4 ms·

They bury the important point halfway through the article: Amazon is a free-cash-flow machine and it has almost always been so. The distinction is subtle [1], b

They bury the important point halfway through the article: Amazon is a free-cash-flow machine and it has almost always been so. The distinction is subtle [1], but consistent (and ideally ever-growing) free-cash-flow is what really matters in valuing a highly capitalized company, even if the firm has always re-invested it each quarter to date. The important point to investors is that the firm's re-investment is a decision -- the company is not brittle to economic downturn and any quarter could decide to payout investors through share buyback etc. Copious free-cash-flow every quarter is why software companies generally have higher valuations than traditional industries and why it was novel that Amazon, which is not obviously a software company, behaves as one financially. [1] https://www.investopedia.com/terms/f/freecashflow.asp https://www.investopedia.com/terms/f/freecashflow.asp

CGMthrowaway 1y ago
Makes sense thanks. Software isnt the only industry where FCF matters most either
- ljlolel 1y ago
  What else?
  - vineyardmike 1y ago
    This business model was made famous by cable companies. They’d undergo expensive built-out to be the cable provider in a town, then benefit from a continuous subscription revenue for literally decades.
    - ljlolel 1y ago
      insurance Famously Warren buffet.
  - CGMthrowaway 1y ago
    Anything capital intensive. Telecom was a good example. Oil & gas (they often have dividends tho) , real estate, anything that is a PE target, really every company though since we are living in a "post P/E" world
klank 1y ago
> any quarter could decide to payout investors through share buyback etc. Your etc. is layoffs. In this example, the "free-cash-flow" is people's salaries. I'm not personally comfortable with it being considered such a liquid asset.
- vineyardmike 1y ago
  > Your etc. is layoffs. In this example, the "free-cash-flow" is people's salaries. I'm not personally comfortable with it being considered such a liquid asset. It’s almost certainly, in the case of Amazon, data centers and fulfillment centers and trucks and planes and heavy equipment. Unfortunately, you are probably viewed as a liquid asset by your management.
  - bluefirebrand 1y ago
    > Unfortunately, you are probably viewed as a liquid asset by your management. What a rotten world we live in
    - agentcoops 1y ago
      For the record, I wasn't justifying the world that has created these incentives. In order to understand (maybe even someday change) the rottenness of the world, it's important to avoid the sort of reasoning that the OP critiques, which sees everything as just a sort of arbitrary maliciousness, rather than understanding the very concrete institutional mechanisms by which it has perversely become 'rational' to view everything outside a few profit centers as a 'liquid asset.' If a firm doesn't generate free-cash-flow, which is very very difficult outside the software industry, it will not receive significant capital investment and will be dependent on debt/profits. This impacts not just the life of employees, but limits what endeavors are funded at all, i.e. in part why it is that "software is eating the world." How to change those incentives is a much more difficult, but real problem.

CGMthrowaway 1y ago

Makes sense thanks. Software isnt the only industry where FCF matters most either

ljlolel 1y ago
What else?
- vineyardmike 1y ago
  This business model was made famous by cable companies. They’d undergo expensive built-out to be the cable provider in a town, then benefit from a continuous subscription revenue for literally decades.
  - ljlolel 1y ago
    insurance Famously Warren buffet.
- CGMthrowaway 1y ago
  Anything capital intensive. Telecom was a good example. Oil & gas (they often have dividends tho) , real estate, anything that is a PE target, really every company though since we are living in a "post P/E" world

klank 1y ago

> any quarter could decide to payout investors through share buyback etc. Your etc. is layoffs. In this example, the "free-cash-flow" is people's salaries. I'm not personally comfortable with it being considered such a liquid asset.

vineyardmike 1y ago
> Your etc. is layoffs. In this example, the "free-cash-flow" is people's salaries. I'm not personally comfortable with it being considered such a liquid asset. It’s almost certainly, in the case of Amazon, data centers and fulfillment centers and trucks and planes and heavy equipment. Unfortunately, you are probably viewed as a liquid asset by your management.
- bluefirebrand 1y ago
  > Unfortunately, you are probably viewed as a liquid asset by your management. What a rotten world we live in
  - agentcoops 1y ago
    For the record, I wasn't justifying the world that has created these incentives. In order to understand (maybe even someday change) the rottenness of the world, it's important to avoid the sort of reasoning that the OP critiques, which sees everything as just a sort of arbitrary maliciousness, rather than understanding the very concrete institutional mechanisms by which it has perversely become 'rational' to view everything outside a few profit centers as a 'liquid asset.' If a firm doesn't generate free-cash-flow, which is very very difficult outside the software industry, it will not receive significant capital investment and will be dependent on debt/profits. This impacts not just the life of employees, but limits what endeavors are funded at all, i.e. in part why it is that "software is eating the world." How to change those incentives is a much more difficult, but real problem.