AMZN Forum Topics
- All Comments on AMZN
- General Discussion on AMZN
- Is Amazon.com Really Worth Over $70 a Share? [view article]
- Amazon: Is 'Free Cash Flow' More Important Than Net Income? [view article]
- Plenty of Bidding for Borders [view article]
- Online Sales: Poking Holes in the Long Tail Theory [view article]
- Rhapsody's New e-Music Download Service Takes on iTunes [view article]
- Sony's Latest Play for Your Living Room [view article]
- Will Wal-Mart Heat Up Chile? Fast Money (6/17/08) [view article]
- Foreclosure Stimulus to Boost Tech's Four Horsemen [view article]
- Wall Street Breakfast: Must-Know News [view article]
- Cloud Computing Gathers Steam [view article]
- Six Attractive Stocks with Hidden Gems [view article]
- eBay's Best Bargain - Itself [view article]
loading ...Recent AMZN Articles
- The Dangers of Cloud Computing: VirtSec on Steroids
- Is Amazon.com Really Worth Over $70 a Share?
- Online Sales: Poking Holes in the Long Tail Theory
- Rhapsody's New e-Music Download Service Takes on iTunes
- Google Launches Affiliate Advertising Network
- Wall Street Breakfast: Must-Know News
- Sony's Latest Play for Your Living Room
- Foreclosure Stimulus to Boost Tech's Four Horsemen
- Friday Outlook: End of the Bull
- Cloud Computing and Virtual Security Barriers
- Full List of Articles »
Is Amazon.com Really Worth Over $70 a Share? [view article]
What did you guys set your your SG&A, and COGS as a percentage of top line revenues? My assumptions back in Janurary were slightly different, and I came up with a $60/share valuation. My assumptions gave AMZN every benefit of the doubt, and put set them up under very optimistic scenarios. Almost half of their revenues come from outside the US. 6 months ago, I thought their overseas operations would be somewhat immune to the credit crisis unfolding here. It's a different story now.Although they see high margin channels through 3rd party sellers, AMZN has extremely tight margins for the overall business. With such tight margins and rising input costs, companies that operate on tight margins are going to feel it. I'm not sure what type of agreement Amazon has with UPS or USPS, but at some point Amazon is going to eat rising costs of shipping, or pass it on to the customer.
Either option isn't great. Customers for the most part, associate AMZN with low cost or free shipping.
There are too many other factors to outline here. I'm not sure what Citi (Mark Mahaney) and Goldman see that I don't with their bullish calls on Amazon.
And please, let's not have another analyst try to compare the Kindle to the iPod.
Two different customer segments, two different purposes.
Reply
e
Amazon: Is 'Free Cash Flow' More Important Than Net Income? [view article]
Good points. The reason I brought this whole thing up was to engage in this type of discussion. While I have never seriously considered AMZN as an investment for several reasons, there are several companies that appear interesting on a FCF basis that have the same negative CCC characteristic - most subscription businesses, for example.Out of curiousity, I downloaded from bloomberg the cash conversion cycles for all the S&P 500 companies. Of the 500, only 69% had data (not sure why so many were missing, but whatever). Of the companies with data, 13% had negative CCC. While a distinct minority, that's still 1/8 of the investment universe (assuming it's representative) for which, at a minimum, there seems to be a lack of clarity on the best way to treat this wrinkle.
At any rate, good luck with your fund.
Reply
Amazon: Is 'Free Cash Flow' More Important Than Net Income? [view article]
Valid points. I actually wasn't citing Mulford's book directly, because I'm travelling at the moment and don't actually have it handy (I work in the hedge fund business and have a degree in accounting). Mulford is one of a few preferred authors/professors, when it comes to the vagaries of accounting.The tricky part really is evaluating the supplier/customer relationship and who has what bargaining position over time. A possible reason why Dell's WC has reversed trend in the last 3 years might be due to their faltering market position and lack of 'power' over suppliers. If AMZN's market position becomes challenged as digital distribution of books gains populairty (and whatever else they sell -- maybe Newegg.com, Walgreens or other industry vertical players materially challenge them online), then perhaps their capacity to charge their suppliers the cost of financing their inventory expansion will ebb. Time will tell.
