7 ms·

You can't just expense stuff like that. For example you buy a warehouse you can't depreciate it all in one year. Retail is a competitive low margin business. Am

You can't just expense stuff like that. For example you buy a warehouse you can't depreciate it all in one year. Retail is a competitive low margin business. Amazon has always had crazy P/E ratio. I could never really understand it. Maybe I could understand aws, but I can't understand the valuation of the core amazon business. Suppose amazon grows to the size of walmart. Walmart is only worth 260B, and they generate a ton more cash than amazon.

alehul 9y ago
You're right that it's a more complicated process than it sounds, but it's been a common trick for ages. Apparently, however, in recent years, it has been focused on capex while still retaining the same fundamental idea. In the words of an a16z partner[1]: > So, though we can’t be sure, it looks like the capex is not going up because Amazon’s existing business has become more expensive to run, but because Amazon is investing the growing pool of operation cash flow into the future. All of this brings us back to the beginning - Amazon’s business is delivering very rapid revenue growth but not accumulating any surplus cash or profits, because every penny of cash is being ploughed back into expanding the business further. But, this is not because any given business runs permanently at a loss - it is because the profits from what is already there are spent on making new businesses. In the past, that was mostly in operations, but in recent years the investment firehose has again been pointed at capex. [1] http://ben-evans.com/benedictevans/2014/9/4/why-amazon-has-no-profits-and-why-it-works http://ben-evans.com/benedictevans/2014/9/4/why-amazon-has-n...
alehul 9y ago
Also, as a separate comment, I understand the crazy appearance of Amazon's valuation but I think it's one of the most justified giants in terms of market cap. They're positioning themselves as a monopsony for the modern world, even expanding into groceries and now, evidently, pharmacies. Imagine one company serving as an access point for so many of our goods, while wielding dubious control behind the scenes to extract profit and move vertically through the supply chain. It's easy to imagine a future where we simply buy the cheapest, reliable goods whenever in need, and end up with Amazon lightbulbs that power our Amazon TV stick, etc, etc, etc. It's scary to just see how many cities are bending over backwards to try to be the location of Amazon's HQ2. Their move with the Echo has gained them another critical access point in the future: smart homes. In the same way we require mobile phones for our apps, we'll require a hub for our IoT devices, preferably voice-activated, and that will be the Echo. It's hard to even sum up all of their advantages, but as someone who has competed with them in one industry before: it's a damn nightmare.
wahern 9y ago
Company A grows revenues at %5 per annum. Company B grows revenues at %4.9 per annum. In both cases the trend is equally likely to continue in perpetuity. And neither company is expected to ever pay dividends. Which stock are people going to buy? _Everybody_ is going to buy Company A's stock and _nobody_ is going to buy Company B's stock. P/E doesn't matter because 1) no dividends and 2) it's not a proxy for relative risk (we established risk is identical between the two). Amazon is special because it's potential for revenue growth is believed to be nearly unlimited. As long as they're not losing money, and as long as they have enough profits to continue growing revenue, people will keep investing. Once the specter of stagnant revenue growth appears, Amazon's stock will probably come crashing down. Basically, investors chase revenue growth, not profits. Berkshire Hathaway works the same way. Buffet might be a value investor who buys companies that can grow profits, but the price of BRK.A tracks the revenue growth of the holding company, not its profits. Conversely, Wal-Mart's revenue growth has completely stalled. In fact, the stock price plummeted the year that revenue decreased slightly. This is how things look as far as I can tell. I'm not a financial professional, and even if I'm right I'm sure there's a far better way (more technical, more comprehensive) to explain this dynamic.
- samfisher83 9y ago
  Walmart is a 500 billion dollar company. Even 1% growth is 5 billion in revenue. They are asymptotic to the US economy growth which isn't growing much.
  - wahern 9y ago
    But the point is that the absolute figures don't matter themselves. Investors chase revenue growth. The huge absolute revenues of Wal-Mart do suggest that revenue growth opportunities are structurally limited by the size of the domestic economy. But then again, unless and until every brick & mortar store in the U.S. says "Wal-Mart", they could still grow. That sounds unreasonable, but it's basically how people see Amazon: capable of growing revenues in large part by capturing existing markets, and being able to do that for the foreseeable future. You said you could never understand why Amazon attracts so much investment despite their P/E and despite the poor margins of the retail industry. I realize you probably said that rhetorically, but in any event my point was simply that profit margins don't matter; what attracts investment is revenue growth. I'm sure there are many reasons--some rational (the corollary of revenue growth is growing marginal profit _potential_), some not--but it is what it is. And it's pretty much how investment has always worked. Indicators like P/E only matter because of what they signal about future revenue growth. A poor P/E often suggests poor capacity for growing revenue. It's a heuristic, and if more direct evidence gives you reason to believe otherwise then you discount the predictive value of the P/E metric accordingly. I suppose another way of looking at it is that Wal-Mart is at the phase where they're capturing profits, not growth. Their profit taking years were priced into their stock during the growth period; as they grew revenue their potential for future profits grew and this was immediately reflected in their stock price. If you look at the financial graphs, their stock price has remained steady with their revenue. When overall revenue declined the stock price dropped sharply, because revenue decline implies a decline in future profits and markets will quickly price future prospects into today's stock price. So in the language of "fundamentals" investing, profits are ultimately what matter; but _future_ profits, not today's profits. Future profits is just another way of saying profit potential; and the best indicator of profit potential is today's revenue growth.

