Amazon is not a bubble

["Dave Farber" <farber () gmail com>]

Begin forwarded message:

> From: Dewayne Hendricks <dewayne () warpspeed com>
> Date: April 11, 2018 at 9:56:14 AM EDT
> To: Multiple recipients of Dewayne-Net <dewayne-net () warpspeed com>
> Subject: [Dewayne-Net] Amazon is not a bubble
> Reply-To: dewayne-net () warpspeed com
>
> [Note:  This item comes from friend David Rosenthal.  DLH]
>
> Amazon is not a bubble
> By Jamie Powell
> Apr 11 2018
> <https://ftalphaville.ft.com/2018/04/11/1523424660000/Amazon-is-not-a-bubble/>
>
> Donald Trump has declared war on Amazon. Infuriated by its perceived abuse of the US postal service the 
> flaxen-haired, SEC-settling President of the United States has launched a string of attacks on Bezos' Seattle-based 
> empire over the past fortnight.
>
> He's not the only one feeling aggrieved though.
>
> Over the past year several high-profile fund managers, from Greenlight Capital's David Einhorn to Nordea Bank's 
> Robert Naess to Morgan Creek's Mark Yusko, have decried the anti-gravity performance of the ecommerce giant's share 
> price:
>
> All three investors have referred to the stock in passing as a 'bubble' -- but are they right?
>
> Optically, there is little doubt Amazon is richly priced. Today it trades at four times last years sales and 170 
> times next-years projected earnings. If you were to liquidate Amazon tomorrow, the book value would only cover 4 per 
> cent of the $680 billion market capitalisation.
>
> Fast-forward five years, and analyst's crystal balls are radiating with even more mind-boggling numbers. By 2023, 
> Amazon is expected to generate $535bn in revenue, or 12 percent of 2017's total US retail sales, according to 
> Bloomberg. If profit margins rise to eight per cent, at a twenty-five time earnings multiple Amazon will comfortably 
> be a trillion-dollar company in the near future. Optimistic, no?
>
> Perhaps not. Let's dive under the hood to see if Amazon's corporate engine really has all pistons firing.
>
> First we'll start with Amazon's retail services, which includes the traditional e-commerce business; Fulfilled By 
> Amazon (FBA); Amazon Prime and pioneering home-surveillance device, the Amazon Echo. Last year, these segments 
> accounted for 90 per cent of Amazon's revenues, and had negative profitability. Ouch.
>
> Well, that is only an issue if you assume Amazon wants to be profitable. NYU's Scott Galloway mused last year that if 
> Amazon makes a profit, Bezos calls his senior management to his office and tells them “you f**ked up”, such is its 
> famed obsession with recycling revenues back into investments meant to spur both domestic and international growth.
>
> This tactic has proven extremely effective so far.
>
> By re-investing in distribution infrastructure, the increasing economies of scale allow Amazon to drive down prices 
> and lower shipping costs, thus improving Prime retention rates, increasing the third party-seller base and driving 
> more web-traffic through the online site in a virtuous growth cycle.
>
> This is no real secret, in fact Bezos allegedly outlined this 'flywheel' strategy on a restaurant napkin at some 
> point in the 2000s:
>
> The increasing importance of third-party sellers is testament to this strategy. 
>
> Over the past three years, FBA has grown from 21 percent of retail services to 30 per cent. No longer needing to 
> purchase its inventory from suppliers, Amazon is now renting out its platform (more on this later), and thus its 
> fulfillment expertise, to small online retailers for a 10 per cent to 25 per cent fee depending on package size, 
> shipping distances, etc.
>
> [snip]
>
> Dewayne-Net RSS Feed: http://dewaynenet.wordpress.com/feed/
> Twitter: https://twitter.com/wa8dzp



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