In terms of approaching it from a valuation standpoint, I think I would try to think about it the way a credit analyst might look at the company. I would treat the WC advantage as a source of financing or cost of debt (your obligations to your suppliers as creditors of your business). Let's say my suppliers/creditors are giving me truly 'free financing' and while my competitors get 3%/45 day terms, I am getting 3%/90 days payment terms due to my industry position advantage (also note: I don't cover retail and haven't the foggiest what actual #s should be, tho most retailers seem to operate on lines of credit/payment terms). I would probably set the cash conversion cycle to zero days, eliminating any swings in WC and the inherent negative cash conversion cycle advantage. Then I would take whatever the average net balance is over 1 year (Accounts Payable Less Accounts Receivables) and multiple it at some rate of return -- money market or what have you. At some point, if this is a credit risk the business will wind down and you will have to pay out monies owed to your suppliers. Then all you have achieved over time is the 'free float' and use of capital provided to you by the suppliers. It's what ADP does with the wages they hold on behalf of employers before their corresponding employees cash their pay checks.... they carry the cash and manage float at money market rates.
Perhaps the more intelligent way is to say, this is a going concern... it will not be wound down, so forget this credit risk perspective. But what I really have here is extremely cheap financing from my suppliers to expand my business. I have a line of credit that is cheap. Again bring the cash conversion days to 0, and attempt to eliminate the WC cash flow benefits from your FCF evaluation. But then drop your cost of capital in a DCF, by add the average Net Working Capital advantage to the remaining balance of debt in the cost of debt calc (at a rate that will obviously be very favorable). I can't remember if AMZN still has converts or what their cost of debt is excluding the WC advantage, but whatever it is... the cheap inventory financing will certainly lower the cost of debt and the total cost of capital, which then boosts the underlying equity value.
Upon further reflection, I think William Kensington's approach is too much of an accountant and not enough reflection upon the economic valued benefit that AMZN is carrying in this negative working capital scenario. It needs to be valued in some way. But I do think Bill Miller and the bulls tend to over extrapolate it though... the WC advantage isn't 'structural free and clear cash flow' in the sense that AMZN sold a book for $1.00 that cost them $0.90, plain and simple. It's borrowing ahead of time and paying back later, which gets magnified as the business ramps and then trails off as it slows or they lose their market position (as seen in their seasonality).
best regards,
-pro Reply
e
Amazon: Is 'Free Cash Flow' More Important Than Net Income? [view article]
Thank you for the thoughtful response.You are correct that I was overly aggressive in writing "Cash is cash is cash" – I was trying to get across that cash flow is a lot closer to economic reality than GAAP, and that one cannot fault cash flow for not being the same as GAAP profits (they are inherently two different things). Cash flow figures can indeed be manipulated, but I still maintain that this is more difficult than manipulating GAAP earnings.
I agree that the benefit of negative CCC will only happen as long as they have revenue growth. But one does not need the negative days to EXPAND in order to generate FCF from WC as long as the business is growing. It appears your argument mirrors Mulford’s (I own a copy of this book) on page 137 regarding HD. Incremental improvements from the current level probably should not be counted on without strong justification. But I would also point you to page 250, where he goes through the different layers of CFFO adjustments for WC. Most of the arguments presented in the original post and responses seemed to designate AMZN’s WC changes as “layer 1,” or CFFO that warrants reversal since it is clearly non-recurring. I tend to think that given AMZN’s long history of negative CCC, it is not clear that such an adjustment is required, and if it is, it may be more appropriately classified as layer 2 or 3, which require greater care and judgment in their application.
I agree that it can be dangerous to extrapolate this out too far, but is that any more true for WC changes than revenue, COGS, or any other financial metric? There seems to be an almost visceral reaction to negative CCC such that people think it is unsustainable, and that the natural state of the world should be for it to be positive. I just don’t think the case for that point of view has been made.
Additionally, if we were to take the alternative route, how would one go about valuing the float as a financial asset?
