Amazon, Apple, and the beauty of low margins
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eugenewei.com
Fundamentally there isn't much point for either because it's not the right customer base. This is what branding is about, if Apple acquires a whole bunch of customers that don't care about quality and then complain that their devices don't have half-baked features it doesn't do the brand any good. These customers will destroy the brand.
I don't want to have to walk into an Apple store and wonder which is the low margin device that will fall apart / fail to perform, if I wanted to ask those questions I'd go to Best Buy.
The low margin Apple market is craigslist, if you want a 3 year old Apple device that's where you can get it.
The most confusing thing about AMZN and APPL are their respective PEs. They are priced as if each are going to adopt the other's business model.
I've wondered about this too, but the post seems to shed some light on it. Amazon arguably has essentially no competition, while Apple, for all that it's doing well at the moment, has plenty.
(I understand the point is debatable. I'm just saying, this appears to be how the market is thinking.)
At $13.1B AAPL made 4.5x what GOOG ($2.89B) did last quarter, And, in that one quarter, earned profits that are ~7x what AMZN has made during its entire existence.
So, yes. It's not entirely clear how "Wall Street" is assessing these tech companies against respective share prices.
GOOG on the other hand I think is a fair enough comparison. Actually GOOG has pretty much failed at all their attempts to make money off anything but ads, which I consider kind of worrying.
PS FYI you posted this twice and the other one is marked dead. I recommend deleting it.
http://www.businessinsider.com/google-generates-1-billion-on...
Frankly, I'd love to own some Amazon stock. I think it's an amazing company with lots of potential. I just can't justify paying the current valuation. I'll probably regret it someday, but for now I'll stick with Apple and their 7 pe. Even if they lose all growth its worth much more than this. It's priced as if they are going out of business right now. I'd pay this much for either their iPhone or iPad business, not to mention having both, Mac, iPod, and anything new they come up with. They sold > 75 million devices last quarter. Doesn't exactly seem like a dying business to me.
While I have no doubt amazon can grow 5x, I do have some doubt as to timeframe. If it did it this year I'd be happy to own it at these prices. I think it's probably at least 5-10 years from that. 0-20% return over that timeframe isn't very good.
That makes amazon overpriced by, what, 25%? Which is not particularly shocking. Lots of stocks are a bit overpriced. AMZN is popular. Don't buy it. Shrug.
When you compare a 3000 P/E to a 20 P/E, you might come away thinking amazon is overpriced by a factor of 100, which would be shocking. But I don't think there's any reasonable case that it's overpriced by a factor of more than 2.
There is no indication that they will ever make huge profits. The Amazon you see is that Amazon you WILL see for the next 10-15 years at least.
After all, this isn't some little start up that's only been going a couple of years - by tech standards Amazon is part of the old guard.
That's what Amazon is, except their assets are market share and infrastructure.
Maybe 20 years is too long for you to wait, but that's fine! The stock is priced accordingly so just cash out and let someone sweat the final liquid value of the assets.
You may be thinking of Forward P/E. But Forward P/E only attempts to project earnings out 12 months.
The E in P/E is the measure of actual earnings over time. The P/E ratio is, quite literally, the number of years required to pay back a stock's purchase price at constant dollars and earnings. AAPLs P/E ratio indicates it would take AAPL 10 years to pay back its current stock price. GOOG's indicates 20+ years. AMZN's P/E ratio indicates it would take over 3000 years to do the same.
You may be right, and AAPL's P/E ratio may be closer to 5 than where it is currently (where the drop comes from a lower stock price). But then, so should AMZN's.
Yes, this is what I mean. I'm no expert on stocks and am not familiar with the terms, but the principle should be there.
Say the "normal" P/E is around 15, which means that people think it's fair to be able to recoup the stock's price in 15 years. Now why Apple's P/E is only 10? That's because people think its future earnings will drop (in statistical sense), so that the current price will still be recouped in roughly 15 years. Similarly, Google's P/E is 20+ because people think its future earnings will rise, so that again the current price can be recouped in roughly 15 years.
Amazon's large P/E isn't that abnormal if you consider that there are plenty of companies which are losing money yet still have a positive stock price. Maybe they have lots of assets, and maybe people expect them to return to profitability soon.
For struggling large companies this can even be a gamble. If you think the company has a 5% chance of returning to glory and earn big, and 95% chance of never earning a profit again, the company can still have a pretty decent expected future earnings in statistical sense.
