NASDAQ:AMZN
2004-Present
Industry: Online Retailer
Category: Low Cost Provider/Wonderful
Why the Company is Mispriced
Good investing is a minority sport. In order to earn better returns we need to be doing things different from the crowd.
One of the things the crowd is not, is patient.
We are investing at the long end where competition is the least.
Alternative View
Instead of traditional retailing which has expensive overhead in inventory, real estate, and operations,
the internet model is a central warehouse. Inventory is only sent after order has been taken.
Online retailing is being held back by consumer psychological bias.
The growth in online retailing is being regulated by the rate at which our own incumbent habits and associations are replaced with rational behavior.
On valuation, Amazon reported FCF of 500m in 2006, has been about this number for past few years
500m FCF is not the true FCF number, it includes all growth investment spending (capex, R&D, shipping subsidy, marketing, advertising).
The company has been investing the growth FCF today to meaningful grow the company, the company continues to grow at 20%
Our subjective estimate is that management could, if so inclined, cancel the discretionary growth spend, and instead return $800m USD in annual FCF to investors after taxes.
Operations would be worth $10b USD, implying share price of $26 (which was about the share price at the time).
In effect, the market was implying that the growth has no value, whereas the company was growing 20% per year.
Shareholders should not want the company to return the cash. Management is spending to grow sales, to lower costs long-term.
Management is obsessed with lowering costs and Amazon will benefit from economies of scale.
It would've been easy to sell when the equity doubles. But mathetically, selling a great compounder is a greater mistake than buying a company that goes bankrupt.
Be it as it may, despite the stock volatility, it doesn't bother us one bit.
Result
Amazon was able to use it's FCF to spawn many great businesses/acquisitions, including AWS.
Perhaps AWS was not modelled in 2004,
but certainly the strength and intelligence of management was identifiable.
In short, Amazon turned out to be a trillion dollar company, and it was a 80-bagger for Nomad.
Notably
"There are two ways to build a successful company. One is to work very, very hard to convince the customer to pay high margins. The other is to work very, very hard to be able to offer customers low margins. They both work." - Jeff Bezos
Note that since Amazon's online retailing business model has a negative cash conversion cycle, i.e. the customers pay before Amazon has to pay it's suppliers, it was important to value Amazon on a FCF-basis, as it is more accurate to reality.
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