Amazon: Should Investors Sleep Well?

Stocks are often evaluated by how the underlying business might perform in the future rather than how things are going right now. Therefore, companies whose main markets or products are under threat tend to have their stock price depressed. On the other hand, companies in new markets with huge growth potential trade at multiples well beyond what’s recommended in any classic investment book. There is nothing wrong with companies being evaluated based on their underlying business outlook; the real problem relies on the fact that sometimes analysts tend to be wrong about the outlook they attribute to stocks. Clearly, belongs to the group of companies trading at generous multiples due to the optimistic outlook surrounding the company. Let us see what substantiates this optimistic stance:

Innovation process in services and products

Just by looking at common media reports about Amazon (NASDAQ:AMZN) you can conclude that the company is always launching and developing new products and services. The innovation within the company has some interesting characteristics.


(Photo credits: Sindy)

Just like Google (GOOGL), there is a decentralized approach to the pursuit of innovations. The company incentivizes the pursuit of small scale experiments. This way, the company sets a natural selection in the initial stage of the development of new business ideas. Often, we see Amazon developing some of these small scale ideas. Lately, we have seen several products being developed by Amazon especially in the media content (Kindle). Since in this area differentiation is high, the company has been able to get a positive impact in Gross Margin:

Table 1 – Gross Margin evolution (2013, 2012, 2011) Lean company

Since the ’80s, the US recognized the Japanese superiority in industrial production, and many US companies have pursued the best Japanese practices in efficiency improvement. Presently, many start-ups incorporate lean principles from the very start. Therefore, Amazon’s management soon recognized that the company’s customers wouldn’t be willing to pay for an inefficient retail system. Waste prevention became one of the top priorities.

One example of defect elimination is the implementation of the andon-cord principle. The company allows customer-service agents to cut a line of products once there is evidence of repeated problems. The product is taken from the website until the issue is solved. This allows the elimination of numerous defects.

On the innovation side, the company adopted autonomation, i.e. humans use the help of machines for automating low-value repetitive tasks, while human workers focus on high-value complex tasks. This results in fewer defects and more successfully shipped items.

Additionally, the company leverages its ability to have fast turnover times for inventories, which means the company generates negative working capital.

In the end it’s all about valuation

I have just described a great company, so should you buy it? Not so fast. In the end it’s all about how much you pay for the great company you have just analyzed. A great business paired with an awful price will most likely end up a poor investment. As we have seen, Amazon is pursuing all those wonderful opportunities that make growth investors salivate endlessly. This creates a problem when trying to identify a figure for normalized profits. It is really hard to grasp where Amazon would be right now in terms of profits if it were more focused on generating earnings. The main problem relies on the fact that the company claims to be so focused on investing in growth that it is impossible to have an accurate idea about the company’s real profit potential. Therefore, I suggest a simple benchmark exercise in order to deal with this problem. The next table might help us in our quest:

Table 2: Amazon sales mix for 2013, 2012 and 2011 (Source: Amazon 10K – 2013)

Now, let us make some simple assumptions. Imagine that the Media segment is like DirectTV (NASDAQ:DTV), EGM segment is like Best Buy (NYSE:BBY) and the Other segment (includes the third party sellers marketplace) is like Wal-Mart (NYSE:WMT), in terms of profit margins. If this was the case, we would notice a clear trend towards a Best Buy like profit margin. Additionally, we would have approximately the following margins (I have used the 2014Q4 revenue mix and benchmark adjusted margins):

Table 3: Weighted profit margin for AMZN based on benchmark companies for segments

So, our simplistic exercise lead us to a 4.37% profit margin for Amazon. Using a 10% Revenue growth rate for 2015, we will have around USD 97.887 Billion in sales in the current year. Using the 4.37% profit margin, theoretically, Amazon should have around USD 4.28 Billion in profits.

As you must be noticing, this figure means a PER around 40 times our theoretical earnings (current price: USD 374.28). For a company already valued at USD 172 Billion, projecting a growth interval between 6% and 16% in 2015Q1, it is hard to find a 40 times earnings multiple realistic.