I was not trying to say that the standard financial metric called P/E ratio should be calculated this way. Rather I think that ideally or principally it should be calculated this way, because what matters is "how many year will it take for me to recoup the money?", not "how many years will it take for me to recoup the money assuming that the company's earnings remains the same?".
But obviously you don't know the company's future earnings, so to make an actually computable metric you can only use the current earnings as an estimate.
"Wall Street" assesses stocks based on whether they can make money at a given valuation. Full stop. They are not investing. The are not acting as agents for investment. They are identifying and executing trades.
If you're trading, an undervalued company you can't convince anyone else to pay more for (or less for, to profit via shorting) isn't a "value".
Because it's simply not about fundamentals.
I fully expect that when Wall Street can no longer convince anyone to pay less for Apple shares, they will begin building the "Apple is unstoppable" narrative and attempt to make money on increasing share price, driving it back up to a record peak. At which point they'll start the cycle over.
Over and over. Because it keeps working.
Amazon's cost advantage and low prices explains why most other online retailers have been unable to gain significant market share and why Amazon is posing an increasing threat to companies like Wal-mart, Target, and Costco.
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[1] I'd argue that Amazon is actually pursuing a dual advantage, both a cost and value advantage (at least for customers that favor convenience over impulse buying). The value advantage stems from the ability to shop at home, its product reviews, its excellent customer service, extensive selection, etc.
I had a quick look at Google Finance (Financials, Annual Data) and I see the following for 2012: Amazon's total operating expenses as a percentage of revenue was 98.2%. Costco's was 97.2%. Wal-mart's was 94.1%. Based on this data, you might argue that Amazon has a cost disadvantage relative to both Costco and Wal-mart. But before reaching any conclusions you would need to back out Amazon Web Services and the Kindle (from Amazon) [1].
As a quick and dirty analysis, we can back out the $2.909b Amazon invested in R&D in 2012. Note, neither Costco nor Wal-mart have a line item for R&D. In this case, Amazon's operating expenses as a percentage of revenue is 92%, or about 5% less than Costco's and 2% less than Wal-mart's. [2]
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[1] You might also want to back out Sam's Club from Wal-mart.
[2] Given Amazon has revenues that are just 11% of Wal-mart's, you could argue that Amazon's cost advantage will likely increase as it further scales revenue and operations.
You made very good points w.r.t. Sam's Club for Walmart or Kindle for Amazon. One needs to adjust the data in order to be precise. The effect though is probably second order and shouldn't change the picture that much. At least it seems consistent with my own anecdotal experience.
It is also that possible Amazon's expense is exaggerated by accelerated depreciation. In the expansion phase if your facility is not fully utilized you get dinged again on appreciation. WalMart owns a lot of real estate and has capitalized lease as well I think so some of the operational cost may show up as interest expenses. To get a true picture one needs to account for all those as well.
The beauty of Amazon's model is that it uses little to no capital (all operations can be funded by negative working capital and other liabilities incidental to operations), so it can expand unconstrained by capital needs, as long as it can find new customers.
How is Apple hurting exactly? What are the symptoms of their failure to go after the low end market? From here, it looks like their big ailment is not making money as much faster than everyone else as some people would like.
Luckily for Apple the U.S. market is also by far the most lucrative, at least for now.
Remove the subsidies and I think you'd see an even greater tilt to Android.
http://www.dailytech.com/Apple+Falls+to+6th+Place+in+Chinas+...
But really it's the Apple apologists that keep saying nothing is wrong that are doing the most harm. If you care about Apple then you should be doing what you can to help put a boot up their backside.
http://online.wsj.com/article/SB1000142412788732353980457826...
Your posts were erroneous, so people corrected you. That doesn't make them apologists.
http://techcrunch.com/2013/01/22/kantar-iphones-top-seller-i...
I wouldn't call the US their only healthy market.
In markets where Android is leading, it is consolidating its lead, accounting for over half of all smartphone sales in the 12 weeks ending December 23.
Doesn't sound like something Apple fans should be cheering about to me. Personally I'm not anti-Apple. I'd just like to see them get back to making interesting new stuff instead of polishing what they already have and suing everybody.
http://news.cnet.com/8301-1035_3-57497144-94/android-apple-t...
