have never paid off. Just look at their ROIC .. you can get a better yield on 10-yr US T-Bill (and that ain't saying much).

    There must be some basis/facts you can point me to that lead you to your "belief" that these businesses are profitable underneath the "investment". I have been searching and digging for three years and have not been able to find it. What I have found is that if you model the "investments" as expenses tied to their revenue stream, you can predict very closely how Amazon opex performs over a multi-quarter/year period. My model has been just about dead nuts on each Q, where the analysts are always surprised. (but they continue to raise targets anyway)
    Aug 21 08:03 AM | Likes Like |Link to Comment
  • Amazon: Profit Is Not In The Dictionary [View article]
    And how do you know that 12322561?

    Paulo and I have shown through our work that Amazon's losses are structural - both due to mix (EGM vs. media) and through fulfillment and T&C costs growing predictably faster than revenue. Their losses are not from capital investments, they are from operating expenses tied to revenue .. these are not going to decline - in fact they grow faster than revenue.

    There is no magical "switch" they can throw to run profitable. This should be clear after all of these years, but it is lost on exuberance. This will get ugly as cash continues to run low as debt runs up.
    Aug 19 07:05 PM | Likes Like |Link to Comment
  • One Thing Is Odd [View article]
    Paulo - I think you got it right, its the fact that the offering is coming. They must be out pitching the stock now with the sell-side firms that will partake in the deal. Last time (Nov 26th, 2012) - the stock rose $22, or 10%, in the two weeks prior to the deal (and this also followed a big drop prior post earnings).

    Maybe something will be announced this week or next. The whole thing is rigged and has very little to do with valuations.
    Aug 19 06:58 PM | 5 Likes Like |Link to Comment
  • Amazon: Profit Is Not In The Dictionary [View article]
    Gross profit is irrelevant for Amazon as they account for 3P and AWS sales at 100% gross margin. They place those operating costs in "fulfillment" and "T&C" respectively. As Bill points out net margin is decreasing as gross margin increases. Net margin and cash flow are all that matters in a business, and both are dropping fast.
    Aug 19 08:10 AM | 2 Likes Like |Link to Comment
  • Amazon: Profit Is Not In The Dictionary [View article]
    Bill - have you given up valuing AMZN based on P/S yet? You usually add a price target based on P/S at the end of your AMZN articles. if you had, your target would have risen post the Q. I am happy to see you didn't do that.


    I have criticized that approach in the past for AMZN, because it assumes an inflated future net margin in the multiple that AMZN has proven time after time it cannot achieve as Amazon's business model had inverse leverage (everyone assume they can flip a magic "profit switch" and still grow - which they cannot).

    WMT is valued at 0.5 P/S and they have 3.6% net margin, which AMZN will never achieve. At 0.5 P/S AMZN is worth $89.
    Aug 18 10:53 AM | 3 Likes Like |Link to Comment
  • The Amazon.com 'Come To Jesus' Earnings Report [View article]
    Paul - current ratio is back to 1.0, 1st time since the $3B issue. It didn't take long for them to eat through that $3B. They will need to go back out for debt soon (or do a follow-on offering .. at these prices that sounds better).
    Jul 25 10:13 AM | 4 Likes Like |Link to Comment
  • Netflix: $35 Billion In Revenue Is Attainable By 2024 [View article]
    10 year forecast? you must be kidding. Analysts can't predict next Q for a company like this, and you want to go out ten years to draw some conclusions? Anything is possible - you could also make the case NFLX will be out of business in less than 10 years.

    This company's stock price is pure speculation as a trading stock - nothing more until the young streaming market shakes itself out.
    Jun 19 11:52 AM | 11 Likes Like |Link to Comment
  • Amazon: When Does The Trouble Begin? [View article]
    Bill,

    AMZN has begun its transition where it has to worry about cash flow and profits, rather than revenue growth, because as you point out, the balance sheet is in dire shape. We all knew this would come some day, as the low hanging revenue fruit has been picked and they need to increase the quality of their revenue, not necessarily the amount. There is no economy of scale with their prior growth plan (jumping into every growth business possible at the lowest price point).

    Most of their recent changes highlight this - increase in prime price, slowing of content deals, slowing of AWS price decreases, lack of new business announcements, increase in 3P seller fees, etc... With that, it is no longer appropriate to value AMZN on a price to revenue basis, valuation will begin to track their ability to deliver free cash flow and earnings. The market has proven this, as the stock has moved wildly on the notion of prime pricing changes.

    I think if you buy AMZN based on a P/S ratio disconnected from cash flow/EPS, you will get burned over the next year as the transition occurs. If they are valued on profitability, their P/S should be 0.5-0.7.
    Mar 18 08:04 AM | 9 Likes Like |Link to Comment
  • Netflix Is A House Of Cards On The Verge Of Collapse [View article]
    Boris - and that is why NFLX will have a hard time raising prices ever .. b/c to get 60-70% of households like they need to make current valuation, they need to be cheap enough that a sub is not tempted to steal free streaming.

