Somebody will be able to cement rock star reputation when he or she does the right thing and tells the investing public the truth about Amazon's economics and competitive position.
The outline isn't hard:
1) While the conventional wisdom is that Amazon will be able to increase margins when it completes its investment cycle, we see little evidence that it will happen. Amazon has now been investing for years with no apparent end in sight. Earnings have dropped throughout 2012. The facts suggest that Amazon's new investments are not generating the expected leverage. In fact, the growth in CapEx consistently trended higher than the growth in revenues and operating cash flows over time, implying that Amazon is seeing reduced leverage from CapEx.
2) The competitive set for Amazon has changed dramatically. In the core retail business, it has morphed from Borders, B&N and Best Buy to Target, Costco and WalMart. The latter group has a lower cost structure than Amazon and is now matching on price, making it difficult to see where Amazon will achieve significant margin increases. On virtually every key metric for retail, Amazon underperforms TGT, COST and WMT. Within the online retail segment, eBay handles a higher dollar volume of ecommerce transactions when measured on a normalized basis (total $ transacted through the website/platform) and has significantly higher margins and earnings, while trading at a forward PE of 17 (compared to more than 150 for Amazon). While eBay's growth rate is lower than Amazon's, its growth is profitable. Further, Amazon's revenue growth rate has been decelerating over the past year (see stock_lol post on the topic), making the multiple expansion hard to explain.
On the cloud front, many of the Tech Titans have recently launched serious competitive offerings. Obviously, Amazon itself is concerned have cut prices 25% in response to Google's aggressive salvo (20% price cut followed by another 10%). That Amazon felt the need to match Amazon's price cut suggests that it does not have adequate lock-in effects to extract high margins on this business over time. Further, the 25% price cut affects our 2013 revenue and earnings forecasts...
3) While most analysts point to the investment as the source of Amazon's declining earnings, we see a different correlation. Amazon's earnings have been pretty well inversely correlated with fuel prices. While Amazon has built out distribution centers to reduce shipping costs, its distribution footprint is still much smaller than the new competitive set and higher fuel prices put it at a relative disadvantage.
With the rising tensions again in the Middle East, we see material risk to Amazon's 2013 earnings, even in the best case. Were oil to spike to $150 over the summer as GS recently predicted might happen, Amazon could very well need to tap the capital markets again. (Note: oil prices alone are not the problem. Amazon's lack of focus and stacked loss leaders are amplifying the effect and the attendant risks). Absent demand destruction, oil prices will inexorably rise in the coming decade and we believe this will continue to be a fundamental challenge to Amazon's competitiveness and profitability.
4) Amazon's financial disclosures have been at best opaque. Given its extensive off balance sheet financing of the distribution facilities and limited true free cash flow (most of the "free cash flow" is generated by changes in working capital given Amazon's negative working capital model), we cannot be confident that Amazon is well positioned to withstand either an oil shock or a demand shock.
Given the macro and geopolitical uncertainty (leading to ever increasing oil prices), combined with domestic austerity (leading to relatively stagnant domestic demand), we are concerned that there could be material risks to Amazon's future profitability if not its business model. For investors looking to play the online and mobile commerce secular trends, both eBay and Google provide vehicles for investors to participate, with much lower valuations, stronger balance sheets and more robust cash flows. Amazon investors have done exceptionally well over the years. We believe it is prudent for long term investors to take profits on a material portion of their position (at least 25%) and wait to see how the next few earnings reports play out before reentering. As the old saying goes, pigs get slaughtered. There is no compelling reason to own Amazon at these prices.
Absolutely great points. unfortunately insanity and delusion can mask reality. that is what is going on with Amazon. I mean who in their right mind is buying AMZN at these levels. I think the downgrades coming after earnings, free pass for Jeff B is going to run out. time to show profits and margins.
Tech - the only way this ends is if you find a group with real cash to pummel this thing one day and start the avalanche. Everyone knows what you post, but they beleive in the momentum first and will follow it until it takes a real hit for 3 straight days - then they will want to get out (it has gone up enough where they can be patient to sell after the high was clear). You're taling about an extra 1M+ shares of sell volume a day for a few days ... that is about $1B+ needed ....then it will fall and CNBC will start to bash it and the rest will be history. An analyst won;t do that, but a hedge fund can ...
As I've said before, everyone is being herded into EXACTLY the wrong place. People who are invested in sound investments are getting killed across the board. But, there is ENORMOUS stress in the system and the confidence games is reaching its limits. Honestly, I was floored with the CNBC lead this morning suggesting the the PC is dead and Intel is being hammered for INVESTING IN DISTINCTIVE CAPABILITIES, where Amazon is systematically rewarding for wasting money on redundant distribution capabilities. I actually used to trust CNBC. At this point, it is so far gone from investing it is frightening. The entire week has been an Amazon pump and AAPL/INTC bashing exercise. Obviously, they BADLY need retail to give up on real investments and buy scams, but it isn't working because trust has been destroyed.
"Who will be the first analyst to downgrade Amazon?"
A few hours after techstrategy posts a "brilliant" thesis why analysts should downgrade AMZN, we get an upgrade from an analyst.
This is pretty sad.
He's pleading on an AMZN board. This guy is way to righeous between how Wallstreet works, and how HE THINKS is should work.. And that's costing him. That's pomposity at it's best thinking it will happen because he thinks it moral. what an idiot.
He loves amzn but hates the price.
He claims they are using a free cash flow valuation metric, and it's genious.
I don't get it. How can there be any cash flow if you only make enough to pay your bills. Sure you pay them late, but accounts payable will always excede accounts receivable. The worse they do with margin, it seems the higher they fly. It is a transfer of wealth from the stockholders to the users.
Anyone who recommends amzn as a buy is also a criminal.
Bla bla fvck in bla, tech... All you gotta do iz look at a chart, then look at the majorz with a little understanding of macro conditionz... Dear lord, man. You just wrote a book.... You must be pretty 'motivated' about now.... Stay away from optionz... They'll make tou insane while they make the writerz rich....
There is a very important, if subtle, point in the essay below... Almost everyone holding Amazon is holding it because of "QE" (as NAS daily reminds us...).
But, QEternity = higher oil prices = reduced competitiveness = lower Amazon earnings, especially compared to other best in class players (WMT, COST, TGT, EBAY). Amazon's revenue growth will not translate to equivalent earnings growth, especially as it continues to branch out to products/categories that are far less well suited to online commerce...
Amazon's business model was well suited to the 90's or even the first half of last decade. Now, it's inferior... The underlying optimization has reversed since then...
It isn't just about making coin for me. I remain hopeful (maybe naive and idealistic) that at least some on WS will get it and do the right thing. Perpetually pumping Amazon to try to sucker in retail simply leads to even greater distrust when it does fall from grace. The institutions that rode this up from next to nothing don't need to make every last penny by selling to retail suckers. By always trying to make retail eat winners (both long and short), WS is destroying the last remnants of trust that enabled the market to recover from its 2009 bottom...
I write the longer posts because I've been told by many that they find them helpful. Trying to do my piece to prevent retail shorts from having to eat a winner...