I started this article by showing evidence about how good Amazon’s business organization is. My goal is to provide assurance that the company is solid in terms of business and is not going anywhere. Answering the question in the article title, long-time shareholders can sleep well knowing they own a great business organization.

However, the results of our analysis revealed a very high earnings multiple. The exercise about valuation is a simple rationale made to provide a tangible view of the potential margin profit if Amazon tried to milk its profits. Some might have used other companies as a benchmark, I welcome other ideas and views about it in the commenting section. However, this rough measure should not be that far from reality which, in my opinion, should lead the prospective investor to think twice before buying this stock at the current price level.

I like Amazon’s business organization, but this won’t be enough for me to feel compelled to buy the stock at the current levels. I will, however, maintain some attention to this stock waiting for a steep dip in the stock price. If that day comes and Amazon is still well managed then I will most likely invest in the company.

Game theory: Why Varoufakis is wrong and there won’t be a deal soon.

Yanis Varoufakis have stated several times that soon there will be an agreement between the EU and Greece about the financing matters. He has based his opinion on the fact that both have more to lose if they don’t reach an agreement.  Mr. Varoufakis has even used game theory to support his opinion.


My opinion is that he might be missing some details in the big picture. This is not an EU versus Greece, it is more an EU Governments led by traditional parties versus Syriza. And let’s be honest if they let Syriza take their way, those traditional parties will most likely face huge troubles in the next elections. Therefore, there is no way that Germany, Spain or Portugal will be in favor of letting Syriza striking a good deal. I believe that the game theory outcomes might be closer to this:


Obviously, if the Syriza government perceives the outcome for the Grexit as worse than the Good agreement for EU, then they will most likely reject the Grexit and follow the next best scenario which is the Good agreement for EU. However, I am truly convinced that Syriza won’t be an easy negotiator and if they want to negotiate they’ll have to be serious about having alternatives. On the other hand, there is no way the EU status quo parties will be open to a deal that satisfies the Greeks. So my guess is the deal will take a long time, as is usual in European politics and financial markets will be kept bipolar for long weeks before any significant deal is made. But be aware of one thing: this time the two sides on the table have too much loose if they concede too much… There might be a surprise!

Earnings Digested: Coach Inc – The turnaround gains traction

Coach Inc (COH) presented last quarter’s results last week. The market reacted with optimism to the news that heavy discounting was largely stopped and encouraging sales in remodeled stores. Additionally, Stuart Vevers collection represented 90% of the women products on sale during the quarter.


Photo Credit: gatoreena

On the retail side, the company has already opened 20 stores with the renewed store concept, intends to renovate 150 retail locations and to open approximately 70 new stores in the current fiscal year. In the end of the fiscal year, the painful retail restructuring will be mostly done. The renewed stores provided encouraging results:

“This holiday quarter was the first time that we were able to offer consumers the full modern luxury experience across product, environments and marketing, albeit, in only a few stores. However, it is proving to be a very powerful strategy in terms of changing consumers’ perception and impacting results as these locations posted positive comps that were greatly above the performance of the fleet.” – Victor Luis (CEO) [Source: Seeking Alpha Transcripts]

Overall, Coach presented good progress on its turnaround efforts, especially on the brand repositioning and on the retail refurbishing.

Additionally, Victor Luis offered additional insights about the acquisition of the shoemaker Stuart Weitzman:

“Stuart Weitzman is a complementary brand, with many similar core equities and characteristics to Coach. It’s a brand built on offering innovation, relevance and value to a loyal customer base. It has an increasing global recognition and a presence in 70 countries and is known for its craftsmanship and quality, fusing fashion and fit in a segment where comfort is a major driver of customer loyalty.

While we will develop each brand separately, over the long-term, we will learn from each other driving synergies across our respective businesses. Specifically, we will leverage Coach’s international infrastructure and expertise in handbags and accessories to develop Stuart Weitzman’s handbag and accessories business. In turn, Coach will benefit from the Stuart Weitzman team’s expertise in footwear development, where they are proven leaders in style and comfort.”