    That is why they will never have success outside of the US and EU - no one outside of there will pay anything for something they can get for free.
    Feb 26 07:43 AM | 2 Likes Like |Link to Comment
  • Netflix Is A House Of Cards On The Verge Of Collapse [View article]
    Boris - to get the actual cash spent on streaming content during the year you have net the additions to streaming content and the change in streaming content. If you do this, NFLX's cash spend was $2.375B (not $3B) in 2013 and $1.753B in 2013. This cash spend as a % of streaming revenue actually is declining (72.8% in 2012 vs. 70.5% in 2013).

    Also, because of this the gap between cash spend and amortization is much smaller than you quote (which makes more sense) .. it is $254M in 2014 (or ~ 11% gap).

    I agree with your conclusion that NFLX is very overvalued, but the spend is not as bad as you state (your net income to FCF is very valid).
    Feb 24 07:35 AM | 2 Likes Like |Link to Comment
  • Second season of House of Cards delivers for Netflix [View news story]
    MIkie713 - I agree .. second season was very disappointing. Loved the first, but the second did not live up to the hype ... story and characters got tired real quick.
    Feb 19 09:53 AM | 1 Like Like |Link to Comment
  • Missing The Point On Amazon's Margins [View article]
    Alex,

    It is simple math ... service revenue (not including shipping) is 100% GM. If you remove that you can calculate Product margin directly (not including shipping expense).

    Gross margin (not including shipping expense) moved from 33.2% in 2012 to 36.1% in 2013 (a 290 basis point increase).

    Product margin (less shipping expense) moved from 21.1% in 2012 to 21.9% in 2013 (a 90 basis point increase).

    Therefore 69% (200/290) of the GM increase is due to Service sales, not product margin improvements.

    Now, bulls will point to the product margin increase as pricing power, but 57% of the product margin improvement is from increased shipping revenue! And the entire increase is wiped out by shipping cost subsidies by Amazon on the rest of the product revenue.

    So, all in all - when you include both shipping revenue and expense, product margins are not up .. the entire GM% increase is due to Service accounting policy.
    Feb 19 08:04 AM | 4 Likes Like |Link to Comment
  • Amazon: Why The Giant (P/E Ratio) Must Fall [View article]
    Your analysis is correct NickBritt .. I have written about this a lot. AMZN is building out Fulfillment centers due the 2x increase in fuel cost over the past several years. THeir calculus was that the expense of the FC's was less than cost of fuel in shipping long distances (+ they knew there were going to need to pay sales tax anyway at some point). Because they are so low on capital, they have been leasing the FC's.

    There are two fallacies perpetuated by analysts on this front:
    (1) FC's are what is driving the CapEx spend and "investment" ... not true - the FC's are leased and are a real annual expense that hurts cash flow. Most of Capex is driven by AWS opex, software development, and content purchases. That spending will have to continue or growth stops, especially in AWS. There is no end to this spending for AMZN.
    (2) FC's will drive down the cost of shipping, and raise net margins. This has proven unequivocally false. Shipping costs continue to climb faster than revenue as shipping rates increase (and prime membership grows) and FC costs rise massively (due to inventory distribution costs, and the massive assortment of goods).

    Shipping and FC costs will rise faster than revenue on a consistent basis - there is nothing to stop the trend here. AMZN's only tactic is to increase the price of Prime to cover these increased expenses - and that is what they are doing. What will this do to growth?

    At some points these facts will become apparent to analysts, but for now they are blinded by the growth and awe of Bezos.
    Feb 10 08:43 AM | 6 Likes Like |Link to Comment
  • Amazon: Why The Giant (P/E Ratio) Must Fall [View article]
    Hi Jeffry,

    In the Q release (and 10k) Amazon breaks out revenue in two ways:

    First: They provide Product revenue (1P), and Services (3P + AWS + Digital).
    Second: They provide a detail breakout of revenue by Media, EG&M, and Other.

    Media + EG&M = 1P + 3P
    Other = AWS + digital subscriptions

    Therefore it is simple math to get 3P:
    3P = Service Revenue - Other
    And e-commerce total (1P+3P) = Media + EGM.
    Feb 10 08:27 AM | 1 Like Like |Link to Comment
  • Amazon: Why The Giant (P/E Ratio) Must Fall [View article]
    Nick,

    Amazon's financial statements tell us exactly what 3rd party sales are. In 2013, they had $9.615B in 3rd part revenue. They record that revenue at 100% gross margin (as per Amazon 10k description). With GAAP they can record at 100% GM, because they never take "title" to the goods, they simply transfer the good to customers and record the fee/commission as revenue (typically about 11-13% of final sale price). 3rd party revenue does contain significant costs though - shipping, fulfillment, technology and G&A. While we don't know Amazon's profitability is on 3P because they don't break it out, I have estimated it to be about 29% EBIT in an article I published (http://seekingalpha.co...).

    What I find interesting is that if they do share inventory with 3rd party vendors, as has been discussed lately for efficiency reasons, wouldn't that constitute title?

    Also - due to the transfer accounting on AWS, digital and 3rd party at 100% gross margin, analysts are giving credit to Amazon for margin expansion while the bottom line remains flat at near 0% net income. They are just transferring costs from COGS to OpEx, so net margin is unaffected. You have to give Amazon credit - they know what moves markets (expanding GM%) - and they are playing it perfectly.
    Feb 8 10:18 AM | 2 Likes Like |Link to Comment
COMMENTS STATS
428 Comments
461 Likes