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All else being equal, investors currently believe that $1 of sales generated by Amazon is
roughly worth 7.5X more than $1 in sales generated by the list of "old" retailers above.


I just turned 120 and for 119 of those years I've been reading people who are understandably skeptical of Amazon's valuation state their cases poorly. For one thing, it's not optimal to compare Amazon's GAAP sales to other retailers. Your chart has Amazon's at $177 billion in sales, $160 billion excluding AWS. But Amazon today sells more stuff from other people than it does from itself, and that stuff is only accounted for on a net basis. Here is JP Morgan's estimate for Amazon's 2018 GMV, which grosses up the GAAP third party take-rate to total retail sales on Amazon (excluding AWS): $401 billion.

Second, the thread eventually recognized that AWS is a separate business with a much different value/revenue kind of profile than, say, Kroger. I have a better chance at medaling in curling than valuing AWS. I don't really understand how strong the cloud eco-system lock-in and scale advantages will prove to be once this mass migration nears maturity or when it will near maturity or what the future disruption threats will look like. This thread used $200 billion and analysts are $150-$350 billion so we'll go with $200b.

Third, someone correctly pointed out that if you're going to make a sales-to-valuation comparison the right denominator should be EV not market cap. Here's the chart with those adjustments (I ignored things like grossing up WMT's 3P sales because it won't matter at all).

2018
Company EV(B) Sales($B)
------------------------------------------------------
Amazon (ex AWS) AMZN 574 401
Wal-Mart WMT 307 510
Costco COST 83 139
CVS Health Corp CVS 91 189
Walgreens Boots WBA 80 130
TJ Maxx TJX 51 37
Target TGT 47 72
Dollar General DG 29 25
Dollar Tree DLTR 27 23
Best Buy BBY 19 42
Kroger KR 36 123
QVC Group* QVCA 20 14
AutoZone AZO 22 11
Kohl's KSS 14 19
Burlington BURL 10 6
Advance Auto Parts AAP 9 9
Macy's M 13 25
Wayfair W 7 6
Ollie's OLLI 4 1
Casey's General CASY 5 8
Dick's Sporting DKS 4 9
Etsy ETSY 3 1
PriceSmart PSMT 2 3
JC Penney JCP 5 12
Supervalu SVU 3 17
Sears Holding SHLD 4 12
EV/S
-----------------------------------------------------
Total Ex Amazon $0.9b $1.4b 0.64
Amazon 1.43
Amazon/Others: 2.23


So instead of every dollar of retail sales generated in other places being valued at $7.75 on Amazon, the market can be seen as implying only $2.2 dollars of value for every dollar in retail throughput.

This is suddenly much smaller disparity. And there's more. Since Amazon is growing retail GMV much faster than this group as a whole, maybe 25% in 2018, more of its valuation is actually tied to future sales as opposed to current sales relative to the above comps. This would further narrow the apparent disparity in how investors are valuing a dollar of Amazon's current retail sales. And there's more still.

Amazon has a relatively nascent advertising business. Here is the WPP CEO recently:

Fifty five percent of product searches in the U.S. emanate from Amazon. So that’s a big question for Google.

Analysts think that Amazon maybe only did around $2-$3 billion of advertising revenue in 2017 (nobody knows), but it's a very nascent, explosively growing stream and some analysts are crazy wide-eyed about the potential, estimating $20 or $30 billion in only 4-6 years. Advertising revenue is of course much higher margin than retail revenue; Google and Facebook generate over 50% EBITDA margins in their ad businesses. An advertising optimist could shave another chunk off the relative EV/GMV.

Of course, it is difficult to start chopping up Amazon into pieces (aside from AWS), because some aspects of advertising can be seen as part and parcel to GMV (kind of like conventional retail vendor allowances) while others can be incremental. And since flows are fungible to Amazon, they can do all sorts of things to favor one kind of monetization over the other, just as Costco can with membership prices. But that just embodies the natural complexity of estimating how profitable it will turn out to be at maturity as the presumably dominant intermediator with perhaps singular scale advantages and a customer base that has some subscriber and lock-in attributes.

Some people think this higher-retail margin day will never come. The internet will be such a fiercely competitive business because of price transparency and empowered customers that the tiny to negative margins we still see twenty years hence is a forever thing. Maybe, but I think those people will probably be wrong. One thing is clear. As big as Amazon is and as long as it's been, we haven't gotten to see them at or even near maturity yet, so the current P&L is not very persuasive counter-evidence to the theory that they will have much strong operating margins when the great plateau in the sky finally comes calling. In fact, they are growing faster or almost as fast as a lot of adolescents who are widely accept to be in investment mode like Wayfair or Stich Fix. So as anathema as it is to imagine a trillion dollar business in investment mode, it's certainly not impossible. And it seems pretty clear that Amazon is still investing like every week is infrastructure week.

If Amazon bought Google, Facebook and Twitter tomorrow, its employee base would only grow 16%. Only some of that is because of its much higher inherent labor requirements. It is supposedly hiring more Alexa developers this year than Google is hiring in total. Alexa is surely a giant money sink for Amazon at the moment; they are trying to trojan horse their way right through your front door and into your brain and only a very small part of that is likely showing up as GMV slash retail gross profit today. They are also paying a ton of money for original and acquired video content rights to increase customer stickiness with payoffs that are necessarily extremely long tailed. They did MSD international operating margins a few years ago but are now burning money in new markets, mainly India, that is entirely about the future. Amazon India is like a better Flipkart and Flipkart is burning a gazillion dollars while Walmart happily rings its doorbell. Amazon has spent several years building and depreciating fulfillment closer and closer to the last mile, probably generating the kind of temporary logistical inefficiencies they managed to greatly reduce the last time they slowed their distribution roll years ago. So much stuff Amazon does today looks and smells a lot more like investment than the kind of covert maintenance capex you see when Oracle or IBM buys some cloud startup, it seems to lend credibility to the implied profitability level implied by the stock price.

I can see not having the confidence to pay $770 billion for Amazon because I don't. But I haven't seen an Amazon price that looked obviously crazy since as this thread implies since 1999. And it turns out I was probably wrong even then.
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