Coach offered a set of interesting results this quarter. The restructuring is on track with encouraging indicators on sales in renewed stores. Additionally, inventories might be on a downtrend which might be tranquilizer for investors. Furthermore, the acquisition of Stuart Weitzman was a surprise but it seems that it might be the first step in transforming Coach Inc from a one brand company to a company owning a wider brand portfolio. This might be the new growth spring for Coach. You can read more about my views on Coach here.

Market Outlook: The U-Turn In European Politics

European leaders did not understand the essence of the present crisis. The turbulence was provoked by the failure of the established elite’s political direction. The establishment is rotten but its roots are deep; this is the reason why the turmoil provoked by the 2010 debt crisis didn’t make victims sooner. Most of the traditional parties (left or right in the government arch) were able to maintain leadership.

François Hollande‘s victory was one of those cases. Promising to revoke austerity, he has done the opposite since he took office. The public’s reaction has been dreadful. French Socialists are one of the most unpopular parties in office right now. In my opinion, they risk ending up like the PASOK: completely annihilated. The price to pay for not meeting promises is getting higher by the day.

If Syriza lives up to its promises with a focused strategy for the Greek economy, then I believe the rest of Europe will feel the effects of a “European Spring”. Spain might be next on that list with the “Podemos” movement on top of early polls. Obviously, markets will be scared at first, but if things are done right, investors will have more motives to celebrate than to cry. The current state of affairs and the situation as the whole continent is in stagnation and flirting with deflation is what investors should be worried about. Countries turning deep left or right in legislative elections do not pose that much of a threat, especially if they are successful in reinvigorating economic growth or at least sparking some inflation.

At the end of 2014, I wrote a market outlook for 2015. This outlook included views on the QE from the ECB. My views at the time were optimistic on the sense that a European QE could cause a positive surprise in the European markets. Now, I think that the current dynamic will be harder for the European markets and especially the EUR in the first half of the year but in the 2nd half things might improve significantly. I still believe that the lower prices affecting commodities will be positive for Europe, but this impact will be offset by the EUR at the lowest levels in years.


(Photo credit: Ian Sane)

Again, the big winner will be the US, more specifically the SPY and USD. The US had the best crisis management of any Western country. They refused to use austerity as their guideline. While European countries were counting pennies in their budget, the US were using printed money to save banks and auto constructors. Moral hazard? Not when they helped the banks just enough so that they could punish them later (example: Bank of America (BAC)).

Finally, Asian countries with debt in USD and emergent countries heavily dependent on commodities, especially oil, will struggle with increasing public debt and shrinking economies. This is the year of the US economy.

(Originally posted on

Blackberry – Lost In Communication


Photo credit: Matthew Hurst

Research in Motion (RIM), renamed BlackBerry Ltd (BBRY), was founded in 1984 and was involved in several activities related to wireless communications. In the beginning of the century, the company introduced a pager that could push email through its proprietary BlackBerry enterprise server. In order to leverage the potential of its own server, RIM introduced its first mobile phone in 2000. Due to the push email and use of encryption technologies, the company was able to gain access to government contracts. The company quickly introduced more phones directed to the consumer market as well. RIM was able to capitalize on its orientation to internet services like email. Through the development of mobile phones with a qwerty form factor, the phones were applicable to both enterprise clients and youngsters addicted to SMS. For this last group of customers the company had a service called BlackBerry Messenger (BBM). This messaging product was a huge success since allowed BlackBerry users to send free unlimited messages. Summing up, RIM specialized in offering low power phones that allowed email access, through its own servers, which was a good edge over competition.

The problems started with the iPhone and the agreement Apple (AAPL) made with AT&T (T) to provide unlimited data packages. This enabled users to have a fully capable internet browser on the iPhone, something that Blackberry wasn’t prepared to fight. The company’s systems were much older and didn’t provide the same feel-good experience as the iPhone. On the same note, never before had carriers allowed the unlimited data package offer that Apple was providing. RIM’s management had never thought that was possible, so they weren’t prepared for the day that could turn into reality.

RIM’s management was so deeply immersed in doing business as usual that they never thought about exploring such a possibility. On the other hand, Apple being a complete newcomer to the marketplace was capable of thinking up out-of-the-box solutions which could revolutionize the whole industry. With this fast shift from low powered phones to high processing smartphones, RIM’s technology was no longer the best in the market and enterprise clients started to adopt other solutions, like the iPhone and Android OS phones.

