Amazon Loses Money On Both Prime And Its Entire Direct Retail Business [View article]
Let's not forget that on 10/14/2011 AMZN was $246.71, and then proceeded to drop 30% to $173.10 by 12/30/2011. This was on poor profitability outlook on strong growth (before everyone bought the "investment" thesis)
There was another big drop last year of almost 20% from mid-sept until Q release near end Oct (then there was the very strange reversal in AH ... that is when Cap world investors made their move into the stock I believe and ran it hard into December). This was when the stock should have retraced back to around $180.
So, in the last 18 months there has been a 30% drop and a 20% drop sandwiched around massive run ups. The drops were not set off by any clear catalyst other than letting some air out of the balloon, so could easily happen again .. it just takes one firm to start some selling (without a manipulator moving in), and you can get a 30% long-squeeze/profit taking in a stock like this that has no fundamentals (or dividend) to keep it afloat (and it is easy to short because of no dividend).
Those moves were about a year apart, but it feels like it is about to happen again, as it has trailed the S&P500 over the past month and YTD, and the recent 6-day run may initiate some profit taking this upcoming week and into earnings. I also think investors will be surprised at the low guidance (sub-20%) growth Amazon is going to give for Q2.
Amazon Loses Money On Both Prime And Its Entire Direct Retail Business [View article]
Eric,
- the streaming costs from titles that are available through Prime are by definition allocated to Prime P/L. I included the source of the estimate of those costs (and they are reasonable based upon the 10K release of video content costs and vs. NFLX as a comparison. All other video / music content you can download through purchase I do not include in prime as that is a separate business - The fulfillment modeling I have done is very complicated, but it is very predictable and highly variable based upon a few key factors: 1P sales volume, 3P sales volume, Q3 & Q4 seasonal adjustment, and an overhead factor (depreciation, utilities, etc..). I agree that you would think at first glance that there should be economies of scale, but when you get into the detail there are not. Paulo has done some great work on this well - and I can tell you it id highly variable and grows faster than overall revenue due to the 3P fulfillment costs burden. - I admit that the 50% FBA is a total SWAG on 3P business, but we have no information to make a better judgment (though AMZN said in their letter to shareholders and in the 10K that is biggest advantage to gaining 3P customers - so it must be significant). In any event it doesn;t change the outcome of the model much - relatively insensitive to it.
One last comment - I believe Amazon is a very good company and nowhere have I said there will be an "imminent demise". I simply think the stock is a bubble on a valuation basis and will come back down to fair value. They always do.
Amazon Loses Money On Both Prime And Its Entire Direct Retail Business [View article]
I was a prime member on a trial basis, but hated the streaming service, so I went back to Netflix. I do love Netflix (and am an avid user), but did take a short position is upper 180's recently. How anyone can pay over $300 per sub is beyond me. NFLX is another one of those crazy stocks - I was a buyer in 60's and got out at $90 (as the drop was way over done and over sold), and then turned that around after the pop near 190.. I think NFLX is worth between $100-$120.
Amazon Loses Money On Both Prime And Its Entire Direct Retail Business [View article]
That's right Peter ... Gas prices won't be dropping any time soon (in fact I would argue that a massive EU like gas tax will be coming in the next 3 years). That is why AMZN had to increase FC sq. footage by 55% on 27% revenue growth in 2012 - this is their gas hedge.
Amazon Loses Money On Both Prime And Its Entire Direct Retail Business [View article]
I love the disclosure on CS front page: "US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision."
Amazon Loses Money On Both Prime And Its Entire Direct Retail Business [View article]
I just read the full Credit Suisse Note .. wow ... what terrible analysis of the factors that impact the business. They spend page after page telling us how shipping is a net positive and fulfillment costs are dropping and that significant economies of scaling are coming. Meanwhile they drop out and ignore significant costs like stock and credit card transaction fees on fulfillment costs .. and oh by the way, they keep interest expense at zero going forward in their model (on the new $3B in debt), yet they have interest income from that cash going forward!
My favorite is the fulfillment center analysis .. $/sq.ft is dropping a little, but what he doesn't tell you is that sq. footage had to almost double vs. revenue growth in 2012 to lower shipping expense a miniscule amount. So fulfillment is way up as percent fo revenue, but is sees it dropping massively ... They also neglect to point that out net shipping expense is down as percent of sales only because they are charging more now - which will lead to reduced growth.
Amazon Loses Money On Both Prime And Its Entire Direct Retail Business [View article]
Thanks a lot Mike,
I had been in agreement with you on the top-line miss theory up until I read the analysts reaction post last earnings call, and I finally capitulated on that thesis. The evidence suggests that the 7 straight Q's of significantly dropping revenue growth and 4 straight Q's of missing rev estimates has only pushed the stock up. My conclusion is that street ignores product sales misses, and values the company based on service segment potential alone (but has no problem using the total revenue to justify the P/S ratio that develops).
