Seriously.
I think the issue with Amazon is the barriers to entry, which is the main engine of any company’s outperformance. It would be an enormous challenge for another entity to build the logistical infrastructure to challenge Amazon. This creates a durable competitive advantage, particularly when combined with the brand value. Some enormous percentage of people look to Amazon first when researching and buying nearly any product chosen at random.
I think the only real challenge to Amazon would be if Wal*Mart or Target or one of those guys could become more digital. They already have a big logistics system and it would probably be easier for them to create the online catalog and graft it to their existing warehousing and logistics than it would be for an online challenger to build up the logistics network.
But they have tried this and not succeeded. I am not sure why not, but I suspect it has to do with brand image. Target and Wal*mart are known for cheap stuff. Amazon is known as inexpensive in price but not necessarily cheap in quality, plus their reviews seem to be better placed and researched.
An interesting comparable is Ebay. When I don’t get something on Amazon, I sometimes look for it on Ebay instead. Usually I look on Ebay when quality is less of an issue. Ebay isn’t a direct challenger to Amazon, but it does seem to operate in a similar space.
I had known that Amazon’s P/E ratio was very out of wack, but I did not realize that P/CF ratios were substantially better. I assume that the difference is in R&D, but can anyone speak to why Earnings is so miniscule but OCF is a lot better? How is are these ratios continuing to diverge?
The guy is also very dismissive of AWS, saying it sells a commodity like product. While the product might be commodity like, AWS is clearly a cost leader. Last time I heard they had a farm of about 500000 custom designed servers along with virtualization and other software which are tweaked to deliver the Infrastructure services very efficiently. It is one big efficient data center that not many competitors will be able to build. We have already seen some wannabe competitors in that space like HP exit the Public Cloud business.
people dont realize that wmt does have an online presence. they have about ~15b in sales vs 90b for amzn. They have same growth rates. both over 20%+. and both are unprofitable on that segment. which is prolly why wmt is doing that pick up crap.
for aws it has the same exact growth rate as msft’s cloud.
so in summary. both sides of the business has same exact growth rates from anotehr competitor. the sole difference being that people would like to overpay for amzn stock.
amzn does spend a lot on R&D though, even compared to wmt. i dont blame them, as long as ppl are willing to overpay for their shares. what’s the hurt from making it rain. wmt is buying back shares, which prolly makes sense given their cheap share price from a relative and historical perspective.
also from a cash flow perspective. wmt generates 5x what they do. yet for sum reason amzn mkt cap > wmt mkt cap.
i’m not positive, but i imagine the vast majority of R&D spending is related to their cloud business and stuff like delivery drones and Amazon Fire and other handhelds. as these segment don’t really provide much in terms of revenue and certainly don’t provide any earnings or cash, they could probably scrap 80% of R&D and it would have no effect on revenues or future growth from retailing. the R&D they are spending now adds optionality beyond the base case i’ve presented but it is not necessary to remain dominant and continue to grow its retail revenues at a rapid pace.
it’s actually kind of scary to imagine the market power AMZN could have in the future if WMT, the only real attempt at a competitor, is unable to create true online competition.
i certainly respect the limitations of my outlook. assuming no paradigm shift, i do see AMZN basically bankrupting most retailers. that said, with a paradigm shift, AMZN may also lose power.
my long-term, long-term outlook is that all retailers, including AMZN will lose power. you can see this already with video game publishers offering digitlal downloads which go direct-to-customer through MSFT or PS networks. currently, they offer the ditigal copy at the same price as the hardcopy on the basis of convenience but game publishers could basically destroy that segment of retail sales by offering the games at a lower price but similar margin to games sold in retail. this is or has already happened with books to some extent. as retailers die, their brands will retain value, and they will be inclined to continue selling solely on the internet. i’d expect most retailers to escape to the internet as their stores die.
in the very long-term, i could see manufacturers going direct to customer for most things. with a small staff of programming monkeys, almost every manufacturer of goods could offer their product, online at a lower cost than through amazon. this is especially true for the most popular products and smaller products.
