Friday, July 27, 2012

In Defense of – Not That They Need Defending. Shrinking the NOW-Gap

 An interesting summary of Amazon as they continue to redefine the retail experience. Aivars Lode
    Posted by kid dynamite
    on July 27th, 2012

I don’t know how I can go about “defending” a stock that I don’t even own – I have no position in $AMZN, and never have – sadly.  Like so many of you, I’ve spent the better part of a DECADE now saying “it’s too expensive – I don’t want to own that stock,”  as it climbs and climbs and climbs.   Here’s the 5 year chart:

Today, I read a number of miffed comments on the Stocktwits stream about $AMZN’s stock rally on earnings that seemed mediocre.   I figured I’d put some thoughts to keyboard while the topic is fresh.

People seem confused/annoyed/angered by AMZN’s continued stock price ascent on mediocre net earnings per share numbers.  The story is about so much more than that though.   There have been a number of companies who have tried the “don’t worry about our profitability, we’re building a customer base and we’ll make up for it later in VOLUME” model.   I don’t think that disaster-in-the-making paradigm applies to AMZN at all:  the beauty of AMZN is that they’ve managed to grow into the most dominant force in the history of retailing WITHOUT accruing huge losses.   Have they “sacrificed” profitability to some extent?  Of course – their margins are small and not growing, but they don’t accelerate revenues via price sales or temporary mispricing of goods that lure customers in based on prices that will rise later (and send customers running for the exits at the same time) – the secret to Amazon’s success is that they’ve built a logistical empire that can get you what you want (and what you don’t even yet know you want) at speeds that continue to blur the line between brick and mortar and online fulfillment times.

What I mean by that statement is this:  if you need something NOW, you still can’t order it and get it in time.  They are continually working on shrinking that NOW-gap, though, and it’s gotten to the point where on Monday if I need something for Thursday, I have no qualms about ordering it from Amazon.   Their goal, I think, is to turn “Thursday” in my mind into Tuesday.   They’re not quite there yet, but they’re awfully close.   I’ve written numerous times about ordering something at 6pm and having it show up at 8:30 the next morning.  How?  I, quite literally, have absolutely no f*cking idea.  I live in rural New Hampshire, and I cannot fathom Amazon’s logistical genius, but I don’t care if they have a band of magical elves delivering the product to me from their Kentucky warehouse – as long as I get it, I’ll continue to be happy and amazed.

New York City residents might remember the internet bubble darling which allowed you to order something as small as a pint of ice cream and a pack of gum, and they’d bring it to you in a few hours.    Not surprisingly, that business model failed.  But Amazon is attempting to further blur that “I can’t order it online because I need it NOW” line by reducing shipping times to seemingly impossibly short intervals.  Will they get to same day?  I don’t know – but they might not need to.  Two day shipping is great, and next day shipping is almost NOW.

AMZN is a logistics company.   That’s something people tend to overlook.   Does AMZN need to spend billions building warehouses across the country to get me my stuff in even less time?  Maybe, maybe not – but the reason the stock doesn’t go down is because they are managing to do this cap-ex and STILL not put up big negative numbers.  They don’t try to convince you to say “don’t worry about these huge losses, we’ll make up for it in volume later” – instead, they make you say “holy crap – AMZN is already a logistical masterpiece – just imagine if they can make it even better, and NOT kill themselves financially in the process!  Then, once they stop growing, they just reap the windfall.”  At least that’s what they make me say.

