I. A “Great Quarter” — Cash Flows > Earnings
The most recent earnings numbers for the company that currently puts the “A” in “FANG” were received with fanfare by Mr. Market, and predictably, analyst estimates have been revised upwards. For some top-down views to help visualize the drama of the recent earnings report, I’ll share some nice charts from a money manager from Charlotte Lane Capital. He’s been on my “go to” list for Amazon analysis and then we’ll make our way towards Amazon’s play in voice.
Luscious. 2.6x TTM EV / GMV. We call this “the hockey stick.” pic.twitter.com/B39p6e0oJl
— ValueTrap (@Valuetrap13) April 27, 2018
Yo…AMZN cash flow numbers. There’s this thing called “accrual accounting,” which allows you to spread the costs around from one period to the useful lives of assets. Here’s what things look like under that lens. pic.twitter.com/MPCntWYrKA
— ValueTrap (@Valuetrap13) April 27, 2018
The spreadsheet chart created by Charlotte Lane Management quantifies this cash flow lens.
I understand what many will say, because most will value business on the basis of reported earnings. Yes, the multiples on Amazon’s earnings have been outrageous. But this is not what Mr. Market is thinking about (yet). Nothing is forever. And I’m guessing that’s why every year, for about 21 years, it’s still early days as far as Jeff Bezos is concerned.
Ben Evans, many people’s “go to” on many subjects, has covered AMZN’s approach to earnings, also observes Amazon focuses on cash flows instead:
“…profits as reported in the net income line are a pretty bad way to try to understand a business like this — actual cash flow is better. As the saying goes, profit is opinion but cash is a fact, and Amazon itself talks about cash flow, not net income (Enron, for obvious and nefarious reasons, was the other way around).”
“Amazon focuses very much on free cash flow (FCF), but it’s very useful to look also at operating cash flow (OCF), which is simply what you get adding back capital expenditure (‘capex’). In effect, OCF is the bulk of running the business before the costs of the infrastructure, M&A and financing costs. This shows you the effect of selling at low prices. As we can see here, Amazon’s OCF margin has been very roughly stable for a decade, but the FCF has fallen, due to radically increased capex.”
This seems like the kind of argument which could be justified when you’re a startup or young business trying to focus on investments and focused on building. And I think that’s clearly an evergreen attitude — you’ll see it if you read the annual letters from Amazon.
II. DAY ONE and The FLYWHEEL
If you jump to the annual letters by Bezos, you’ll notice he ends each update with his first letter. A lot of you already know that phrase about how everyday is “Day 1”. You can be as dismissive about “Day 1” all you like but this line from his 1997 letter also reveals a unique blend of humility and hubris which has informed its focus on cash flow over GAAP earnings:
“We established long-term relationships with many important strategic partners, including America Online, Yahoo!, Excite, Netscape, GeoCities, AltaVista, @Home, and Prodigy.”
If you reckon the age of Amazon from these 21 annual letters, where on the day the annual report is released it is “Day 1” yet again, then a lot has been done by a “three week” old company. And what’s being reported on each year is NOT the same old thing done, over and over again, that might be the case with an established incumbent, on its cash flow treadmill, hairs greying.
Amazon’s business model, after over 20 years, is to never become a treadmill but remain a flywheel. And a new component of this flywheel is picking up speed, spinning faster with each and every “Day 1” devoted to cap-ex for it.
Here’s a visualization from Amazon, describing its “flywheel” business model.
We know that means more for customers but what’s it worth to investors?
Enter Aswath Damodoran. I use price and charts but in the past I used to build spreadsheets and his book is on my shelf. Prof. Damodoran has studied and written about Amazon for as long as the company has existed. I would give some attention to his insights, which dovetail with observations from Ben Evans and Charlotte Lane Capital.
“Amazon has the most fearsome business model, simply because its platform of disruption and patience can be extended to almost any other business, one reason why every company should view Amazon as a potential competitor. I know that the old value adage is that if you buy quality companies and hold them forever, they will pay for themselves, but I don’t believe that! There are good companies that can be bad investments and bad companies that can be terrific investments, as I noted in this post. Amazon has fallen into the first category for much of the last five years and continues to do so….”
His valuation of AMZN is that it’s worth roughly 1100+/share after factoring in the recent quarter. That’s a bit lower than the current market valuation but I am more focused about Amazon’s business model and where its platform of patience and disruption could be focused next.
Back to today and where my attention is regarding Amazon’s flywheel. There are new parts being incorporated into Amazon’s relentless, patient and disruptive machine. Voice.
III. The Flywheel’s Newest Cog & Isaac Asimov
Voice was the loudest thing heard at the most recent CES gathering. But first, let’s take a step back, about 30 years, to help us understand what could be unfolding only just now. Isaac Asimov in 1988 predicted that there would not only be personal computers with screens and keyboards, he preferred voice controls too. He begins with the reason for the rise of computing and automation:
” As computers take over more and more of the work that human beings shouldn’t be doing in the first place — because it doesn’t utilize their brains, it stultifies and bores them to death — there’s going to be nothing left for human beings to do but the more creative types of endeavor.”
