Tech company valuations

[Vish_ram]

This is not being short term oriented. This is an inherent bias in some investors. A company growing at double digits and sporting a P/E of <15 gives people a lot of comfort. It trades in the comfort zone. A market P/E or less for a company plays tricks on the mind making you think there is value.

 

A market systematically undervalues a growth company. It is warranted as the future growth is uncertain for most firms. The ones that continues to defy odds and grows gives tremendous returns to the shareholders.

 

You can see this bias in full display in this forum. Just go through the CRM thread. Many were shorting it at 60's 2 years back. It trades at $90 today.

[DTEJD1997]

 

 

A buddy and personal car mechanic of mine opened his own shop a couple of years ago. It was interesting to hear from him that his goal is to take as little salary as possible to support himself, and to reinvest all the money he makes on growing his shop. He wasn't trying to make profit at this point. Now he never had any business education nor heard about how companies like Amazon operate, but he just understood that for his business to grow and achieve his goal, that's what he had to do.

 

So when I hear a story like this, I completely understand giving up profit to grow the business value. In fact, it could be the default startegy for many entrepreneurs. Not sure why one cannot see this from what Bezos is doing, especially when he continuously preach that that's what he is doing.

 

Whut, whoa, wait a minute....I am confused!

 

Your buddy, who opened a car repair shop...was not trying to make a profit.  He was trying to grow it and take market share.  So he took as little salary as possible and invested as many of the PROFITS as he could so he could grow the business.

 

I don't get it...if he was not trying to make a profit....how would he have anything significant to reinvest in the business?

 

Shouldn't he have been working for free/almost for free to build it up?

 

 

 

[Liberty]

Whut, whoa, wait a minute....I am confused!

 

Your buddy, who opened a car repair shop...was not trying to make a profit.  He was trying to grow it and take market share.  So he took as little salary as possible and invested as many of the PROFITS as he could so he could grow the business.

 

I don't get it...if he was not trying to make a profit....how would he have anything significant to reinvest in the business?

 

Shouldn't he have been working for free/almost for free to build it up?

 

There's more than one way to reinvest into growth.

 

He could do it by slashing his prices/margins. This way, he would be reinvesting the potential profits that he would otherwise be making into growth.

 

He can also reinvest the profits into the business in other ways. For example, he could keep his profit margins normal, but take all that money and add more employees, more equipment, maybe rent a new locations, etc. He's still keeping the money inside of the business rather than taking it out.

 

Both approaches look different from an accounting point of view, but the general idea is the same; use money that could go in your pocket and instead "spend" it on accelerating the creation of value.

 

f.ex. When Amazon uses money from its more mature and profitable US retail business and uses it to pay for the startup of its operations in India, that's what it's doing. When it's using profits from AWS to invest in Prime Video content to attract more subscribers who then spend more on retail and are stickier sources of revenues, that's what it's doing. When it invests in CAPEX way over what it needs strictly for maintenance (more fulfillment centers, more data centers, more robots, entering more new markets, etc), that's what it's doing.

[clutch]

A buddy and personal car mechanic of mine opened his own shop a couple of years ago. It was interesting to hear from him that his goal is to take as little salary as possible to support himself, and to reinvest all the money he makes on growing his shop. He wasn't trying to make profit at this point. Now he never had any business education nor heard about how companies like Amazon operate, but he just understood that for his business to grow and achieve his goal, that's what he had to do.

 

So when I hear a story like this, I completely understand giving up profit to grow the business value. In fact, it could be the default startegy for many entrepreneurs. Not sure why one cannot see this from what Bezos is doing, especially when he continuously preach that that's what he is doing.

 

Whut, whoa, wait a minute....I am confused!

 

Your buddy, who opened a car repair shop...was not trying to make a profit.  He was trying to grow it and take market share.  So he took as little salary as possible and invested as many of the PROFITS as he could so he could grow the business.

 

I don't get it...if he was not trying to make a profit....how would he have anything significant to reinvest in the business?

 

Shouldn't he have been working for free/almost for free to build it up?

 

I should have worded it more precisely (i'm obviously not strong in accounting). Yes, he was working almost free to maximize profit. So I'm assuming he wasn't trying to take any free cash from his business at this point, so spend most of that profit as cap ex. But he was also using operating expense to "grow" his business (stock up on inventories, lease additional equipment)...but obviously i didn't see his financial statements to know the exact details. 

 

Come to think about it again, probably not the best analogy for Amazon, but a general reflection of a growth-minded entrepreneur.

 

[Liberty]

Josh Tarasoff (2013) comments on AMZN profitability:

 

https://youtu.be/XAubRoZbI9U?t=23m15s

[alwaysinvert]

A market systematically undervalues a growth company. It is warranted as the future growth is uncertain for most firms. The ones that continues to defy odds and grows gives tremendous returns to the shareholders.

 

These lines are perfect in more ways than I can properly express. It represents both bull markets and survivorship bias flawlessly.

[Jurgis]

If AMZN is a decent bargain at $1,000/share, where does it NOT become a decent deal?  $1,500?, $2,000,  $3,000? more?

 

In my personal business, I could EXPLODE sales if I wanted to make a small or zero profit.  I bet I could probably expand sales 5X or even more...but at the end of the day, I've got bills to pay and wealth to accumulate through retained profits...