AMZN may be able to stem this direct-to-customer tide if it has an incredibly efficient fulfillment process and can offer delivery at a much lower cost than the manufacturers to the point that the difference in delivery costs is greater than the extra margin of an online only manufacturer. another assumption is that the only way these dying retailers can actually survive and compete against amazon in online retail is if many of them merge and can reach sufficient scale. another wildcard is how quickly will delivery technology take to transfer from the originator (e.g. Amazon’s delivery drones, Uber-type delivery fleets, etc) to the masses.
the bottom line is that many products could be pulled from AMZN’s ecosystem if the manufacturing companies can deliver them at similar costs to AMZN with its retail margin currently.
“for aws it has the same exact growth rate as msft’s cloud.”
I think revenue from Public Cloud (IaaS) for AWS is much bigger than MSFT. In fact I remember reading the IaaS revenue of the next 10 competitors combined is less than that of AWS. Microsoft lumps a lot of their SaaS offerings like office 365 in Cloud. These products cannibalize some of Microsoft’s existing revenue sources.
love amazon, part of my long-term core holding for a while now. People don’t seem to understand its franchise value and barrier to entry and foolishly looking at only multiples.
matt, but what is the delivery mechanism for manufacturers to send goods directly to customers? People buy random things, and don’t want to complicate their lives by sourcing relationships to acquire trivially cheap things. I bought some $10 sewing supplies from Amazon the other day. A 10% cost savings would have been trivial. I do not want to go through the process of logging into a new website, setting up credit card info, etc.
In fact, it might be more efficient to have an intermediary, which has more information on customer habits, and that can simplify delivery, marketing, and other operations.
For high cost items - let’s say you buy a car - you would go straight to the manufacturer. For small items that comprise a majority of transactions, you might prefer to just have more convenience.
my point is that one day, the manufacturer of the sewing supplies will not allow AMZN to carry its products. so long as a manufacturer is able to get his product to market and make it available and convenient for consumers, it will opt to exclude retailers as much as possible. the manufacturer always has the most power in the manufacturer-retailer relationship. WMT has changed this dynamic in the lower end of the market but this power is reliant on its volumes, which are declining.
perhaps the greatest threat to AMZN in future is a website that allows consumers to browse all products but doesn’t fulfill orders and simply takes the order and relays the order to the manufacturer who then fulfills it. if delivery costs are driven down to the point that AMZN’s infrastructure is not incredibly important, which with greater automation (e.g. self-driving cars, robots, delivery drones), this seems like the natural progression.
I didn’t check your $7B, but that’s $14ish/share or about 50x FCF. That’s insanity. More than double Google. This isn’t a space I invest in because I can buy cash flows alot cheaper, so I won’t say I’m an expert. But that looks insanely rich.
Amazon already does precisely this. For instance, you can buy Swiss watches listed on Amazon, but the order supplier is an actual watch store, which has its own website, but cannot reach the same customer population as Amazon. Amazon also provides online payment services, so the store doesn’t have to have its own big IT staff. The same service exists for virtually every product.
Amazon charges these third parties a transaction fee for these services, but it is probably not very large. Amazon’s profit margins are very low, as they capture the small marginal benefit from all these services.
^called drop shipping
At what point do you think that Amazon is at risk for anti-trust actions?
I’ve sold an extra investments textbook this way. Remarkably easy.
they do this but they also sell their own inventory of stuff. so maybe the risk is that AMZN eventually becomes just an order taker rather than an order fulfiller. and if you’re simply an order taker for most items, expect competition. AMZN’s competitve advantage currently lies with its actual retail/fulfillment business as this area is defensible and requires tens of billions in capex to match. if you’re simply an order taker, you’re now ebay.
amazon is not going to be an order taker did you see the wearhouses they built
manufacturers already have warehouses
its also the rest of the company tied into the infrustructure and logisitcs.
there really isnt anyone to compete with them yet.
they dont even need humans they got robots fulfilling orders
yes, i know it’s awesome. amazon is awesome. i think they’ll keep taking names for the next couple of decades. but what i’m talking about is 20-30 years in the future and could spell the end of AMZN dominance, which will likely be 10x what it is today.