MorningWord 12/28/15: $AMZN Grace

by Dan December 28, 2015 10:51 am • Commentary

If your Christmas clean up was like mine, it consisted of breaking down boxes. Ten years ago when I started as a Prime member, my wife and I didn’t say a word to anyone about how awesome it was. At the time we had two kids under three, living in New York City, the idea that diapers (and almost anything else) could be delivered the next day to our doorstep for $5, or in two days for free seemed to good to be true, and the more people who used it, the more unlikely Amazon would be able to offer such a service.  This morning Amazon issued a press release stating that three million people worldwide joined Prime in the third week of December, with an estimated total globally of 60 to 80 million as of this past September.

The bet with Prime is simple for Amazon, Prime members spend more on Amazon than non members. And key to grabbing an even bigger piece of the retail pie now is new delivery methods and offerings to Prime members.  The jury is still out on whether the investments in fulfillment centers and logistics of the last few years have helped expand margins in retail, as Amazon does not release data on the profitability of a Prime customer vs that of a non Prime customer, but it widely believed that this service is a loss leader on some level. This should not come as a surprise as the company is expected to have $107 billion in sales this year with Net Income of about $3 billion (bulls will point to EBITDA more than doubling this year to an expected $10.6 billion on a sales increase from $89 billion to $107 billion, meaning the company is becoming more profitable before a bunch of stuff).

Which brings us to Amazon Web Services (AWS) which this year will account for less than 10% of its total sales. But AWS as a business has doubled since the start of last year, with much higher margins (op margins of about 25%) than its retail sales.  And investors are certainly excited by the impact on company wide margins. A year ago today, AMZN had a market cap of a little more than a $150 billion, today its is $315 billion. A lot of this excitement has to do with AWS. Was AWS’s profit contribution of less than $2 billion in 2015 rewarded with a $150 billion market cap gain?!

AMZN 10 year chart from Bloomberg
AMZN 10 year chart from Bloomberg

Shame on me for not realizing the significance of a high growth business that AMZN is using to white wash losses in their core. But ultimately it’s a business that will become massively commoditized. And I never regret missing moves that I think are built on something fundamentally wrong. I take heat for this opinion on CNBC and I get crap online as if that sort of skepticism “costs people money.”  But give me a freaking break.  The fear of missing out on a bubble is a psychological bias. And a bad one. It is guaranteed to get you into way more trouble over time than the one or two times chasing with the herd works. If this sort of thing is your bag, have a ball. But it ain’t mine. And on AMZN I have been consistent and transparent about it for years (read it all here).

Wrong is wrong and I can admit that, and I often do. But just because I won’t buy a stock does not mean I am short it. And when I attempt to pick holes in what seems like a mania, that doesn’t make me a perma-bear. That’s exactly what self-directed investors should be doing with all their investments. And if you miss some mania due to skepticism, don’t worry about it, you’ll see those people again on their long journey back to the middle.

AMZN has doubled in the last year, that does not mean it has done so for good reasons. And it doesn’t mean that it’s a good fit for most investment profiles.

As always, Caveat Emptor!