I wanted to develop this analysis to highlight just how bad 85% of the business is. That cannot be ignored as a breakeven, because it is isn't.
Amazon Loses Money On Both Prime And Its Entire Direct Retail Business [View article]
I knew some people would complain about using Operating margin - I don't like it as either, as I am a believer in using net margin. I stuck to operating margin for 2 reasons: (1) that is what analysts are focused on and I tried to refute Hottovy's claim of 9% OM for Prime. I didn;t want to confuse things by using NM vs. OM in the same article. (2) Internally companies look at their business segments typically at the OM P/L level. I felt that this is how AMZN leadership would look at it.
Amazon Loses Money On Both Prime And Its Entire Direct Retail Business [View article]
Paulo - you could be right as we both don't know but here was my thinking: after AWS the bulk of T&C is the development of the Kindle family (+ potential new phone), internal software development, and tech development for content delivery (video/books, etc..). All of kindle and content delivery should be associated with 1P .. internal software shoudl be a fiarly even split with 3P (by revenue) .. on that basis, I think the split by % of sales is fair (rather % of volume - 60/40).
Amazon Loses Money On Both Prime And Its Entire Direct Retail Business [View article]
pfifla1: How can you not love Prime? You get a free video streaming service ($98 value) + you save on free 2-day shipping ... Basically the average Prime user get $200 of stuff (video and shipping) for $79 .. that is a great deal for the consumer - not for AMZN.
And they don;t make it up on volume .. this article shows that on average AMZN loses money on each direct retail transaction, so on top of giving away ~ $120 to each Prime user, they lose money on the underlying transaction due to low prices, shipping and fulfillment costs.
Amazon Loses Money On Both Prime And Its Entire Direct Retail Business [View article]
Hi Sunil,
It helps their cash flow more than revenue for the Q as the full Prime revenue ($79) goes to "additions to unearned revenue" in the cash flow statement. They defer the revenue and recognize it over the term of use (so they recognize $6.58/month in revenue). AWS works in a similar manner (I wrote about this in a separate article: http://seekingalpha.co...)
This has been inflating their cash flow relative to revenue for a few years and is why Bezos wants you to focus on cash flow rather than net margin%.
Amazon's Revenue Deceleration Probably Continued [View article]
All good Q's MIchael ... I have come now to think that if Direct retail falls well below expectations, the stock will not be impacted (like last Q). But if 3P slows down, there will be trouble. EPS, total growth, op margin, net margin, quality of cash flow, all do not matter.
The only two that do matter are Services rev growth exceeding on a GM% increase.
Eventually the rest have to matter (once cash begins to run low), but right now, they do not, and may not for a while.
Amazon's Revenue Deceleration Probably Continued [View article]
Hi Michael - I just submitted a new article (hopefully will come out later today, worst by morning) that shows how reliant AMZN is on 3P profits - and this is the area that is under massive attack from eBay (and course the 3P sellers also see comp for B&M as well like best buy).
My model shows the impact (based on eBay potential, fedex Jan/Feb shipments, channel advisor data, etc..) shows 3P at 35-36% growth (down from 42.7% in the 4th Q). This would be the 7th straight Q of growth declines in 3P. If 3P drops below 30% this year AMZN outlook will be in real trouble.
Ironic note: What has driven eBay to an all-time high is the fact that investors/analysts believe that eBay will be taking share from AMZN in 3P over the next 3 years based on the 3/28 analyst day. Amazon stock continues to soar anyway! reality will just not stop the bus. Hard to imagine that both can win. Amazon loses money on its Direct Retail business and does not have the cash to compete with eBay's cash printing operations, but I think the Street will need to see this play out before they sell AMZN.
Amazon Loses Money On Both Prime And Its Entire Direct Retail Business [View article]
There was another big drop last year of almost 20% from mid-sept until Q release near end Oct (then there was the very strange reversal in AH ... that is when Cap world investors made their move into the stock I believe and ran it hard into December). This was when the stock should have retraced back to around $180.
So, in the last 18 months there has been a 30% drop and a 20% drop sandwiched around massive run ups. The drops were not set off by any clear catalyst other than letting some air out of the balloon, so could easily happen again .. it just takes one firm to start some selling (without a manipulator moving in), and you can get a 30% long-squeeze/profit taking in a stock like this that has no fundamentals (or dividend) to keep it afloat (and it is easy to short because of no dividend).
Those moves were about a year apart, but it feels like it is about to happen again, as it has trailed the S&P500 over the past month and YTD, and the recent 6-day run may initiate some profit taking this upcoming week and into earnings. I also think investors will be surprised at the low guidance (sub-20%) growth Amazon is going to give for Q2.
