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Timothy Phillips  

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  • 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, 2014. 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, 2014. 09:53 AM | 1 Like Like |Link to Comment
  • Missing The Point On Amazon's Margins [View article]

    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, 2014. 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, 2014. 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, 2014. 08:27 AM | 1 Like Like |Link to Comment
  • Amazon: Why The Giant (P/E Ratio) Must Fall [View article]

    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 (

    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, 2014. 10:18 AM | 2 Likes Like |Link to Comment
  • Amazon's 'Free Pass' [View article]
    Jeffry - I completely agree and have written about this very topic. The balance sheet continues to worsen during good times ... wait until a minor pullback with the economy. It will get ugly quick for them.
    Jan 22, 2014. 07:56 AM | 1 Like Like |Link to Comment
  • Amazon's 'Free Pass' [View article]
    Lowering Capex does add to income over time (not instantaneously) by reducing future depreciation (assuming there is no impact on Net Income).

    What is not mentioned here is that Operating Cash Flow includes Depreciation, which is a result of prior CapEx spending. If CapEx is flat for a period of time, Depreciation ~= CapEx and has no impact on FCF. So, FCF is only impacted by the difference of CapEx to Depreciation (so a shrinking business can show positive FCF on large operating losses as well .... just like a growing Biz can show positive FCF from payable pushouts while showing income losses). Both of situations pay the piper eventually, and Amazon will as well.
    Jan 20, 2014. 08:52 AM | 1 Like Like |Link to Comment
  • Amazon Loses Money On Both Prime And Its Entire Direct Retail Business [View article]
    Yet AMEN, here we are 9 months later, and the stock is up 46% since I wrote this. And the assumption is that AMZN makes even more money on prime now than at the time of this writing (the old make up the loss per unit on volume). The fraud continues.
    Jan 13, 2014. 08:08 AM | 1 Like Like |Link to Comment
  • Reassessing Amazon Prime's Strength [View article]
    AMZN has negative Margin on Prime. Check out this article on the subject:
    Jan 10, 2014. 04:54 PM | 4 Likes Like |Link to Comment
  • Netflix - Just How Much Growth Is Required To Justify Today's Valuation? [View article]
    Hi MIchael,

    YELP has the real possibility of going belly up - much, much more so than AMZN. But, we are splitting hairs here, as all of the names we mention are in bubble territory. I did an analysis on all S&P500 stocks in terms of growth vs. FWD P/E vs. market cap (as MKT cap goes up, typically growth and FWD P/E drop ratiometrically). There is very high correlation for almost all 500 stocks, except for about 10 - that are many times larger then the rest. The FWD P/E of the 490 is a little under 15 (vs. the entire which is about 15 and a half) .. the other 10 (including NFLX, AMZN, FB, etc...) is over 100. The bubble is really limited to just a small slice of the market, and that is why in the media, where they look at the market as a whole, don't see a bubble.
    Jan 10, 2014. 09:15 AM | Likes Like |Link to Comment
  • Netflix - Just How Much Growth Is Required To Justify Today's Valuation? [View article]
    TWTR and YELP are the two most overvalued stocks in the market by far, especially on P/S basis (never mind frwd EPS) - way in the stratosphere vs. the most optimistic growth scenarios. While NFLX is overvalued, the downside is far less than TWTR & YELP if there is a hiccup in the market.
    Jan 9, 2014. 08:41 AM | Likes Like |Link to Comment
  • Apple Does Something Amazing [View article]
    Sure Ashraf, but by ARM spending the effort to license and develop the core on Intel's advanced tech tells me there may be more to it. It could be a one-off, but this is not typical of how ARM has worked in the past.
    Oct 31, 2013. 09:55 AM | Likes Like |Link to Comment
  • Apple Does Something Amazing [View article]
    Arnold - no rumor - this is fact from a press release by Altera.

    Big news for ARM, and a big capitulation from Intel.
    Oct 31, 2013. 08:52 AM | 1 Like Like |Link to Comment
  • Amazon And The 'Profitless Business Model' Fallacy [View article]
    Paulo - I think of the "investing" mantra in a different way. All of the opex expansion (depreciation and expenses) and shipping expenses are the result of growth (and not the other way around - that they spend to get the growth).

    The growth is driven by low prices (vs. cost) - in other words, they sell below total cost (they lost $574M TTM on product sales), and cover that loss with working capital increases from pushing out payables and gains from Prime+Gift Cards.

    That is how they "invest".... in aggregate they price below cost for growth. The model has worked so far, but they are at the limit on the working capital game (payables are at a limit, and inventory turns is becoming a beast) and Interest expense is getting to be an issue.

    Now -here is where the analysts are wrong. Because the opex/shipping is a result of the growth (can't slow unless growth slows), which is driven by below cost pricing, the moment they raise prices to generate earnings, the entire game stops - growth will end and the valuation will collapse.
    Oct 29, 2013. 08:28 AM | 2 Likes Like |Link to Comment