Can Amazon Win on Thin Margins Without More Scale?

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June 12 (Bloomberg) –- ISI Group Senior Managing Director Gerg Melich discusses Amazon’s new groove. He speaks on Bloomberg Television’s “Market Makers.” (Source: Bloomberg)

Pullback this year, greg.

The company seems to be trying to do something about it, including strong-arming the likes of a chef, time warmer -- time warner over home video, and now music streaming.

Is that we want to see a complex we want to see them -- is that what you want to see?

What we want to see is improving the relationships.

The whole point of amazon is to get there revenues up.

If they can get up to 2 billion next year, then they -- than their revenues will kick in.

Can they do it if all of those amazon prime users want to listen to lady gaga?

They claim to be the one-stop shop.

The only place you need to go.

It isn't if everything you want is not there.

You can still get lady gaga, but not for free.

Amazon has 21 million items on prime.

They are up to about 30 million paid members in the u.s. and a 5 million people that have had that for five years, they spent $2000 a year with prime.

If they can get millions of households to spend $2000 a year, they can get there.

It is about enhancing that relationship.

How do you put a valuation on this company?

They are trading at 36 times realized earnings.

That is huge.

They're going into this, into music to make no money.

It is unprofitable.

They don't seem to be in a rush to make a profit themselves.

At what point do you say, a lot of this is priced in?

The fair market cap is $5 billion, so something is priced in.

But with the extra it will be about eight the lien dollars.

Even with either., they have shown their -- with ebitda, they have shown their cap x is great.

What the market is telling you is, if you look beyond just the reported eps, there is a lot more cash flow generation.

And membership stream with revenue can be quite sticky if you get prime membership to continue to grow.

It to be a weekly shop for most people.

Eight billion dollars of it.

-- of ebitda next year.

Compared to what?

6 million and change.

Something like that.

But what does it matter to their customers?

Is there operating leverage their?

Their gross margins have grown in the past couple of years.

Part of that is the move from three to first party.

But the value investor would say, no, that is wrong.

The key is not growing gross margins, but net margins, or operating margins.

The margins are very skinny.

I would not expect a value manager to find amazon on a lot of their screens based on current results.

It is not exactlyebitda, but an operating margin is not far off.

This is a pretty chart.

What they have now are 39 million prime members, and that is what they have been working to get versus two years ago.

At what point did you look at the immense effort that some of my jeff bezos has put in?

Is there a point at which you say this company has become over 10 from trying to do too much?

Absolutely, not everything they are doing -- overextended from trying to do too much?

Absolutely, everything they are doing, not every thing is going to work.

Posco has margins that are less than three percent.

Yet the stock and the company -- costco has margins that are less than three percent.

Yet the stock in the company is a great performer.

If they get like cosco in the next few years, then they will get back on stream where it was.

Rose has been out of favor this year.

Why is jeff dave those -- jeff bezos so obsessed with the film and cap of the reason amazon is not making more money as he is spending billions of dollars to build up fulfillment centers across the u.s. and around the world.

For more people to shop amazon, do they really need to get the stuff out faster?

Flex i do believe they have to -- i do believe they have to get the film and right.

Is that so much more important than the business?

They're getting about two percent of market share with retail sales.

If they can replicate, let's say, a wal-mart back end in terms of distributional centers without the 200 billion dollars in store assets and all that goes along with that, that is a net win in terms of assets.

To drill it down, get those prime members and keep them happy and service levels high.

That is how you get the repeat customer for the you raise the right point about the scale of walmart.

Walmart is trying to use its stores and superstores to almost reverse engineer the amazon model.

What if they are successful?

What if they can use those stores as for film and centers and get stuff to people faster than amazon is able to do it until bezos builds that up?

The neat thing about retail is that it is so big.

Or trillion dollars.

-- $4 trillion.

You can have the company like walmart that has the biggest ever and has less than 10% share.

If they get the model right and the best assortment and the best service to the customer, then they can't both win.

It is not like walmart has to die as -- than they can both win.

It is not like walmart has to die as a result.

[indiscernible] we look at amazon as a retailer.

Any amazon -- any retailer, even if amazon goes to china, there are a lot of local tastes and preferences that you need to understand about your customer.

That will be a big hurdle for them to do.

You never say it is impossible, but china is a very different market than the u.s. and it works in both ways.

Thank you very much.

Great to have you.

This text has been automatically generated. It may not be 100% accurate.

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