Take Europe. The ratio of Android:iPhone may be higher in Europe than in the US, but it's still a MASSIVE share. And people are still extremely defensive if they've got anything but an iPhone here in the UK.
The European models also have carrier subsidy on ALL monthly contract phones, not just iPhones. Generally only poor people have pay-as-you-go.
It's not as if there aren't regular articles on here about the ratios of iPhones to Androids in all markets.
It's slightly confusing that you could believe any of what you wrote.
BTW, you're also wrong about any company that's growing should post "record-breaking" earnings. Earning are profits. Growing companies often post losses. It's not turnover.
`The firm matched last year’s net profit figure at $13.1 billion.` [1]
[1]http://www.washingtonpost.com/business/technology/apple-face...
"Apple just announced its Q1 2013 earnings, and the company posted a record $13.1b profit on a record $54.5b in revenue. That's just over last year's record of $13.06b profit on $46.33b in revenue at this time last year, and well over the $8.2b profit on $36 billion in revenue in the last quarter."
http://www.theverge.com/2013/1/23/3908330/apple-q1-2013-earn...
$13.1 > $13.06 but just a bit.
`Apple reported record-breaking net profits for the three months to 31 December 2011 of $13.06bn (£8.36bn), up 118% from the same period in 2010.` - http://www.bbc.co.uk/news/business-16712089
If you pare back the reason why Apple is a profit leader in the markets it sells to, you might come up with design, quality and brand. In the end the competitors can eventually catch up on design and quality. But brand is something that's build over a long time, and takes a long time to change.
Wow.
Just to be clear, we are talking about Apple right?
"94.2% of iPhone users plan to buy an iPhone for their next phone, improving upon last year's rate of 93%."
"Android phones were measured at a re-buy rate of 60%, up from 47% last year."
(Source: http://tech.fortune.cnn.com/2012/07/17/piper-jaffray-80-mill...)
"Delving deeper into the retention and user metrics, iPhone and iPad users are 52% more loyal to their apps than Android users. A healthy 35% of Apple iOS users launched an app more than 10 times after downloading, compared to 23% of Android users."
(Source: http://www.localytics.com/blog/2012/app-user-loyalty-increas...)
"Google paid App devs approximately $320 million through end of January. At that time Apple reported it had paid out $4 billion."
(Source: https://twitter.com/asymco/status/199127829550612481)
I'm finding conflicting numbers on mobile browser share, but none of them are making the iPhone look particularly weak either.
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I see two scenarios that could theoretically actually hurt Apple (not just in a slowed growth kind of way, but by actually causing their revenue to fall): iPhone users ditch the platform for something else they like better, or another platform becomes more lucrative to develop for, causing developers to abandon the iOS App Store and leading users to abandon the iPhone over the lack of new and updated apps.
From the bits of data I can dig up, that doesn't look like a terribly immediate threat: iPhone users are still ridiculously loyal to the platform and still far more willing to spend money on apps. Some of this is old data and things change quickly, so life could be worse for Apple than I realize.
That said, the closest things I could find to reasons to worry: Android users do seem to be becoming increasingly happy with their phones, or at least the platform, and they're downloading apps at a rate approaching what Apple's App Store sees, even if it hasn't led to the same developer revenues iOS produces yet. Apple's dominance profit-wise is far from guaranteed, and Android is a legitimate threat that could eventually bring down the empire.
I'm having a hard time believing Apple's hurting at the moment though in any way besides a drop in share price. Revenue is healthy and growing. iPhone sales are healthy and growing. Profit is healthy if a bit stagnant. (Ironically enough, it's a decline in margins hurting Apple right now, not sales.) iPhone users seem to like their phones enough to buy upgrades, and to buy and use apps on them, and Apple is still winning new converts.
If this is what hurting is, Apple sure makes hurting look attractive.
Amazon then, can be considered to have a more stable position because newcomers cannot beat them on price, but merely match them.
2) Profit.
As far as business plans go, it's pretty obvious and pretty solid. It'll be implemented as a dual monopoly-monopsomy setup: consumers go to it to buy most goods, get screwed. Suppliers sell to it, get screwed.
There's a reason Wall Street likes AMZN.
Mainstream economics does argue that monopolies enable excess profit, and I've never seen reason to question that part of it. But I'm genuinely curious and open to other models, even Austrian ones.
