A Ticking Time Bomb

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I'm sure people have been talking about this on here at one point or another, so apologies for missing that if it has happened.

I am talking about Amazon here. Is a short the right play?

This company seems like it is dying financially, but lets face it, Amazon completely dominates the market of online-shopping. It has reported negative income last year after receiving 60 Billion in total sales, and has declining Net Income the past couple years. Can someone explain the capital structure of this company to me, and how a 60,000 top line turns net negative?

The company's chart seems constant over the past several months, despite the bull-market, but had that huge jump at the beginning of the year even after reporting a loss. The company's P/FCF is absolutely horrible simply because there is no FCF. It seems that this company literally finances itself through large amounts of debt, and is highly leveraged, and basically spends all revenues on its costs which seem very high, and towards its debt. Hence why there is no FCF.

So does this company purposely not make any money, and is it leveraged so much that they can charge such cheap prices (thus capturing a large market share, becoming/holding the leader of online sales) and not have to worry about it?

Again, I am sure this has been a topic discussed at one time or another, and I apologize for being behind on Amazon as I have never really looked through their statements. But within minutes of looking through here, I really wonder why there are so many investors still in this company, why the chart has not moved, and why the price is still so damn high. To me, it seems that this is a highly inflated bubble that is ready to pop any minute. But on the flip side, Amazon completely dominates the online market so maybe this is why it has/will not move. So let me ask my fellow monkey's this:

Should I short the %#[email protected] out of Amazon or not?!?

Comments (12)

 
May 28, 2013 - 11:31pm

macro33:

Yes but not yet. Amazon is a stock that reacts to moderately positive news. Its like internet bubble 2.0 with amazon the way you describe it. I'd wait until we have a clearer macroeconomic outlook after the next Fed meeting but then again it may be too late by then.

I agree here. Yes, but not yet. We saw last week how the market reacted to the fed even hinting at eventually stopping quantitative easing. When QE actually slows down, this artificial bull market will be due for a correction and it will be stocks like Amazon that will be hit hard.

 
May 29, 2013 - 6:39am

This is from Jeff Bezos' letter to shareholders published last month:

"Our heavy investments in Prime, AWS, Kindle, digital media, and customer experience in general strike some as too generous, shareholder indifferent, or even at odds with being a for-profit company. "Amazon, as far as I can tell, is a charitable organization being run by elements of the investment community for the benefit of consumers," writes one outside observer."

Basically, he takes a very long run approach and is trying to build a lasting brand.

 
May 29, 2013 - 8:06am

Schumpeter:

This is from Jeff Bezos' letter to shareholders published last month:

"Our heavy investments in Prime, AWS, Kindle, digital media, and customer experience in general strike some as too generous, shareholder indifferent, or even at odds with being a for-profit company. "Amazon, as far as I can tell, is a charitable organization being run by elements of the investment community for the benefit of consumers," writes one outside observer."

Basically, he takes a very long run approach and is trying to build a lasting brand.

I think this is spot on. Bezos is taking a much longer view than is typically allowed by the public markets (and probably the private markets for that matter) and basically getting a free pass right now.

My understanding of the bull case has always been something like - "they could stop investing so heavily and margins would rise 800bps+ instantly" (I think they had pretty decent profitability for 1-2 years in the mid/late 2000s so those margins are viewed as attainable again). Also FCF > NI due to the nice working capital characteristics of the business so some bulls cite that too.

I don't think it's a long because I lean value (though I believe AMZN has a real moat from business perspective at this point) but it seems to me the stock will keep working as long as spoo's keep going up, top-line meets/beats and the bulls can point to margin improvement opportunity with a bit of credibility - certainly in a bear market the valuation support seems non-existent but that's a tough macro call to make.

 
May 29, 2013 - 10:51am

FCF isn't a good metric for AMZN because their cap-ex is so significant (by choice). OCF gives you a better handle on their earning power. Bezos doesn't care about bottom-line earnings for investors, because he's trying to build the biggest moat he can now. It's not a stock I would buy b/c of the volatility but I certainly wouldn't be short.

 
May 29, 2013 - 12:05pm

Governor Caesar:

FCF isn't a good metric for AMZN because their cap-ex is so significant (by choice). OCF gives you a better handle on their earning power. Bezos doesn't care about bottom-line earnings for investors, because he's trying to build the biggest moat he can now. It's not a stock I would buy b/c of the volatility but I certainly wouldn't be short.

Good point. And OCF continues to grow and is quite positive from a high level.

 
May 29, 2013 - 11:00am

Amazon sold their soul to the devil with this state tax issue. Once this national tax reporting becomes standard their Prime is going to gut local and smaller retailers. I wouldn't short Amazon any time soon.

 
May 29, 2013 - 3:33pm

The also have gone on hiring spree. I live in Seattle and the Company has hire people like crazy (rents around the area are almost 1.5x now from two years ago, mostly due to the influx of Amazon people).

What I think is more interesting is the work culture there and the impact a decrease in stock price could do. People there are intense and competitive (high turnover rate). People treat each other like shit and you work insane hour. The pay is not much different than MSFT (more stock) but they always tell you can expect a 20% stock appreciation. It is hard to get promoted and most of your comp is in stock. I think once the stock stops going up (or going down) they are going to see huge levels of attrition because working there is like working in Ibanking but without the bonus (unless the stocks goes 2x).

 
May 30, 2013 - 3:04pm

Not short or long AMZN but would lean long. Internet in general is such a great sector right now due to the mobile compute revolution basically doubling / tripling the engagement for big mobile brands. AMZN has huge moats in e-commerce and they have the premier public cloud (AWS) and one of three e-reader ecosystems and two major pure OTT video services (along with NFLX). At some point they will make money from all these assets, I'd argue they are underearning right now for what they have created.

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