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What Amazon Fears Most: Diapers


Parsad
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  • 4 weeks later...

Looks like they really did fear Diapers.com:

 

Amazon to buy Diapers.com for $540 million

http://finance.fortune.cnn.com/2010/11/06/amazon-to-buy-diapers-com-for-540-million/

 

I think Amazon made a bad precedent on Zappos and I did not expect Amazon being so naive to believe they can buy every problem out. It is like paying for the blackmail and expect nobody will try it again. It is this expectation that Amazon will pay leads to even more ventures in the future.

 

We will see. As I said, AMZN is not worth the multiples trading at now.

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I think Amazon made a bad precedent on Zappos and I did not expect Amazon being so naive to believe they can buy every problem out. It is like paying for the blackmail and expect nobody will try it again. It is this expectation that Amazon will pay leads to even more ventures in the future.

 

We will see. As I said, AMZN is not worth the multiples trading at now.

 

I don't know about that, there is nothing inherently wrong with acquiring companies, as long as they are not overpaying. Being able to take out verticals like Zappos (shoes) and Diapers (babies) might make sense if they can integrate them into their supply chain and use their buying power to bring down prices (a la Walmart).

 

I don't know what Amazon is worth, but I do know that I wouldn't short it. They are run by a great operator and can have a nice runway for growth going forward (esp. if their cloud initiatives pan out... most of my friends in the start up community are using Amazon cloud services).

 

For me, I'd rather short based on more substantial metrics - financial fraud with catalysts in place. Valuation-based shorts always seem like a sucker's game to me.

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Shorting definitely seems to require some trading skill, or an ability to catalyze price action.

 

Tariq, have you read "Fooling Some of the People"? Einhorn's early thesis on ALD heavily focused upon misrepresentative accounting. Meanwhile, the company nurtured an equity investor group that prioritized dividends without adjusting return requirements as the source of those dividends switched from operating income to realized capital gains to debt/equity issuances.

 

The lesson I learned is that companies have tools to combat a reputation war, which can buy them time to restore fundamentals.

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The short thesis on Amazon, beyond valuation, is about the media hole - their operating excellence has always been about media - books, DVDs, and CDs, and those are where they still consistently beat competitors on prices and earn outsize profits, too. The business of selling those in physical form is going away.

 

More important than whether Amazon can grow and have significant share in digital sales is whether it will be a good business. Consider one of the biggest successes in this area so far, iTunes. It is not a significant money maker for Apple, and not just in relative terms - it is apparently just not the high margin business one might expect. For now, Amazon loses money for each digital purchase of TV shows they sell. How they will take share in this kind of business and also turn it into a great business from an owner's perspective is not clear. Apple doesn't have a problem with not making much money from this kind of thing. For Amazon, that model would be a big problem long term.

 

Transforming the model of your core business quickly is heroic. Many "smart" teams have failed at it. The logic of simply transferring a competitive advantage is flimsy, and of course making a new one in a new space is always difficult, and Amazon should be on a near-level playing field there, its early start with Kindle notwithstanding.

 

AWS might be growing its top line at 50%, but it is basically not significant anytime soon. If it is lucrative to the bottom line, there seem to be a large handful of competitors that could offer similar services just as well sooner or later. It does seem smart and could remain unique, but again, not meaningful.

 

Beyond that - for apparel, international, and other tangible goods retailing - they should not be as good as Amazon's core media business has been, even if they're good for consumers. Buying Quidsi could be a great move, but Amazon already sells diapers, and with a "subscription" option. Maybe they can apply some buying power for diapers.com now, but Amazon's excellence in logistics wasn't enough to beat a fledgling competitor. Put another way, if Amazon could apply logistics and scale to new verticals and build a strong advantage in a variety of new areas consistently, they wouldn't need something like Quidsi.

 

At a more granular level, the company whiffed on summer earnings, guided way down, and would have missed again in their third quarter if not for an equity gain recognized when they acquired the remainder of a partially owned business (Woot). Analysts all believe the earnings weakness is driven by "investments in the future from a position of strength" - this is partly true, as the top line was still growing at a blistering 39% in Q3. It remains to be seen what the real return on this spending will be, though, and the company guided Q4 sales growth between 26% and 40% and operating income between -24% and +18%. The huge spread on the latter was not widely criticized, but clearly it is not just driven by investing in the future (big, planned investments would be easier to build in to estimates for the forward quarter - probably not an explanation for such wide breathing room).