So anyway, Amazon has built this logistical ninja model to get you what you want in a hurry, and the key is that they’ve managed to do while being profitable (or barely profitable, or barely unprofitable – but they’re not putting up huge losses).   Critics point to ridiculously high P/E multiples and miss the point:  when Amazon stops expanding their logistical empire, their customers won’t just click over toBuy.Com or some other website – the system still works, and once the cap-ex slows, the profits increase.   Once the infrastructure is in place, Amazon can continue to add more low-margin items.   They’ll happily sell you another $1000 worth of goods that they can only make $15 on – why not?   They want you to buy EVERYTHING from them.   I agree with the statement that CEO Jeff Bezos made in the earnings release yesterday:

“Amazon Prime is now the best bargain in the history of shopping – that is not hyperbole… We successfully launched Prime seven years ago with free unlimited two-day shipping on one million items. The price of annual membership was $79. Since then, Prime selection has grown to 15 million items. We’ve also added 18,000 movies and TV episodes available for unlimited streaming. And we’ve added the Kindle Owners’ Lending Library – borrow 170,000 books for free with no due dates – it even includes all seven Harry Potter books. What hasn’t changed since we launched Prime? The price. It’s still $79. We’re very grateful to our Prime members, and thank them whole-heartedly for the business and for the word-of-mouth that has made this program grow“

But the retail mastery – and make no mistake: Amazon has changed the retail landscape permanently – isn’t even the whole story.   Cloud computing, warehouse hosting, continued delivery advances (did you know that Amazon has delivery lockers in New York City, Seattle and D.C. for those people who don’t have doormen and have trouble receiving packages?) – it’s just getting better and easier.   They’re making it harder and harder for you to say “f*ck it, I really need this today – I’m gonna get in my car and drive to the store to get it.”

On Twitter today, the astute @Microfundy asked a crowd-sourced question to $AMZN bulls: “What would make you sell?”

I replied:

“no position, but I’d short $AMZN when someone shows they can offer any competition. right now, $AMZN is eating all of retail”

What I found even more interesting was a reply to my response, from @SteveZ1, who wrote that Amazon is:

“a cancer for other retailers. Can one up them if manufactures sold direct from one central fulfillment center. That’s next”

He didn’t realize that he’s making the Amazon bull case:  that IS next:  and that one central fulfillment center, as I noted in a reply, is called   Manufacturers pay Amazon to hold their goods in Amazon’s warehouse and to have Amazon handle the logistics of e-commerce (that’s what is happening when you see “sold by xxxx, fulfilled by” in the description).    Amazon IS the central fulfillment center: they are not about to get slaughtered by one!    @Trendrida replied with a story from this week about American Apparel making use of Amazon’s e-commerce platform.

Regular readers know that I’m a huge fan of Amazon as a consumer.  My wife and I place upwards of 100 orders a year on   Just this week, in the wake of our microburst, I used up the last of my 2-stroke engine oil that runs my chainsaw, weedwhacker, and leaf blower.   I had one last gallon of fuel that I’d mixed.  I knew I could order the oil I wanted on Amazon – I’d done it before – but I figured I’d stop into Lowes and pick some up while I was in town.   Guess what – Lowes didn’t have what I wanted, so I went home and ordered it on Amazon anyway – wondering to myself why I’d even bothered to waste my time at Lowes: I didn’t need the stuff today, after all.    It came less than 48 hours later, Amazon Prime, hand delivered to my doorstep.   Today I ordered a fertilizer spreader.   Where else would I buy one from?   No brainer.

Now I’ve written all of the above, but I still don’t own the stock.   Why?   I wish I had a good answer.  I don’t.  The best answer I have is that even after all of my “rationalization,”  AMZN isn’t “cheap.”   My point is that Amazon as a company is here to stay – that’s one of the first things I think about when I think about shorting a stock: could this company disappear?  With Amazon, I think that the answer is “no*,” and I think that they will eventually be able to reap the benefits of the logistical infrastructure empire that they have invested heavily in over the last decade.   Perhaps that means that they just “grow into” their current valuation – I have no idea: time will tell.

This also seems like the perfect time to emphasize that I am not suggesting that anyone buy $AMZN stock.  You’ll notice that I don’t really make stock recommendations on this blog.   What I’ve tried to do in this post is explain what I think is the bull case for Amazon.  If you’re sitting at home, reading the earnings report and shouting at your monitor “THEY ONLY MADE A PENNY A SHARE! HOW THE F*CK CAN THE STOCK BE UP MORE THAN 7%?”  well, I’ve attempted to offer one variety of explanation.

No comments:

Post a Comment