Amazon Loses Money On Both Prime And Its Entire Direct Retail Business [View article]
- the streaming costs from titles that are available through Prime are by definition allocated to Prime P/L. I included the source of the estimate of those costs (and they are reasonable based upon the 10K release of video content costs and vs. NFLX as a comparison. All other video / music content you can download through purchase I do not include in prime as that is a separate business
- The fulfillment modeling I have done is very complicated, but it is very predictable and highly variable based upon a few key factors: 1P sales volume, 3P sales volume, Q3 & Q4 seasonal adjustment, and an overhead factor (depreciation, utilities, etc..). I agree that you would think at first glance that there should be economies of scale, but when you get into the detail there are not. Paulo has done some great work on this well - and I can tell you it id highly variable and grows faster than overall revenue due to the 3P fulfillment costs burden.
- I admit that the 50% FBA is a total SWAG on 3P business, but we have no information to make a better judgment (though AMZN said in their letter to shareholders and in the 10K that is biggest advantage to gaining 3P customers - so it must be significant). In any event it doesn;t change the outcome of the model much - relatively insensitive to it.
One last comment - I believe Amazon is a very good company and nowhere have I said there will be an "imminent demise". I simply think the stock is a bubble on a valuation basis and will come back down to fair value. They always do.
Amazon Loses Money On Both Prime And Its Entire Direct Retail Business [View article]
Amazon Loses Money On Both Prime And Its Entire Direct Retail Business [View article]
Amazon Loses Money On Both Prime And Its Entire Direct Retail Business [View article]
Amazon Loses Money On Both Prime And Its Entire Direct Retail Business [View article]
should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision."
Amazon Loses Money On Both Prime And Its Entire Direct Retail Business [View article]
My favorite is the fulfillment center analysis .. $/sq.ft is dropping a little, but what he doesn't tell you is that sq. footage had to almost double vs. revenue growth in 2012 to lower shipping expense a miniscule amount. So fulfillment is way up as percent fo revenue, but is sees it dropping massively ... They also neglect to point that out net shipping expense is down as percent of sales only because they are charging more now - which will lead to reduced growth.
I may have to write an article on the detail ....
Amazon Loses Money On Both Prime And Its Entire Direct Retail Business [View article]
I had been in agreement with you on the top-line miss theory up until I read the analysts reaction post last earnings call, and I finally capitulated on that thesis. The evidence suggests that the 7 straight Q's of significantly dropping revenue growth and 4 straight Q's of missing rev estimates has only pushed the stock up. My conclusion is that street ignores product sales misses, and values the company based on service segment potential alone (but has no problem using the total revenue to justify the P/S ratio that develops).
I wanted to develop this analysis to highlight just how bad 85% of the business is. That cannot be ignored as a breakeven, because it is isn't.
Amazon Loses Money On Both Prime And Its Entire Direct Retail Business [View article]
Amazon Loses Money On Both Prime And Its Entire Direct Retail Business [View article]
Amazon Loses Money On Both Prime And Its Entire Direct Retail Business [View article]
Amazon Loses Money On Both Prime And Its Entire Direct Retail Business [View article]
And they don;t make it up on volume .. this article shows that on average AMZN loses money on each direct retail transaction, so on top of giving away ~ $120 to each Prime user, they lose money on the underlying transaction due to low prices, shipping and fulfillment costs.
Amazon Loses Money On Both Prime And Its Entire Direct Retail Business [View article]
It helps their cash flow more than revenue for the Q as the full Prime revenue ($79) goes to "additions to unearned revenue" in the cash flow statement. They defer the revenue and recognize it over the term of use (so they recognize $6.58/month in revenue). AWS works in a similar manner (I wrote about this in a separate article: http://seekingalpha.co...)
This has been inflating their cash flow relative to revenue for a few years and is why Bezos wants you to focus on cash flow rather than net margin%.
Amazon's Revenue Deceleration Probably Continued [View article]
The only two that do matter are Services rev growth exceeding on a GM% increase.
Eventually the rest have to matter (once cash begins to run low), but right now, they do not, and may not for a while.
Amazon's Revenue Deceleration Probably Continued [View article]
My model shows the impact (based on eBay potential, fedex Jan/Feb shipments, channel advisor data, etc..) shows 3P at 35-36% growth (down from 42.7% in the 4th Q). This would be the 7th straight Q of growth declines in 3P. If 3P drops below 30% this year AMZN outlook will be in real trouble.
Ironic note: What has driven eBay to an all-time high is the fact that investors/analysts believe that eBay will be taking share from AMZN in 3P over the next 3 years based on the 3/28 analyst day. Amazon stock continues to soar anyway! reality will just not stop the bus. Hard to imagine that both can win. Amazon loses money on its Direct Retail business and does not have the cash to compete with eBay's cash printing operations, but I think the Street will need to see this play out before they sell AMZN.