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The short thesis on Amazon, beyond valuation, is about the media hole - their operating excellence has always been about media - books, DVDs, and CDs, and those are where they still consistently beat competitors on prices and earn outsize profits, too. The business of selling those in physical form is going away.

 

More important than whether Amazon can grow and have significant share in digital sales is whether it will be a good business. Consider one of the biggest successes in this area so far, iTunes. It is not a significant money maker for Apple, and not just in relative terms - it is apparently just not the high margin business one might expect. For now, Amazon loses money for each digital purchase of TV shows they sell. How they will take share in this kind of business and also turn it into a great business from an owner's perspective is not clear. Apple doesn't have a problem with not making much money from this kind of thing. For Amazon, that model would be a big problem long term.

 

Transforming the model of your core business quickly is heroic. Many "smart" teams have failed at it. The logic of simply transferring a competitive advantage is flimsy, and of course making a new one in a new space is always difficult, and Amazon should be on a near-level playing field there, its early start with Kindle notwithstanding.

 

AWS might be growing its top line at 50%, but it is basically not significant anytime soon. If it is lucrative to the bottom line, there seem to be a large handful of competitors that could offer similar services just as well sooner or later. It does seem smart and could remain unique, but again, not meaningful.

 

Beyond that - for apparel, international, and other tangible goods retailing - they should not be as good as Amazon's core media business has been, even if they're good for consumers. Buying Quidsi could be a great move, but Amazon already sells diapers, and with a "subscription" option. Maybe they can apply some buying power for diapers.com now, but Amazon's excellence in logistics wasn't enough to beat a fledgling competitor. Put another way, if Amazon could apply logistics and scale to new verticals and build a strong advantage in a variety of new areas consistently, they wouldn't need something like Quidsi.

 

At a more granular level, the company whiffed on summer earnings, guided way down, and would have missed again in their third quarter if not for an equity gain recognized when they acquired the remainder of a partially owned business (Woot). Analysts all believe the earnings weakness is driven by "investments in the future from a position of strength" - this is partly true, as the top line was still growing at a blistering 39% in Q3. It remains to be seen what the real return on this spending will be, though, and the company guided Q4 sales growth between 26% and 40% and operating income between -24% and +18%. The huge spread on the latter was not widely criticized, but clearly it is not just driven by investing in the future (big, planned investments would be easier to build in to estimates for the forward quarter - probably not an explanation for such wide breathing room).

 

I think anyone who wants to understand the competitive landscape in the etailer business should read this post. Well done. I could not agree more with your opinion. Amazon is obviously struggling to find revenue sources to justify its valuation while its core business is maturing. It will lead to unwise business decisions. It strikes me again how fast a dominant force in this industry can be challenged by niche competitors.

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Using cash is such a bad idea.

Could you explain why?

 

Yes just about everyone thinks the stock is overvalued. When your stock is too high. You have to close the value gap. You can buy assets with it and as long as the assets are cheaper then your stock the value gap will be closed or you can issue a ton of shares for cash as well. Amazon should be using pricey stock to buy not so pricey assets. If they are using cash then they are just paying a boat load of money for assets. If you pay 20x earnings for Zappos then you are only getting a 5% return on your cash unless Zappos grows significantly.

 

Henry Singleton was the best at doing this when he was at Teledyne.

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Using cash is such a bad idea.

Could you explain why?

 

Yes just about everyone thinks the stock is overvalued. When your stock is too high. You have to close the value gap. You can buy assets with it and as long as the assets are cheaper then your stock the value gap will be closed or you can issue a ton of shares for cash as well. Amazon should be using pricey stock to buy not so pricey assets. If they are using cash then they are just paying a boat load of money for assets. If you pay 20x earnings for Zappos then you are only getting a 5% return on your cash unless Zappos grows significantly.

 

Henry Singleton was the best at doing this when he was at Teledyne.

 

But the problem is that Amazon overpaid with its shares as well........

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