“Percentage margins are not one of the things we are seeking to optimize. It’s the absolute dollar free cash flow per share that you want to maximize, and if you can do that by lowering margins, we would do that. So if you could take the free cash flow, that’s something that investors can spend. Investors can’t spend percentage margins.” “What matters always is dollar margins: the actual dollar amount. Companies are valued not on their percentage margins, but on how many dollars they actually make, and a multiple of that.” “When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we’ll take the cash flows.” Jeff Bezos is very focused on this “absolute dollar free cash flow metric.”
People really need to get off of the "income analysis" trope with Amazon. It's not how they operate their business, so why do people (analysts and media mainly) analyze it any other way?
There's a tradeoff here. Bezos is of course a world class executive and founder, but he's underselling the advantage of big margins which is risk.
In a downturn, a slight decrease in margins across the board will push a company on the razor's edge from profitability to unprofitability. Margin means margin for error - when the company isn't doing well and investors are scattering to safety and liquidity is nowhere to be found a higher margin gives your company a buffer when you have to cut.
Of course when revenues are growing like crazy and the economy is gangbusters it sounds great to cut margins for absolute growth but that's a booming economy. Things are very different in a downturn.
Company executives are often smart, and often know their business better than anyone else, but they're also biased. What comes out of a CEO's mouth is very likely to have more to do with what he or she wants _you_ to think than with what _they_ actually think. So taking CEO's grand theories with a grain of salt is in general a good idea for investors.
As to why margins matter... Bezos' quote talks about how valuations are multiples of cash flows. This is true, but multiples aren't constants. Basic investment theory suggests that the multiple should be an increasing function of the company's growth rate, its ratio of sales to assets, and its margins. So if you want to maximize your company's value you ought to be concerned with all of those things. Which isn't to say that trading lower margins for higher growth is a bad decision in Amazon's case, but it's not like it's an irrelevant number.
However, in its disclosures to bond investors, the company added back items like stock-based compensation, sales and marketing expenses, even general and administrative expenses to arrive at what it called a “community-adjusted EBITDA” of positive $233 million.
Great read. Points #5 (on being able to use a longer time horizon when investing in ideas to let them grow) and #6 (on the growing importance of consumers) stood out to me as well.
> People really need to get off of the "income analysis" trope with Amazon.
What does this have to do with the article? Percentage margins aren't mentioned anywhere. It mostly talks about absolute dollar operating income which, unlike GAAP income, isn't too different from free cash flow. For example: "Operating income for AWS was $7.29 billion in 2018, up from $4.31 billion in 2017. [...] And AWS is the lion's share of Amazon's operating income: Nearly 58% in the fourth quarter of 2018, and nearly 59% for the full year." So AWS is certainly a major driver for Amazon's free cash flow.
Because GAAP is a useful tool for analyzing a business, independent of what the CEO might say. The CEO is not exactly an objective observer to his own company.
Businesses are judged by the income they produce because the reason businesses exist is to generate income. If people want to run a charity they would presumably register as a charity. There are interesting edge cases, but the No 1 company on the NASDAQ by market cap is not one of them.
"It's not how they run their business" is an interesting observation, but businesses ultimately don't get to choose the yardstick they are measured by. In the long term, that is income.
I do wonder what is going to happen when/if there is more margin compression in the cloud space. Specifically when it comes to Amazon, because Amazon really has razor thin margins in its retail sector. Other cloud providers have high profit margins outside of the cloud (Google, Microsoft, Apple) so they could still be ok. They all have so much pricing power too, that I wonder if there is some mutually assured destruction of margin that prevents them all from competing heavily on price. Or if the space is growing so fast that they simply don't need to compete on price as much.
Amazon has people locked into Lambda, Google and Apple have people locked into device integration, and Microsoft has people locked into Office and in a short while Github CI integration.
All three are trying to differentiate more and more (with varying degrees of success) while they increase the price of the commodity services so it doesn't compete with the differentiated ones. They will not compete on price with each other.
I just don't know what will happen if somebody plays an Amazon at the commodity segment, and go selling services with thin margins.
They double and triple dip customers pretty hard today, I'd imagine margin lost on basic services like EC2 would shift to AWS specific services they can layer more costs on top of (i.e. RDS)
Sort of. It depends if you want to use Kubernetes to operate your own S3, your own RDS, your own SQS, your own Kinesis, your own Cloudfront, your own DynamoDB, etc.