Quoting minimally:
http://mises.org/humanaction/chap16sec6.asp
> The special conditions and circumstances required for the emergence of monopoly prices and their catallactic features are:
> 1. There must prevail a monopoly of supply.
> 2. Either the monopolist is not in a position to discriminate among the buyers or he voluntarily abstains from such discrimination.[12]
> 3. The reaction of the buying public to the rise in prices beyond the potential competitive price, the fall in demand, is not such as to render the proceeds resulting from total sales at any price exceeding the competitive price smaller than total proceeds resulting from total sales at the competitive price.
> 4. It is a fundamental mistake to assume that there is a third category of prices which are neither monopoly prices nor competitive prices.
> 5. [some stuff about cartels]
> 6. The concept of competition does not include the requirement that there should be a multitude of competing units. [i think you will have to read further to understand this one]
> 7. If it is possible for the seller to increase his net proceeds by restricting sales and increasing the price of the units sold, there are usually several monopoly prices that satisfy this condition.
> 8. The monopolist does not know beforehand in what way the consumers will react to a rise in prices. He must resort to trial and error in his endeavors to find out whether the monopolized good can be sold to his advantage at any price exceeding the competitive price and, if this is so, which of various possible monopoly prices is the optimum monopoly price or one of the optimum monopoly prices. This is in practice much more difficult than the economist assumes when, in drawing demand curves, he ascribes perfect foresight to the monopolist. We must therefore list as a special condition required for the appearance of monopoly prices the monopolist's ability to discover such prices.
> 9. A special case is provided by the incomplete monopoly.
> 10. Duopoly and oligopoly are not special varieties of monopoly prices, but merely a variety of the methods applied for the establishment of a monopoly price.
> 11. The monopolized good by whose partial withholding from the market the monopoly prices are made to prevail can be either a good of the lowest order or a good of a higher order, a factor of production.
> 12. [discussion relating to governments intentionally encouraging monopoly]
And it goes on.
The biggest takeaway is that monopolies sometimes but not always enable higher profits by restricting supply. It's important not to assume all monopoly will enable significantly more profits than competitive market prices. Some analysis is required in any given case.
And the issue of whether and why monopoly prices are bad, and what if anything should be done about them, is considerably more complicated than "the government should prevent all monopolies" (typically with no mention of whether they are charging monopoly prices, or even could profitably do so tomorrow).
Anyone thinking that they are going to wind up as the Standard Oil of retail is going to be hugely disappointed. First they have plenty of quality competition that isn't going to just keel over and die. Second their tax advantages are gone long term. Third, as the internet erases frictions, Amazon is just another middleman begging to be cut out of the picture if he takes too big of a cut. Fourth Amazon has to deal with real antitrust in Europe and protectionism in Asia. Fifth even US antitrust wakes up and does something from time to time.
Can you really cut storefronts out of the picture? Even if you replace that with google+paypal, does paypal become the middleman?
I get that a lot of consumers will still shop around for prices, but I certainly wouldn't ignore the millions(?) of us who will gladly ignore small price differences if it means I get a predictable, easy shopping experience.
Once Amazon reaches their peak, it's hard to say where it will go. But considering that they're aleady nailing the hosting industry, producing a very popular ebook reader and tablet, taking a slice of NetFlix's pie, and eating up all of retail, I'm sure they'll throw inordinate amounts of cash at whatever their next best ideas are.
Reminder: monopolies are totally legal.
Too much money for not enough benefit was the reason I stopped using it.
This assumes that Apple is actually competing with amazon. Does BMW compete with say Ford.... maybe but really they are after different markets. Apple has said numerous times they are not interested in going after the low end market.
Another way to look at it - if competition was the motivation for the iPad mini, it would have cost $50 less.
I'm an "Apple customer" and I'm price sensitive, I've also considered many Android based tablets as well as WebOS based tablets. Now we all know that anectadata is of limited value, but compare to no data...
I'm also certain more people cross shop Fords and Bimmers than one might initially assume.
Some time I can't fight the feeling that german premium car makers are the Apples of the automotive world...
How did they take over mp3 players? They made a high cost product everyone wet their lips with, and year later made cheaper versions everyone who was enviously waiting for could afford. They make an excellent play on consumer psychology.
Not having to sweat a constant onslaught of new competitors is really underrated. You can allocate your best employees to explore new lines of business, you can count on a consistent flow of cash from your more mature product or service lines...