Correct. It's easy to beat your competitors on price and grow if you don't need to make a profit. For now Amazon is not a business. It's a non-profit.

 

You're looking at it wrong.

For sure I am. After all a company is not supposed to make money.

 

A company is supposed to create value. Reinvesting all your earnings internally is one way to create value. TCI didn't have any earnings either.

 

Since reading Cable Cowboy, I see Amazon in a whole new light...

 

I won't comment on AMZN, but it seems that companies with great capital allocation and minimal to no earnings can be quite mispriced by the market. Liberties, cough, cough.  I'm sure there are other examples. 8)

[winjitsu]

 

I won't comment on AMZN, but it seems that companies with great capital allocation and minimal to no earnings can be quite mispriced by the market. Liberties, cough, cough.  I'm sure there are other examples. 8)

 

 

To add further to your point, while Liberties did not have GAAP earnings, they were *reasonably* valued on a FCF & EV/EBITDA basis. I don't think you can make the same case with Amazon...

[Liberty]

 

I won't comment on AMZN, but it seems that companies with great capital allocation and minimal to no earnings can be quite mispriced by the market. Liberties, cough, cough.  I'm sure there are other examples. 8)

 

 

To add further to your point, while Liberties did not have GAAP earnings, they were *reasonably* valued on a FCF & EV/EBITDA basis. I don't think you can make the same case with Amazon...

 

What TCI spent on m&a and debt interest, amazon is mostly spending organically. That's different optically, but it's all really growth expenses when you get to the bottom of it...

[cmlber]

 

I won't comment on AMZN, but it seems that companies with great capital allocation and minimal to no earnings can be quite mispriced by the market. Liberties, cough, cough.  I'm sure there are other examples. 8)

 

 

To add further to your point, while Liberties did not have GAAP earnings, they were *reasonably* valued on a FCF & EV/EBITDA basis. I don't think you can make the same case with Amazon...

 

What TCI spent on m&a and debt interest, amazon is mostly spending organically. That's different optically, but it's all really growth expenses when you get to the bottom of it...

 

If Amazon spent $1 billion to purchase a single billboard in Montana with the Amazon logo on it, it would likely grow revenue.  Is this a "growth expense" that should be taken out to normalize earnings?  If you gave me billions of dollars a year to piss away I could grow revenues really fast too. 

 

How do you determine that Amazon's "growth expenses" are good investments and not billboards in Montana?  They may turn out to be great investments, time will tell.  But it is very far from the TCI days where they were investing in monopoly cable systems where the unit economics were clear. 

 

There is only one thing I'm certain of when it comes to AMZN, that is that this (and the AMZN thread) is going to be an incredible thread to look through in 10 years.  There will be some amazing lessons, one way or the other. 

 

 

[Liberty]

 

I won't comment on AMZN, but it seems that companies with great capital allocation and minimal to no earnings can be quite mispriced by the market. Liberties, cough, cough.  I'm sure there are other examples. 8)

 

 

To add further to your point, while Liberties did not have GAAP earnings, they were *reasonably* valued on a FCF & EV/EBITDA basis. I don't think you can make the same case with Amazon...

 

What TCI spent on m&a and debt interest, amazon is mostly spending organically. That's different optically, but it's all really growth expenses when you get to the bottom of it...

 

If Amazon spent $1 billion to purchase a single billboard in Montana with the Amazon logo on it, it would likely grow revenue.  Is this a "growth expense" that should be taken out to normalize earnings?  If you gave me billions of dollars a year to piss away I could grow revenues really fast too. 

 

How do you determine that Amazon's "growth expenses" are good investments and not billboards in Montana?  They may turn out to be great investments, time will tell.  But it is very far from the TCI days where they were investing in monopoly cable systems where the unit economics were clear. 

 

There is only one thing I'm certain of when it comes to AMZN, that is that this (and the AMZN thread) is going to be an incredible thread to look through in 10 years.  There will be some amazing lessons, one way or the other.

 

Exactly, you have to judge if Amazon is getting good ROIC on its investments. That's what's hard about this situation. I didn't say that cable was the same as cloud computing and 1P/3P e-commerce, just that on one side TCI's FCF was apparent because it was used for M&A while Amazon's FCF isn't because it's mostly reinvested above that line. If Amazon was mostly growing through M&A, it's financial statements would look very different but that might not necessarily be better underlying economics.

 

Not all sources of value have to be converted to FCF right now to be worth something. For example, Moody's or See's untapped pricing power had value even long before they actually use it fully.

 

Edit: btw, one interesting thing that many don't understand about Amazon: The economics of third party sales on its platform are more attractive than 1st party sale. They basically just take a cut on what's sold through their website, like Ebay, and that's inherently higher margin than carrying inventory and operating warehouses, etc. 3P sales have been growing faster than 1P sales, but for those, only the actual amazon cut is recorded in revenues, not the whole dollar amount of the pricetag of what was sold. So accelerating 3P sales are actually a second-derivative headwind on overall revenue growth (ie. for the same amount of merchandise sold, the revenue will be lower for 3P than 1P but profits will be higher) but actually increase the velocity of value creation.