If you have the dev resources to do that, great. But lots of other players will prefer to use off-the-shelf stuff from cloud providers.
If I’m using a cloud provider product like text-to-speech then which part of Kubernetes abstracts those APIs so I can move from Polly to Bing with no work? I didn’t think Kubernetes covered things like that?
Kubernetes doesn’t help with storage integration with S3, ETL processes involving Redshift, using queues and notifications setting up security, etc.
Kubernetes is no more the be all end all of maintaining cloud agnosticism than using the repository pattern means that you can tell your CTO to get rid of your company’s multi million dollar Oracle installation.
For Amazon, the cloud is the little engine that could. Amazon Web Services comprised just 11% of the company's overall sales in 2018, but delivered more operating income than all other business units combined.
I think that's the point the article is trying to make (first sentence of the article)
AWS is a byproduct of Amazon's e-commerce business, that became a viable service of it's own. It was a brilliant move to monetize the excess compute power Amazon had to have on hand for it's e-commerce business. Without the e-commerce business, AWS wouldn't exist.
This is a myth, and it needs to die. AWS was not designed for amazon's infrastructure, nor was it spare capacity of said infrastructure at any point. It was built from the ground up to be an independent service selling to third parties, on independent servers in independent data centers.
It took many years for amazon.com retail stuff to migrate to it, and supposedly some parts still aren't migrated.
Part of that success was a mandate back in the earlier days of the company that all development and systems administration assets be designed with the presumption that they may be converted into a customer accessible frameworks one day.
I'm a recent convert to 'Boglehead' investing. Among the principles Bogleheads follow, we don't like to pick individual stocks-- index funds are far safer.
But I cheat a little. One of my small holdings is Amazon. They look set to dominate in multiple arenas. Fingers crossed at least one pans out!
AWS, Facebook and amazon are going to get absolutely crushed if there’s a recession that triggers a tech industry pullback. All the VC funding that goes to these hot tech companies goes to Facebook and google for ads and AWS for server space.
In addition, kubernetes is going to start squeezing aws’s profit margins, particularly ec2 as people move to commodity k8s hosting.
Is the implication that people/businesses will stop developing and using web services? I just don't see how we can go back now. Further, web tech is cheaper to scale than anything else, so when the wallet tightens it seems that's where budgets would focus.
Also, AWS moves faster than web tech on the whole, so even if the general shift to k8s continues, AWS will be there to make it easier than rolling your own, and at a price point that's "worth it."
It's too easy to steal market share with software. There are no moats. Kubernetes is the first of many equalisers, crossplane.io is next. There's no monopoly effect.
[+] [-] mbesto|7 years ago|reply
https://25iq.com/2014/04/26/a-dozen-things-i-have-learned-fr...
People really need to get off of the "income analysis" trope with Amazon. It's not how they operate their business, so why do people (analysts and media mainly) analyze it any other way?
[+] [-] landryraccoon|7 years ago|reply
In a downturn, a slight decrease in margins across the board will push a company on the razor's edge from profitability to unprofitability. Margin means margin for error - when the company isn't doing well and investors are scattering to safety and liquidity is nowhere to be found a higher margin gives your company a buffer when you have to cut.
Of course when revenues are growing like crazy and the economy is gangbusters it sounds great to cut margins for absolute growth but that's a booming economy. Things are very different in a downturn.
[+] [-] dba7dba|7 years ago|reply
I wish Apple operated that way, as lowering Apple device price will very likely increase the absolute amount of dollars coming into their back acct.
I mean I get Amazon and Apple ear their income via different methods but still.
[+] [-] scott00|7 years ago|reply
As to why margins matter... Bezos' quote talks about how valuations are multiples of cash flows. This is true, but multiples aren't constants. Basic investment theory suggests that the multiple should be an increasing function of the company's growth rate, its ratio of sales to assets, and its margins. So if you want to maximize your company's value you ought to be concerned with all of those things. Which isn't to say that trading lower margins for higher growth is a bad decision in Amazon's case, but it's not like it's an irrelevant number.
[+] [-] scarface74|7 years ago|reply
https://www.gfmag.com/topics/blogs/wework-works-bond-market-...
