Amazon (AMZN) Part I

I've been looking around, mostly on Seeking Alpha, at some of the analysis of Amazon, and, of course, there are some people that say it's a buy, and others that say it's a sucker bet.  So, while I don't generally get terribly interested in unprofitable businesses, I decided that there was enough interest in it to start a series of posts analyzing and valuing Amazon.

This first post is really just to show anybody reading this how little I actually know about Amazon.  Most of what I think I know is rumor and speculation.  What I do actually know is that last year Amazon sold a whopping $60B or so of stuff, but managed to lose money.  Call me stupid, but that doesn't sound great to me.

The bull case seems to be centered around the idea that Amazon is doing a lot of capital spending, and that it's the huge depreciation expenses that are eating up the profits.  This is expected to change.  I can understand that, but what I don't get is that most of their capex (at least as far as I'm aware at this time) is on building new fulfillment centers; you know, buildings that are depreciated over about 30 years.  I'm not sure how that's going to work out to lower depreciation expenses any time soon, so I'll have to check that whole depreciation thing out.

One of the bear cases talked about competition with bricks and mortar retailers.  I think Best Buy was one that was offering a price matching deal.  In order to be competitive then, Amazon was having to offer free shipping on increasing numbers of orders, and the total bill for that was in the billions of dollars.  Again, I don't know the numbers, but I'll check on it.

Speaking of competition, while the bears are acknowledging competition for Amazon, at least some bulls seem to think that Amazon has no competition.  Of course, the do have competition.  And they actually have a competitive disadvantage to bricks and mortar stores in some ways.  I watch people in stores all the time, and it's clear, people like to be able to touch stuff before they buy it.  Of course, you could always go to the store to touch the stuff, then go home and order it on Amazon, but then, that brings up another weakness.  I know that once I've touched something and have decided I want it, I don't want to go home, find it on Amazon, order it, and wait a few days to get it.  And I don't want to pay extra for fast delivery.  So, I, at least, am more likely to buy whatever it is from the store.

Building all these new fulfillment centers also brings to mind one of the advantages that Amazon has, or did have until they started building a lot, which is not having buildings all over the place.  But, there is good reason for it: they can speed up deliveries and, perhaps reduce shipping costs somewhat.  Still, that used to be the big thing about Amazon; it didn't have the expense of buildings all across the country.

As you can see, I don't know much at all about Amazon, but that will change over the next little bit, and I'll keep posting things as I dig through the news and annual reports, eventually coming up with what I hope will be a compelling story about the company; whether it is a bull or bear story, we'll just have to wait and see.