Isn't this contradictory? Having a low margin business by definition should mean that you have a smaller cash flow available to fund your R&D?
Also, somewhat unrelated, but I think one needs to draw a distinction between a low margin consumer staple style business (like cosmetics, food, or Amazon) and a low margin discretionary style business (luxury goods or consumer tech).
Not always. It depends on how consumers react to the price of your products. A drop in profit per unit (by lowering one's price) might yield a large enough increase in units sold such that the total profit is higher. This is especially important for retailers who can't price discriminate easily.
High margins and a low or even negative free cash-flow are possible, too. And my opinion is that more companies collapse due to cash flow issues than too high costs (given they don't sell below production costs).
But, if they are constrained by supply chain and manufacturing capacity, then maintaining the highest prices the market will bear makes the most sense.
I for myself thought about this a couple of days back. It was more like brain training in Supply Chain Management (the execution of the mentioned low and high margin strategies if you want). Now, Low vs. High margins looks more than just obvious.
What I came up with, and please feel free to give feed-back, as one big difference between Amazon and Apple is the product range. Amazon has orders of magnitude more products and commodities than Apple. What makes it eassier (not easy, mind you, just easier) for Apple to manage their supply chain. You can see this in their release schedule, everthing is planned according to that. Hard to do with thousands of product lines. In this area, Apple is really doing great in the planning part of supply chain management, from my outside perspective they are a benchmark here for everybody else. Plus, one could argue their supply chain strategy matches perfectl their business strategy.
Amazon on the other excels at the logistics part of supply chain management. As mentioned in the article, they have to in order to get their low margins and high customer satisfaction. Currently, I'd say Amazon is doing to logistics what Toyota did up to the lets say 80s and Wal-Mart did up to the early 2000s (no coincidence that Amazon hired Wal-Mart people back then).
What both companies have in comon is really good view of Point-of-Sales data. Big difference here to most other companies around.
How does all that match with high and low margins? In the place of Apple excellence in supply chain planning is used in combination with a narrow product range to allow for high margins and high inventory turn rates (again, a narrow product range is helping a lot here). Supplier management is critical point here, too.
In the place of Amazon logistic excellence is used to run an very efficient ditribution network. This efficiency allows them things like next-day delivery and their low margins. Think Toyota Production System and Lean and all the businesses that tried to copy that since the late ninties.
So, as long as both companies can keep their respective levels of operational performance up I don't think they are in trouble.
Back on the OP, the low margin-attack was what the whole Android industry did on Apple, Samsung in particular. But Samsung is different story all together.
schraeds 34 minutes ago | link [dead]
Apple made as much profit this quarter ($5B), as Amazon has earned, ever.What?
If you can get people to pay you quickly (in advance is best, on delivery is ok, 30 days after delivery is standard) and you can delay paying your suppliers (90 days after delivery is best, 60 days is ok, 30 days is standard) you can improve cash flow and there are a bunch of benefits to it.
I don't think it's legal in the UK anymore. It's very easy for a big company to squeeze little companies into accepting really lousy terms.
http://static.squarespace.com/universal/scripts-v6/012420132... is the thing that references it. Lines like
a.all(".sqs-block.map-block[data-block-json]").each(function(e) {
d.Squarespace.Rendering.renderMap(e.one(".sqs-block-content"), d.JSON.parse(e.getAttribute("data-block-json")))
});
That's where the investors disagree with you. Amazon is trying to do to big box stores what big box stores did to mom and pop stores. I buy everything from $2 batteries to $5000 electronics on Amazon. Only reason I go to local stores is groceries or emergency goods (meds, last-minute-gifts). Nobody knows what will happen to Office Depot or Kohls in 20 years but unless Amazon royally screws something up, I am certain they will remain significant for decades to come.
I love Amazon by the way, and do a lot of my shopping there. But, IMO, its hard for investors at these levels to see a decent return.
After Walmart destroyed the mom and pop store they didn't incrase prices, and Amazon probably won't either. Particularly since Amazon are an online retailer, and it is very easy for customers to shop around.
Not sure if they can ever stop, maybe slow down but they will still need to buy companies. And, Amazon needs to make $5+ Billion in profit with this valuation, something missing
After Walmart destroyed the mom and pop store they didn't incrase prices
Well they "forced" companies to lower the prices Walmart paid http://www.fastcompany.com/47593/wal-mart-you-dont-know so the net is more or less the same.