Asimov surmised both competition and creative inspiration, and imagined that education could become a life-long pursuit and he described what it would be like:
“I suppose that one essential thing would be a screen on which you could display things, and another essential part would be a printing mechanism on which things could be printed for you. And you’ll have to have a keyboard on which you ask your questions’ although ideally I would like to see one that could be activated by voice. You could actually talk to it, and perhaps it could talk to you too, and say, “I have something here that may interest you. Would you like to have me print it out for you.?” And you’d say, “Well, what is it exactly?” And it would tell you, and you might say, “Oh all right, I’ll take a look at it.” -Isaac Asimov (1988)
Not too long ago was the third anniversary for one Asimovian technology at Amazon: Alexa.
Why am I writing about this? It began the moment I began to see Gary Vaynerchuk push it, use it, have his Alexa device look up his content, repurpose his streaming / video content into feedstock for podcasts, available on demand. That’s when a phrase he used, “multi-casting” prompted thoughts about multi-tasking. Time and attention habits drive voice tech.
I noticed how Slate talked about the growth built on its voice content — podcasts. Everyone I read or know seems to have created a podcast to share their thoughts and work. Recorded voice content marketing has been around since the first Edison devices and this habit has only grown larger.
In the past year I read about this idea of listening to podcasts at “2X” or more speed, and requests for listeners who would listen to podcasts and digest content as a job. Imagine that. I have suggested as a future job idea, a few months ago, about people being paid to consume media/content and the demand to rent someone’s attention to save time will rise.
It was just a few years ago that smartphones didn’t exist or that touchpad interfaces didn’t exist on personal devices. Now our interfaces could soon enough be less finger tapping on glass, metal and plastic and more hand gestures (“AR” is for a future topic) and our voices. First world problems include worries about our devices eavedropping and telling on, as well as laughing at us* but I’m getting the sense that’s less of a worry. (*There was recent news of Alexa units being heard laughing as of 3/7/2018.)
Why might we worry less about getting laughed at by our machines? A tech strategist friend of mine reminded me that we could be silent all day at the coffee-house/ WeWork/ open share space/ office/ dinner (coffee) table, texting and typing, and I think he’s right in a way. But it also made me think about when could people begin to use their indoor voices more and it might not be with each other directly.
Perhaps more of our active conversations, outside of making podcasts, will be happening instead with our connections to our slice of the Big Stack, via Alexa and other agents. Tomorrow’s oracles commune with invisible forces without benefit of chewing herbs while hunched over geothermal vents. Maybe it will be with devices or services from Amazon. Some of our greatest dialogues could be monologues integrated with the Stack itself, if you include Alexa’s “Memory”. “With this capability, Alexa can remember any information for you so that you never forget. Alexa can store arbitrary information you want and retrieve it later.”
“These are all great, but “Memory” may be the most subtle, yet profound. You’re effectively able to “teach” Alexa things, that she’ll retain and recall.”
— M.G. Siegler (@mgsiegler) April 26, 2018
During the third anniversary of a Asimovian platform on the rise, I discovered the following remarks from its chief evangelist, Dave Isbitski ( three years before he would be called an evangelist for Alexa).
1/7 Here is a little bit of #AmazonEcho history for you. Three years ago on March 3rd 2015, I did the first official Alexa/Echo talk. There wasn’t much there yet SDK wise but the potential a voice driven, conversational experience held was staggering.
— Dave Isbitski (@thedavedev) March 2, 2018
2/7 I knew we needed to get it out there for people to tinker with and fought to be able to present a talk. I was able to internally pitch @Official_GDC as a fit, since I knew #Gamedevs were already looking into #VoiceDesign and it is a natural fit for #VR.
— Dave Isbitski (@thedavedev) March 2, 2018
Tren Griffin, citing Chris Dixon, described how new technologies still in its early days have the potential to evolve from a toy product into a disruptive process if it benefits from improvements in base technologies:
“ To distinguish toys that are disruptive from toys that will remain just toys, you need to look at products as processes. Obviously, products get better inasmuch as the designer adds features, but this is a relatively weak force. Much more powerful are external forces: microchips getting cheaper, bandwidth becoming ubiquitous, mobile devices getting smarter, etc. For a product to be disruptive it needs to be designed to ride these changes up the utility curve.”
While three years have already passed since Mr. Isbitski’s prescient move to reach out to gamers, it’s still early days. Ed Thorp’s autobiography begins with amusing anecdotes about how he learned basically through play. I think society learns how to make new tools, as its members develop both art and new skills and professions, through playing with new technology which may begin with either the adventurous and / or those with the time and resources.