However, in its disclosures to bond investors, the company added back items like stock-based compensation, sales and marketing expenses, even general and administrative expenses to arrive at what it called a “community-adjusted EBITDA” of positive $233 million.
[+] [-] got2surf|7 years ago|reply
[+] [-] nwellnhof|7 years ago|reply
What does this have to do with the article? Percentage margins aren't mentioned anywhere. It mostly talks about absolute dollar operating income which, unlike GAAP income, isn't too different from free cash flow. For example: "Operating income for AWS was $7.29 billion in 2018, up from $4.31 billion in 2017. [...] And AWS is the lion's share of Amazon's operating income: Nearly 58% in the fourth quarter of 2018, and nearly 59% for the full year." So AWS is certainly a major driver for Amazon's free cash flow.
[+] [-] sonnyblarney|7 years ago|reply
[+] [-] roenxi|7 years ago|reply
"It's not how they run their business" is an interesting observation, but businesses ultimately don't get to choose the yardstick they are measured by. In the long term, that is income.
[+] [-] partiallypro|7 years ago|reply
[+] [-] marcosdumay|7 years ago|reply
All three are trying to differentiate more and more (with varying degrees of success) while they increase the price of the commodity services so it doesn't compete with the differentiated ones. They will not compete on price with each other.
I just don't know what will happen if somebody plays an Amazon at the commodity segment, and go selling services with thin margins.
[+] [-] PopeDotNinja|7 years ago|reply
What do you consider thin margins? Their overall margins are better than Walmart's.
Amazon: 65_932_000 / 177_866_000 = 37% [1]
Walmart: 126_947_000 / 500_343_000 = 25% [2]
[1] https://finance.yahoo.com/quote/AMZN/financials?p=AMZN
[2] https://finance.yahoo.com/quote/WMT/financials?p=WMT
[+] [-] mhermher|7 years ago|reply
[+] [-] bigdubs|7 years ago|reply
[+] [-] tanilama|7 years ago|reply
Not any more, if their advertising business keeps skyrocketing, Amazon will be US's Alibaba.
[+] [-] partingshots|7 years ago|reply
And thank god Kubernetes exists. Not about to waste my time relearning the API of every new cloud offering a company wants me to try.
[+] [-] paulddraper|7 years ago|reply
If you have the dev resources to do that, great. But lots of other players will prefer to use off-the-shelf stuff from cloud providers.
[+] [-] chrisseaton|7 years ago|reply
[+] [-] scarface74|7 years ago|reply
Kubernetes is no more the be all end all of maintaining cloud agnosticism than using the repository pattern means that you can tell your CTO to get rid of your company’s multi million dollar Oracle installation.
[+] [-] altmind|7 years ago|reply
if you've told me aws takes more premium on their products than apple per $, i wouldn't believed.
[+] [-] babaganoosh89|7 years ago|reply
[+] [-] kgwgk|7 years ago|reply
[+] [-] pezdeath|7 years ago|reply
I think that's the point the article is trying to make (first sentence of the article)
[+] [-] SketchySeaBeast|7 years ago|reply
[+] [-] vira28|7 years ago|reply
[+] [-] scarface74|7 years ago|reply
[+] [-] unknown|7 years ago|reply
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[+] [-] roadkillon101|7 years ago|reply
[+] [-] throwaway2048|7 years ago|reply
It took many years for amazon.com retail stuff to migrate to it, and supposedly some parts still aren't migrated.
[+] [-] MrStonedOne|7 years ago|reply
[+] [-] Wordball|7 years ago|reply
[+] [-] RickJWagner|7 years ago|reply
But I cheat a little. One of my small holdings is Amazon. They look set to dominate in multiple arenas. Fingers crossed at least one pans out!
[+] [-] empath75|7 years ago|reply
In addition, kubernetes is going to start squeezing aws’s profit margins, particularly ec2 as people move to commodity k8s hosting.
[+] [-] benburleson|7 years ago|reply
Also, AWS moves faster than web tech on the whole, so even if the general shift to k8s continues, AWS will be there to make it easier than rolling your own, and at a price point that's "worth it."
[+] [-] lazyant|7 years ago|reply
[+] [-] cavisne|7 years ago|reply
[+] [-] ilikerashers|7 years ago|reply