Sunday, November 9, 2014

* (AMZN) - Debunking Massive Misconceptions & Uncovering Incredible Facts (4 Charts)

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AMZN closed Friday trading at $299.86.

Provided by Livevol

Disclosure: I am long AMZN (very small).

There are some misconceptions floating around AMZN that I'd like to address with a reminder that AMZN has larger revenue than almost every public company in the United States, has revenue 8x larger than Alibaba (BABA) and has a larger gross profit, 1-year growth than GOOGL, AAPL, DIS, WMT, INTC F, JNJ and ~490 of the S&P 500.

Further, BABA's net income (earnings) is basically half of what AMZN spends just on R&D alone, or in English, AMZN can turn a profit greater than BABA at any time it "feels" like it and still be left investing huge amounts on research and development.

AMZN Spends as Much on R&D as All of Alibaba's Total Revenue

Before I get hate mail, I wrote a compelling story about Alibaba (BABA) and the firm's incredible earnings margin % very recently: BABA - Stunning Charts and Facts

Misconception #1: AMZN isn't a growing company.
AMZN continues to grow its revenue base substantially, nearing one of the largest public companies.  It has larger revenue over the trailing-twelve-months (TTM) than GOOGL, JNJ, WFC, BAC, PG and is within a stones throw of MSFT.  Further, the year-over-year trend has never been negative in the last 10 years, growing revenue from $7B to now $85B.

For comparison's sake, BABA Revenue (TTM) is ~ 1/8th of AMZN revenue at ~$10B.

Revenue (TTM) Trend

Provided by Capital Market Laboratories

Misconception #2: AMZN is selling products at a loss -- it's easy to raise revenue if you sell $1 of product that costs $1.10 to make.
AMZN not only has positive gross margin %, its gross margin % has increased nearly 30% in the last four years -- a remarkable result given the enormous revenue growth.

The chart below shows revenue in the blue bars, and overlays gross margin % as the red line.

Revenue (TTM) vs Gross Margin %

Provided by Capital Market Laboratories

-----> All of these charts were done with CML software: Try this yourself (free trial)

So what is going on with AMZN?

Revenue (TTM) vs. R&D per dollar of Revenue
The blue bars chart AMZN revenue, the red line charts research and development (R&D) expense per $1 of revenue.  Not only is R&D increasing, it's increasing relative to the increasing revenue.  At ~$0.10 of R&D per dollar of revenue, AMZN spent ~$9B in R&D in the last year.

For comparison, Alibaba spends about $1B in R&D.

Provided by Capital Market Laboratories

R&D per dollar of Revenue vs. Net Income Margin %
AMZN is losing money -- that is not a misconception, that's a fact.  But, when we chart R&D per dollar of revenue in the blue bars and now chart the net income % (earnings %) as the red line, we can see exactly what's happening.

AMZN is investing in R&D and that expense (investment) is impacting earnings linearly.  The company can turn a profit whenever it wants to.

Provided by Capital Market Laboratories

Where is the R&D going?... Who knows exactly, but certainly a chunk is going to build AWS (Amazon Web Services) aka "the cloud."  And is it working?...

Well, here are the players in the cloud right now:

AMZN, MSFT, GOOGL, HPQ, VZ and a few others.  And which of these giants is the leader?.... is.

But, this business has been referred to as a "race to zero."  As in zero margins, zero profits.

Here's an article from Business Insider all the way back from 2012:
There's no question who the most important cloud player is: Amazon. But what we love about this company is that it is still the most innovative. It still works like a startup, always staying one step ahead.

It's wild to think that a company founded to sell books could have been the catalyst for so much change in the IT industry. But it was -- and still is.

The 10 Most Important Companies In Cloud Computing

Knowledge is Power. Be Powerful.

All of these charts were done with CML software: Try this yourself (free trial)

This is trade analysis, not a recommendation.

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  1. Not trust article and completely biased....will short amazon tomorrow

  2. The representation that $9 billion is an R&D number is without support.
    The gross margin increase is a distortion because AWS and 3P costs are not reported in the calculation of gross profit costs, as Amazon tells you as much that it is not relevant in their filings.
    It appears you either did not read the financial statements well or you attempt to deceive.

    1. What are you talking about? The line item for R&D is reported on over 200 different websites.

      And the gross margin% may be distorted (maybe), but it's been consistently so, and therefore the increase is ultimately exactly what we should be examining.

      Finally, if you accuse someone of deception, try it without anonymity. You're not only wrong, which is OK, it happens, but you're a coward.

  3. There is only one website that matters. R&D disclosure Find it

    1. classifies expenses as: "Technology and Content"

      “Other large technology companies use the standard XBRL tag for R&D, and report substantial amounts, as you would expect. Amazon, in contrast, uses its own tag, which is described as capturing:

      Payroll and related expenses for application development, editorial content, merchandising selection, and systems support; and costs associated with computing, storage and telecommunications infrastructure.”

      Wrt to arguments about using the XBRL tag specifically R&D:
      Morningstar, CapIQ, and Reuters are on one side and EDGAR on the other, oh and EDGAR is the only one really trying to sell XBRL data.

      I stand with my own knowledge, S&P, Reuters, Morningstar and 200 other financial websites which have debated this issue for over a decade and all come to the same conclusion.

      The ‘Technology and Content' line item is a very close proxy for R&D.