This outreach to gamers has echoes of the “homebrew computer club” and the birth of personal computing. A society learns from the playthings of the wealthy during that first flattish part of the S curve. Recreation first, a little feedback, and then utility and industry later. Or, in Bezos’ words, “yesterday’s ‘wow’ quickly becomes today’s ‘ordinary’”.
One way I sense it might still be early days is that I did a caveman style approach and did a word search of about 20 years of AMZN annual letters. Just the letters so like I said “caveman”, not high end analytics that CB Insights would provide. Go to a link near end of this post and you can try a search.
Tuur Demeester, more well known for his coverage of crypto technology and markets, shared commentary about the early days of hydrocarbon technology. It took nearly a quarter-century after the discovery of petroleum until a mainstream use-case was developed: automobiles. And then it would be roughly another quarter-century for that use-case to transition from plaything of the rich to mainstay of the global economy.
6/ Note that the promise of petroleum was already recognized in the 1820s. It wasn’t until Pittsburgian Samuel Kier invented an economic way to derive the burning fluid kerosene in 1850 that the Pennsylvania oil rush took off. https://t.co/LJj0Ou9JWW pic.twitter.com/8TZxwfHN0p
— Tuur Demeester (@TuurDemeester) March 2, 2018
I like to read observations, however random at the time, which might take on a bit more meaning in a future context. A few comments from those I follow on the internets, not meant to be representative of the market, but were off-the-cuff observations from some smart folks. What it says to me is that there is massive potential but it’s early.
Having an Echo in our house has probably increased our music consumption by 600%. I’m a believer that voice could/will be huge at some point for the home
— Ben Carlson (@awealthofcs) February 25, 2018
Alexa says she is having trouble understanding right now — try again later. And just when I had become accustomed to her voice. Time for plan B.
— Jeff Miller (@dashofinsight) March 2, 2018
Scott Galloway stated it plainly about Voice & Alexa:
“The iPhone is the most transformative device since the microchip. However, there’s a new sheriff in town. As of Q1 2018, the most influential device is the Amazon Echo. In two years, a third of computing will be screenless, and two thirds of that will be processed by Alexa. The operating system of our lives had bifurcated into mass (Android/Windows) and luxury (iOS). However, the next operating system is Alexa, and its parent company, as predicted, will soon be the most valuable firm in history.”
Where is the next opportunity in the next operating system of our daily lives? It wasn’t long ago that eSports / gamers were among the first wave of users of Alexa thanks to evangelists. Let’s go back to Asimov’s “creative types of endeavors” as our guide. But before the artisans and journeymen creators, the initial workers might be builders of the tools.
Amazon is hiring like crazy at its Alexa unit, via Citi’s Mark May, who trawled through internet companies’ hiring plans looking for patterns. pic.twitter.com/ZW8OyNTdwt
— Joe Weisenthal (@TheStalwart) March 13, 2018
Amazon is not alone. It was hiring at Alexa according to Citi’s Mark May, but I saw earlier this year there were 1147 openings recently as Google is hiring for product and technical. The “Flywheel” model at Amazon, however, may provide an edge because it propogates through starting with play, becoming a part of your home life, and finally impacting work tasks, professions and entire industries.
NOTE: Here’s a link to a wordpress that has about 20 years of AMZN annual letters. Try using “find” to search for voice, Alexa, etc. to get a sense of how early this is and how dramatic the changes to come could be.
Here’s the most recent 2018 letter. Take note of the milestones cited for each line of business/service. In the milestones of this letter, voice is featured in the fourth and fifth items, under Alexa and Amazon Devices. This line caught my eye: “There are now more than 30,000 skills for Alexa from outside developers, and customers can control more than 4,000 smart home devices from 1,200 unique brands with Alexa.”
I wonder if it we will see 300,000 or 3 million skills and 100,000 micro-brands by the time there are analyses which separately value Voice related businesses or if this technology subsumes other business lines at Amazon or at other Big Stack platforms.
And those skills wil be made by users not coders. Amazon has just released “Alexa Blueprints”, where home users can create, without needing to know coding, new skills and they will be available to all Alexa enabled devices connected to a user’s account.
Maybe the road from 30,000 to 300,000 skills is shorter than we realize. “An innovation that is disruptive allows a whole new population of consumers access to a product or service that was historically only accessible to consumers with a lot of money or a lot of skill.” (Clayton Christensen, ht to Tren Griffin.)”
I wanted to close with Asimov’s thoughts on education in my mind and tie it back to Amazon. The company’s final milestone item in this year’s annual report letter is “Career Choice”. This is as close to a truly long-term, anti-fragile, form of employee benefits: tuition and classroom training for certificates and associate degrees. Before you utter “company town”, it might not be quite the same: “We fund education in areas that are in high demand and do so regardless of whether those skills are relevant to a career at Amazon.” But I wouldn’t be surprised if voice and Alexa had a role to play in this space as well.
But let’s listen to price as well. A quite ebullient tone. Watching and listening.
Originally published at big-stack.com on April 27, 2018.