Those Awful Amazon #s

Posted on October 25, 2011 by dmoynihan

I’m of the opinion, shared by some of my fellow independent publishers, that Amazon will only become a company you can deal with again after their stock price corrects. Talking a 60-70% drop from its peak, a la Netflix. Betting against Amazon’s stock has been a fool’s errand for well over a year now, with the shares soaring even as the company repeatedly and routinely missed earnings targets, but this time, as they say, might just be different. The problems at Amazon are now too big to ignore.

The way to understand Amazon’s business is to look at its cash. And its cash position has not been healthy for a very long time. Its supposed main ebook competitors (apple and google*), have enormous cash hoards, which those firms add to each and every quarter. Apple, for example, just increased its cash holdings to over $80 billion, Google’s at $40 bil., Amazon is now at $6 billion, down from $10 at the start of the year.

Gets even worse, Amazon’s Accounts Payable (the money they owe somebody but haven’t come through with yet), at $6.5 bil., is up $1.7 bil. from a year ago. Their net cash is less than their Accounts Payable for the first time in a very long time. Google’s Accounts Payable stands at around $500 bil., Apple–I don’t know what they owe, but I’m pretty sure they’re good for it.

Some of Amazon’s cash issues might be attributable to the Zappos acquisition. If so, that was a very stupid acquisition. But to list Amazon’s errors over the past couple years would fill a business text.

If this company doesn’t execute flawlessly with Kindle Fire and in general over the next three months, there will be layoffs at Amazon. I’d recommend they start with the folks who think driving customers to third-party sellers via censorship is a good idea. Cut those employees, Mmm’kay?

Disclaimer: we at Disruptive Publishing used to be highly dependent on Amazon for our revenues. Didn’t really have a choice, actually. Since the censorship began, and especially since this summer, when I pulled out all my titles from CreateSpace Enterprise (formerly Booksurge), that has ceased to be the case. At this point, Amazon, while still a significant source of funds for me, is just one revenue stream among many. And after all, pr0n drives distribution. Given Amazon’s 2% profit margins, compared to the 20+% margins enjoyed by Apple and Google, the Seattle-based retailer is just not as monolithic as you’d think, especially as Apple and Google continue to slowly, steadily, profitably, improve their ebook offerings.

*Yes, I’m leaving out B&N as an ebook competitor to Amazon. But Kindle Fire will kill the NookColor, if it hasn’t already. And, really, given that B&N first aggressively courted my titles, then decided to eliminate me, while still owing me money, my only interaction with them at this point is to teach my daughter to laugh like Louie dePalma, so that the pair of us can properly celebrate when our local B&Ns go the way of Borders in a year or two.

**Look, I’m, rooting for Kobo, OK. They seem very nice.

About dmoynihan

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  • http://mikecanex.wordpress.com Mike Cane

    >>>Their net cash is less than their Accounts Payable for the first time in a very long time.

    And yet as you point out there, it’s been the case before now — and they still survived.

    If they need to raise cash, there are plenty out there who’d throw it at them, given the way everything else is effed in the economy.

    OTOH, that’s a very interesting point about Amazon’s stock price. What’s their P/E ratio? Oh, I just looked: P/E 100.15 Holy shit! By contrast: Apple is P/E 14.37, Google is P/E 19.88, and B&N is …. hm, there’s not one listed at Google Finance.

  • http://www.munseys.com dmoynihan

    I don’t think they’re gonna go broke. But, you can only do so much if you’re squandering all your resources. And you can’t be nearly as arrogant when your stock falls through the floor.

    /B&N’s got no PE listed, ‘cuz their earnings are negative.

  • http://mikecanex.wordpress.com Mike Cane

    DOH! You can tell I’m not expert on P/E, re B&N!

    Aside from Zappos, where is Amazon making a mistake?

  • http://www.munseys.com dmoynihan

    Well, that’s a long list. Put it to you this way: Amazon pulled itself out of its hole last time by ramping up MarketPlace (all the third-party sellers, for clothes and electronics and pet food and what not.) You talk to any analyst, and I was actually hanging with one when we went to China to pick up kids as a group, they’ll tell you the only money-making part of Amazon is Marketplace–Amazon takes the money, somebody else ships the goods, Amazon pays the seller minus a fee. That’s a cash cow, and ironically, it’s one that Amazon stole from Ebay, back when Ebay got too aggressive with its content partners in a way that’s much like what Amazon has been up to.

    Everything else besides Marketplace that Amazon does actually loses money. So any time Amazon gets more aggressive, brings stuff in house, becomes a publisher, whatever, you know they’re gonna show a loss.

