This is an interesting P/E analysis of AMZN, compared to other retailers - Walmart, Costco, Target. Given the current stock price of Amazon, the guy calculates the time that it would need to achieve the P/E of these other companies, given certain assumptions about growth and profit margins.
Anyway, he seems to think AMZN is over valued, even if he doesn’t explicitly say this.
Yeah, AMZN is a great short here, highly overvalued and hasn’t figured out how to make a profit despite billions in revenue. Sign of a market top.
Only issue I have with this has nothing to do with numbers, and is purely anecdotal but I still think accounts for something. I have moved 3 times in the past 4 years, from being able to shop at Walmart & Target, to Target & Costco, to none of the above based on proximity to the stores. The only constant on that list is Amazon as they are an online retailer and are able to meet my needs anywhere I go.
Their lack of ability to make a profit despite steadily rising prices is extremely problematic, Amazon used to be the cheapest option and no longer is.
The article is interesting to me, but it is flawed in assuming this industry is fully commoditized. Amazon provides superior service, fast delivery, and the convenience of having all your online orders in one place. Customers are further invested in their platform through Prime memberships. Many Amazon customers will not be sensitive to say, a 2% price difference in most inexpensive products, which they might pay in order to stay in the convenience of Amazon’s system. So provided that Amazon’s presence in the online market is sufficiently large, they have an advantage in customer retention.
Of course, this could change if another dominant online retailer were to emerge, or if a service arose that aggregated the products of many smaller websites in a user friendly way (in fact Amazon sort of does this through 3rd party sales).
I’m not saying the conclusion of the article is incorrect, but it does assume certain things, and the author acknowledges this.
I don’t understand the argument that AMZN has to make a profit on a GAAP accounting basis If you take one look at their actual cash flow statement, you will see they generate close to $7 billion in operating cash flow and plow all that money back into growth capex. I don’t care one bit about GAAP earnings, all that matters to me is cash flow generation and this company is a machine. I will continue to own it.
An analysis about Amazon that doesn’t mention AWS?
Let me channel my inner Blake here: LMAO
^yup aws is now the biggest part of amazon
A writer that bases any “analysis” on P/E doesn’t have the right to refer to someone/something else as dumb.
i’d be willing to pay 5% higher prices to avoid going into a brick and motar store.
Not kidding either.
as thommo pointed out, AMZN doesn’t make a profit on purpose. it is in “stealing market share” mode and will reinvest every single dollar into low prices, additional services and R&D until its competitors die off. at which time, they’ll own so much of the market that they can increase prices or change how services are provided and create sexy profit margins.
i agree that AMZN could probably raise prices by 3-5% across the board and i would still buy just as much product, and they would have a profit margin of 3-5%. the thing is that they want to own a much larger share of the market before they exercise their ability to raise prices.
AMZN will likely conquer the world and will likely acheive revenues of $1 trillion within most of our parents’ lifetimes.
Pretty good chance I’ll never step foot in a Costco, Target, or Wallmart for the rest of my life and I have no idea if AMZN is cheaper.
But what happens when AMZN raises prices 3-5% and Amazon 2.0 comes around and undercuts them by 3-5% in order to take market share? The switching costs are extremely low, especially for non-Prime members.
^ that’s the point.
at which time AMZN is able to increase prices by 3-5% and little or no consumer pushback, there will be no competitor anywhere near AMZN’s scale and pervasiveness and efforts to undercut AMZN will be laughable.
any online competitor would not have the infrastructure to match AMZN’s delivery times, fulfillment technology and economies of scale and any retail competitor will always have a higher cost due to physical retial location costs.
^ Not sure I agree, but it’s an interesting take. We’ll see if Jet.com is able to take any share away from Amazon. I’m skeptical, but this is a different situation than the one we’re debating.
to put my position in perspective, AMZN spends 15% of COGS on R&D. compare this to any other retailer which spends next to nothing on R&D.
AMZN is already a low cost leader for most items. compared to its peers, AMZN could reduce R&D completely, and transfer those savings to consumers and lower prices across the board by 15% and still be at its current level of profitability.
as AMZN grows in scale, it will either be 1) years ahead of competitors due to the billions and billions spent on R&D and fulfillment infrastructure, 2) by far the lowest cost operator as all current R&D spending is transferred to consumers via lower prices. I assume it will be somehwere in the middle in the future and/or AMZN will finally reward its shareholders with 10-20% profit margins by cutting back R&D and raising prices as competitors die.
rofl those are some lofty margin expectations. especially since most of the stuff they sell are in the low margin bizness. ~90% of rev
also AWS, they value it at 10x revenue. at 16b rev. that kidn of valuation is insane. and this is a ridiculously high margin bizness, they are pretty dominant in this space though. second largest comp is at 2b rev.
bottom line. cant wait for comps to **** them royally.
just look at R&D. if they cut down to zero, which is basically the R&D cost of the average retailer, they’d trade at a P/E of 44x earnings after-tax. they also grow revenues well over 20% y-o-y, consistently. compare that to most retailers who are flatlining and expected to decline in the next year and that puts in perspective their valuation a little bit relative to peers.
AMZN game plan: grow at 15-20% for 10 years partly due to aggressive R&D spending and low prices. then cut R&D spending by 75%, and raise prices marginally (say 3% across the board), and tell me what their P/E would be if they stayed at the same price… i’ll tell you, 12x earnings. now imagine if they can raise prices 5-10% as physical retail cascade into bankruptcy. this is not an aggressive forecast by any means as if AMZN can build an efficient grocery business, growth will be absolutely crazy as this will cause basically all highly levered, low margin retail grocers to die an immediate death.
brick and mortar retailers’ game plan: allow AMZN to steal market share and slowly die as revenues perpetually fall and lenders come knocking, over and over again. this is already happening and will accelerate if retail wages keep going up.
i hate brick and morter stores and having to line up behind deadbeats at Walmart and Target.
Costco crowd is slightly better
I’m not sure that is an option since I’d bet very little of their technology and content expense is truly R&D related. It seems to be much more operational than pure R&D. I doubt the company could continue running for long without these expenses, especially in the AWS unit. Here is the description they provide in their tag for this line item:
“Payroll and related expenses for application development, editorial content, merchandising selection, and systems support; and costs associated with computing, storage and telecommunications infrastructure.”
I only think you’d have to change a few words in the above to describe Walmart’s strategy and ascent. While I agree with the most of what you are saying, I think the conclusion isn’t so obviious. There will always be a chance for some competitor to start out in some boring segment like books and eventually transform the industry. I don’t think Amazon will be immune just like Walmart wasn’t to changing times. Who knows if the internet is even the mode of commerce – perhaps an even more convient way surfaces.