Reply
Amazon: Is 'Free Cash Flow' More Important Than Net Income? [view article]
LTV - Look. It's likely that their negative cash conversion cycle is sustainable at some level and the cash flow (as the business grows) from WC is appropriate in a FCF calculation -- SOLELY as a reflection of revenue growth. The problem really would be on any expansion in the negative days of conversion. I would regard that as poor quality FCF because it's clear that any business cannot expand their cash conversion cycle in absolute day figures indefinitely. Even Dell (which also has a negative cash conversion cycle) hit the wall on WC gains in the last 3 years (they have seen a cash outflow on WC even as revenue grew), so it can be a bit dangerous to extrapolate these things too far. Other than that, I would encourage you to learn more about cash flow, read Charles Mulford's book on distorting cash flow figures. "Cash is cash is cash" is not always the case. There are many ways to overstate cash flow as seen in Harley Davidson, Bungee and other companies.Reply
Speculator
Plenty of Bidding for Borders [view article]
I have a Borders Reward account, but have not used the card for the past 7 months. I go to Amazon.com instead for purchases. I think someone will scoop this company up in bankruptcy, or at least wait until the stock drops below $2, that way their valuations for purchasing can be lower (Ex. JP Morgan and Bear Sterns) Replye
Amazon: Is 'Free Cash Flow' More Important Than Net Income? [view article]
As opposed to simply making assertions, please present an argument as to why FCF from WC is of poor quality, and why it should not be viewed as CFFO.Reply
Online Sales: Poking Holes in the Long Tail Theory [view article]
I don't sell books. I collect eyeballs for my web customers. By having 2,500 pages instead of 250 I collect a lot more eyeballs. These additional eyeballs are not as focused as the ones I collected with the original 250 pages but the cost of the extra pages is vanishingly small. This is very much like the transistor count on chips. The original ICs had a few transistors and each transistor had a sizable cost. Now, with millions of transistors on a chip, the cost per transistor is vanishingly small. The effect is similar, with chips you have vastly more processing power and with websites you have vastly more eyeball collecting capacity.How to convert those extra eyeballs into additional sales is a different issue and that is what professor Anita Elberse is addressing.
Reply
Amazon: Is 'Free Cash Flow' More Important Than Net Income? [view article]
it is poor FCF quality and bill is right.- the 'free float' advantage should be awarded a money market interest rate and valued as a separate financial asset.
- it should not be included as a cash flow from operations.
the problem with shorting AMZN is when does the market recognize this phenomenon is bogus? probably when the growth slows and the working capital advantage ceases. when does that happen? no one knows, not goldman, not bill not even AMZN itself... Reply
Online Sales: Poking Holes in the Long Tail Theory [view article]
The local used bookstore is normally successful with obscure items only if it has a browser base big enough to sell them. It is now possible using the internet. Instead of selling only within a small radius, you have everyone in the whole wide world who has a computer as a possible customer. The commonplace "best sellers" are difficult to sell profitably because everyone else has them, and price-cutting is rampant. The obscure has little competition, and therefore more profit potential. ReplyRhapsody's New e-Music Download Service Takes on iTunes [view article]
Many of the articles and comments I read on this subject take the stance that there will be one winner and many losers. I believe Apple will remain the largest player in this space until someone offers EASIER access to a media library that plays on the iPod. I use an iPod and every time a new service is announced, I check it out. If there was a library available as big as iTunes that I could access unrestricted via subscription, I would use it. What will probably happen is that as soon as that level of service becomes a reality, Apple will match the offer. That'll be a great day for me. ReplyOnline Sales: Poking Holes in the Long Tail Theory [view article]
Long Tail is a great concept but I must agree that people make selections like lemmings and that long tail looks quite short sometimes.I am one of those rare people who spend vacation time browsing used book stores. I have noticed that there are far fewer of them than before, and the ones that have survived concentrate on popular novels. In other words, in the average used book store there might be a handful of dusty travel and history books waiting for me to discover but there are a vast quantity more of popular romance novels and fantasy fiction.
We live in a disposable society and if you are not an aficionado of whats in the top ten -- or perhaps top 100 -- hits then you are generally out of luck. Reply
Online Sales: Poking Holes in the Long Tail Theory [view article]
I think Jeff Bezos (CEO of Amazon) has pointed out a number of times that Amazon is making a large chunk of its sales in long tail products (such as the millions of titles of books it offers). ReplyOnline Sales: Poking Holes in the Long Tail Theory [view article]
so what's your point? isn't it that adding ever more 'obscure' items comes at a marginal cost which in turn starts weighing on the overall profit margins if you just add a sufficient number of such items? and does a company create or destroy shareholder value adding heavily on the tail side? ReplySony's Latest Play for Your Living Room [view article]
This issue (who gets paid what on a download) was at the heart of the writers strike. This article is right on, the future is here. It's the beginning of the end of dvds. Reply