From that point on, RIM was always behind the curve. The company’s efforts to catch up were proving unsuccessful. The management team was overhauled in the beginning of 2013, which was already a warning signal. During 2013 the revamped strategy was to update the BB operating system and bring new touch and qwerty phones to the marketplace. The company overestimated the demand for its new phones, which led to excess inventory and subsequent costly write-offs. Stock market quotation reached its peak around $230, in 2007, heavily beating the S&P 500. Presently, it trades at $10.70, or a loss of 95%.

The main lesson we have to retain is to be sure that the competitive advantages that a company is exhibiting are resilient or if a possible future event might be able to destroy them. Another interesting lesson comes from the fact that it seems that Blackberry lost the focus of its real business: delivering reliable and easy-to-use communication solutions. Along the way it seems that management started to think they were on the business of making cell phones. They turned their focus from the client to the product. This is a deadly mistake; it’s not a product that you sell, it is the client that you serve. To be a successful investor in the long term, one needs to comprehend the business of the companies in which he is investing. Additionally, he must be sure that the management also understands it, or else you might end up with a 95% loss.

Post originally published on:

If The Bear Comes: Keep Calm!

The current stock market landscape is screaming troubles. More than just short term variations, we are talking about significant economic developments. The shockwaves from the plunge in the oil price might create a short term bear market or even a short term recession. In this case, one should remain undisturbed and keep searching for companies whose stock price was hit by the general market downturn.

Usually, during a market meltdown appear great opportunities. One reason is the fact that the really great companies are able to avoid economic downturns, however, during a market panic all companies suffer in terms of market quotations. One good example of this effect was Google’s ($GOOG) stock price, which traded around $700, in the end of 2007. In the 4th quarter of 2008 it shrunk to around $300, without any fundamental reason. The price has been in recovery since then. Google has kept its growth profile as it was visible then, and now the stock price is above the $1000 mark (after adjusting for the stock dividend). In Google’s case, the only thing that shrunk was the stock price, neither sales nor profits had any decrease during the most problematic period of the subprime crisis.


Photo credit: Srikrishna Narasimhan

There are other cases of fallen angels impacted by the economic downturn, we are talking about cyclical companies that reveal a dip in revenues and profits. These cases are more complex and usually more risky. One example here is the auto industry. At the depths of the crisis, almost every auto maker felt the impact of the crisis in its operations. Most of them saw its share price reduced to ashes, however, most of them recovered. Obviously the risk involved in this kind of investment approach is significantly higher since some auto producers went bankrupt. But the returns are also greater. One example is the Ford Motor Co ($F), the company traded around $1.43 during the 2008 panic, but since then recover to the point of being trading at around $14.76.

The moral of the story is: If the bear comes, keep calm and search for great opportunities!

2015 Market Outlook: United States, EU and the Oil Industry

As we are approaching the end of the year, it is time to make the balance of the present year and to formulate some outlooks regarding the next one. A couple of days ago, I wrote an article for Seeking Alpha about the market outlook for 2015, you can consult it here. In the article, I defend that next year will be though for emergent countries, especially those heavily dependent on commodities. On the other hand, the US will be leading the world economy and Europe might surprise if the unconventional QE goes forward. However, the EUR will most likely suffer in any case, there will be no real opponent for the USD.


[Picture: Bert Kaufmann]

In the article, I left some doubts about the shale oil industry in the US. However, some analysts have been suggesting that the shale break-even point lies between $80 and $60 which means that only if the oil price keeps plunging will there be a problem (Source: Business Insider). Assuming that the oil price remains above the $60 figure, I think that the US shale industry will survive. We might have a M&A season in the sector, but the industry as a whole has good chances of surviving.

If this positive scenario materializes, I see the US economy creating more jobs and improving the housing market, thus create a virtuous cycle where the US will be seen as a global safe haven for investors. Again, I insist on the idea that the bet in the US economy will bring the best risk/reward outcomes for investors in 2015.