    2nd Example: With Kindle 2, Amazon got ludicrously aggressive trying to capture ebook market share. Buying Stanza, adding the free books, twisting everyone’s arm behind the scenes to make ebooks available at huge discounts (and exclusively). Kindle was going to be the only source and destination for ebooks. Some of Amazon’s conduct during this period may well get them into court if blood’s seen in the water. Upshot of this behavior, Amazon spent a fortune to go from 80% or so of the ebook market with Kindle 2 to under 50% in just a couple years. KindleFire will let them take some of that back from B&N, but that’s a horrific performance, particularly as both Apple and Google have gotten *better* at selling ebooks lately.

  • Patti

    I agree with your post, except the part where Apple and Google are in better positions because they have more cash on their books. That’s not necessarily a good indicator. Would you rather invest in a company that takes most of their cash on hand and invests it back into their company (either through substantial R&D or stock buybacks) or would you rather invest in a company that is holding tons of cash and not really doing anything with it?

    I would be more interested to see why Apple and Google are hoarding all of that instead of using it to create more value for their investors. Is it a safety net? If so, what do they think is going to happen that they would need that much of a net?

    Now, we know that Apple and Google invest substantially in R&D which actually makes me extra curious about why they have so much cash (or cash equivalents) on their books.

  • DMcCunney

    I think the Kindle Fire commentary misses the point. It has nothing to do with competing against the B&N Nook Color.

    Amazon is a retailer, and is all about selling you stuff.

    Amazon created and sold the Kindle to prime the ebook pump. Ebooks were a natural for them: they are the world’s largest catalog retailer, and already had the infrastructure to display the catalog and take the order. Adding immediate fulfillment in the form of an immediate digital download was relatively trivial. eBooks don’t have warehousing or distribution costs. For Amazon, what’s not to like?

    Once the Kindle had primed the pump, we started seeing the Kindle app for various platforms. (Which was easy, since Amazon’s offerings are based on the Mobipocket acquisition, and Mobi already had reader apps for most things.)

    That was *no* surprise. For Amazon, it was always about the books. They want to sell you ebooks, and they’re not fussy about what you read them on, as long as you buy from Amazon. Their whole ecology is built around locking you into them as the vendor.

    There were rumors some time back that the Amazon unit that designed the Kindle was working on other devices, so the Kindle Fire comes as no surprise either. But while you *can* read eBooks on the Fire, that’s not the point of the device, and if it kills off the Nook Color, that will be a happy fringe benefit. The Kindle Fire is about *other* media.

    With increasingly pervasive broadband, It is possible for consumers to store and access all of their content on the cloud. Amazon is a major player in cloud services, with the servers and network infrastructure to *be* the cloud where stuff is kept. Amazon wants to be the consumers cloud, and the *only* place where we buy, store, and access our various media. “You can have anything you want, as long as you buy it from and access it on Amazon”.

    The Kindle Fire is intended to do the same thing as the original Kindle – establish Amazon as the vendor of choice for digital content that isn’t eBooks. Expect Amazon to push on demand video and music as time progresses.

    It’s risky, but I’m not willing to bet against them just yet.

    (Expect pressure on Apple about that cash hoard, BTW. Apple was always extremely conservative, did not pay dividends, and accumulated cash. But they will be expected to do something useful with the cash they’ve accumulated. It’s hard to think of a major acquisition Apple could make that would be of any real benefit to them, so I expect to see calls to start paying dividends.)
    ______
    Dennis

  • DMcCunney

    @Patti: I expect that $80 billion cash hoard to be a question new Apple CEO Tim Cook will have to deal with. I think it’s best viewed as a historical artifact.

    Apple has always been fiscally conservative, preferring to retain earnings, and has not paid dividends. But $80 billion in cash/cash equivalents is money that is *not* invested in the corporation and preserving/increasing shareholder value, so there will be calls to Do Something with it. The question is what Apple *can* do. What sort of major acquisition could Apple make that would complement their existing business? It’s hard to think of one offhand. (Gee, maybe they could acquire HP…)

    I expect to hear of a lot of pressure on Apple to start paying dividends as a way of using that cash to provide shareholder value.
    ______
    Dennis

  • Max

    I wouldn’t root too strongly for Kobo–they have the worst customer service of any company I’ve had to deal with in recent years. As a consumer, I’d rather give my money to Amazon, but they won’t sell epubs.

  • DMcCunney

    @Max: Note that Kobo was just acquired by Japan’s Rakutan for $315 million:
    http://www.vancouversun.com/business/technology/Toronto Kobo acquired Japanese firm Rakuten million/5681405/story.html