alehul 9y ago

You're right that it's a more complicated process than it sounds, but it's been a common trick for ages. Apparently, however, in recent years, it has been focused on capex while still retaining the same fundamental idea. In the words of an a16z partner[1]: > So, though we can’t be sure, it looks like the capex is not going up because Amazon’s existing business has become more expensive to run, but because Amazon is investing the growing pool of operation cash flow into the future. All of this brings us back to the beginning - Amazon’s business is delivering very rapid revenue growth but not accumulating any surplus cash or profits, because every penny of cash is being ploughed back into expanding the business further. But, this is not because any given business runs permanently at a loss - it is because the profits from what is already there are spent on making new businesses. In the past, that was mostly in operations, but in recent years the investment firehose has again been pointed at capex. [1] http://ben-evans.com/benedictevans/2014/9/4/why-amazon-has-no-profits-and-why-it-works http://ben-evans.com/benedictevans/2014/9/4/why-amazon-has-n...

alehul 9y ago

Also, as a separate comment, I understand the crazy appearance of Amazon's valuation but I think it's one of the most justified giants in terms of market cap. They're positioning themselves as a monopsony for the modern world, even expanding into groceries and now, evidently, pharmacies. Imagine one company serving as an access point for so many of our goods, while wielding dubious control behind the scenes to extract profit and move vertically through the supply chain. It's easy to imagine a future where we simply buy the cheapest, reliable goods whenever in need, and end up with Amazon lightbulbs that power our Amazon TV stick, etc, etc, etc. It's scary to just see how many cities are bending over backwards to try to be the location of Amazon's HQ2. Their move with the Echo has gained them another critical access point in the future: smart homes. In the same way we require mobile phones for our apps, we'll require a hub for our IoT devices, preferably voice-activated, and that will be the Echo. It's hard to even sum up all of their advantages, but as someone who has competed with them in one industry before: it's a damn nightmare.

wahern 9y ago

Company A grows revenues at %5 per annum. Company B grows revenues at %4.9 per annum. In both cases the trend is equally likely to continue in perpetuity. And neither company is expected to ever pay dividends. Which stock are people going to buy? _Everybody_ is going to buy Company A's stock and _nobody_ is going to buy Company B's stock. P/E doesn't matter because 1) no dividends and 2) it's not a proxy for relative risk (we established risk is identical between the two). Amazon is special because it's potential for revenue growth is believed to be nearly unlimited. As long as they're not losing money, and as long as they have enough profits to continue growing revenue, people will keep investing. Once the specter of stagnant revenue growth appears, Amazon's stock will probably come crashing down. Basically, investors chase revenue growth, not profits. Berkshire Hathaway works the same way. Buffet might be a value investor who buys companies that can grow profits, but the price of BRK.A tracks the revenue growth of the holding company, not its profits. Conversely, Wal-Mart's revenue growth has completely stalled. In fact, the stock price plummeted the year that revenue decreased slightly. This is how things look as far as I can tell. I'm not a financial professional, and even if I'm right I'm sure there's a far better way (more technical, more comprehensive) to explain this dynamic.

samfisher83 9y ago
Walmart is a 500 billion dollar company. Even 1% growth is 5 billion in revenue. They are asymptotic to the US economy growth which isn't growing much.
- wahern 9y ago
  But the point is that the absolute figures don't matter themselves. Investors chase revenue growth. The huge absolute revenues of Wal-Mart do suggest that revenue growth opportunities are structurally limited by the size of the domestic economy. But then again, unless and until every brick & mortar store in the U.S. says "Wal-Mart", they could still grow. That sounds unreasonable, but it's basically how people see Amazon: capable of growing revenues in large part by capturing existing markets, and being able to do that for the foreseeable future. You said you could never understand why Amazon attracts so much investment despite their P/E and despite the poor margins of the retail industry. I realize you probably said that rhetorically, but in any event my point was simply that profit margins don't matter; what attracts investment is revenue growth. I'm sure there are many reasons--some rational (the corollary of revenue growth is growing marginal profit _potential_), some not--but it is what it is. And it's pretty much how investment has always worked. Indicators like P/E only matter because of what they signal about future revenue growth. A poor P/E often suggests poor capacity for growing revenue. It's a heuristic, and if more direct evidence gives you reason to believe otherwise then you discount the predictive value of the P/E metric accordingly. I suppose another way of looking at it is that Wal-Mart is at the phase where they're capturing profits, not growth. Their profit taking years were priced into their stock during the growth period; as they grew revenue their potential for future profits grew and this was immediately reflected in their stock price. If you look at the financial graphs, their stock price has remained steady with their revenue. When overall revenue declined the stock price dropped sharply, because revenue decline implies a decline in future profits and markets will quickly price future prospects into today's stock price. So in the language of "fundamentals" investing, profits are ultimately what matter; but _future_ profits, not today's profits. Future profits is just another way of saying profit potential; and the best indicator of profit potential is today's revenue growth.