VALUEx Vail 2012 – Amazon’s Valuation

In this series of several articles I’ll discuss my thoughts from the VALUEx Vail conference. The idea for this conference came to me when I attended VALUEx Zurich

VALUEx Vail 2012 - Amazon's Valuation

In this series of several articles I’ll discuss my thoughts from the VALUEx Vail conference. The idea for this conference came to me when I attended VALUEx Zurich, organized by Guy Spier and John Mihaljevic in February 2011. The thought of spending three days learning and sharing ideas with smart, like-minded value investors felt instantly right.  Investing on some level is a never-ending pursuit to get better.  Most of us are locked up in air-conditioned offices where we learn through reading SEC filings, magazines, blogs, etc.  Though reading is important, it should not be a substitute for interaction  and debate with other investors. That is why, for the second year in a row, I oranized a conference in sunny (and at the time, wildfire-threatened) Vail, Colorado.

Before I dive into what I’ve learned from the conference, let me tell you more about the setting and the conference itself.  Vail is Colorado’s gem; think of it of as  a modern (better) replica of Switzerland, hidden in the Colorado Mountains, two hours west on I70 from Denver.  Vail is a green, neatly manicured town, with mostly two-story old-European-styled buildings sitting in the foothills of a gorgeous mountain.  It is acutely trying to be European – even its police force drives Volvos (which is unheard of in the United States, where taxpayer money is only spent on American-made cars).

VALUEx Vail is not your typical conference.  It is a not-for-profit (but for-learning), by-invitation-only (you have to apply to be invited) conference.  All content is participant-generated, which is why the attendees are carefully selected and the size of the conference is intentionally limited to 40 participants.   For three evenings, from Wednesday through Friday, we got together at private venues and listened to half a dozen fifteen-minute, well-researched presentations, followed up by ten-minute question and answer discussion sessions.  Then we had dinner, which was followed by dessert, usually outside, accompanied by a dessert speaker or two.  The day usually ended at a local bar, where conversation continued well into the night.  In the morning, the ones who could get up after late-night drinking had breakfast together – more thoughtful conversation.  Since the evening event is only open to participants, but Vail is too beautiful to be enjoyed without your loved ones, during the day we took our families to two different ranches.   On Thursday, we went to the Lazy J Ranch, where we played horseshoes and bocce ball, and the kids even took some skeet-shooting lessons.  On Friday we went to Nova Guides Ranch, where we played volleyball.  The kids fished – they didn’t catch anything, but they loved trying.

Here are pictures from the conference, mostly taken by Cristy Reid, and a few by me.

You can find all presentations here.  

There is no signup yet for next year’s VALUEx Vail conference, which will most likely be June 19-21.

Why Amazon May Be Worth 179 Times Earnings

The VALUEx investment conference I hosted last month in Vail, Colorado started with a presentation by Josh Tarasoff , a general partner at Greenlea Lane Capital, whose long-stock idea was Amazon — at the time trading at a modest 179 times trailing earnings. The rich valuation was not lost on Josh. In fact, this was a perfect presentation to start the conference, as the theme of the conference was to challenge our thinking, that is — to borrow a line from Apple — to “think different.” Amazon is one of the best-managed and most innovative companies in the U.S., if not globally. It constantly pushes the boundaries of what it is. It went into cloud hosting because it felt it had unique expertise running its own enormous website, and now Amazon is going into supply — it will ship goods to you if you run a retail operation.

Josh’s take on Amazon was that it changes the way we shop. Our normal brick and mortar shopping habits are simple: We go to stores every so often, where the merchants have performed their “black art” of merchandise selection, trying to maximize their limited real estate to have the highest appeal to the average shopper (to be more precise: the shopper with the largest wallet). Amazon doesn’t try to appeal to the average shopper or to the wealthiest one, it appeals to the most important shopper — you. Its merchandising strategy is simple: Supply everything! With the Internet and thus Amazon being on our smart phones, tablets, PCs, etc., we can shop on Amazon whenever we realize we need something — instantly.

Amazon is habit-forming for younger generations and habit-changing for older ones. This way to shop will gradually become embedded into the DNA of younger generations. A few days ago I needed an iPhone car charger. I didn’t add it to my mental shopping list of things to buy next time I go to Best Buy, I simply fired up the Amazon app on my iPhone and bought it. I almost cannot think of a second website where I’d go if I needed to buy something. I might Google it if it was an expensive item; if not I’d just go directly to Amazon.

Amazon’s brick-and-mortar-free cost structure puts it at a competitive advantage against other retailers. The thing I find very refreshing about Amazon is that it allows its competitors to post their merchandise on the Amazon website — they can even do so at lower prices if they like. If a customer buys the competitor’s product, Amazon still makes a commission on the sale. Though we’ve been conditioned by Amazon to think of this as a normal way of doing business online, think about how this would look in the brick-and-mortar setting. Imagine Kohl’s allowing Target to put its pair of Nike shoes right next to Kohl’s pair of the same shoes, at a lower price.

Josh’s argument was that online shopping has just a 3 percent market share of total retail sales, but that sometime down the road, it will have 20 percent.Amazon, he believes, will grow at a faster rate than the overall online shopping market. He pointed out that Amazon’s growth rate actually accelerated over the last few years. Smart phones and tablets were probably the accelerators, as they provide instant online access to the world’s largest store and are great price-comparison tools (especially if you are visiting a Best Buy store). Josh’s Amazon’s investment story is not only dependent on future sales but on its margins expanding — they’ve declined from 4.6 percent in 2010 to 1.8 percent in 2011. Josh believes that growth and investments in new projects are depressing margins.

You may agree or disagree with Josh’s case for Amazon, but it demonstrates his ability to think outside the value box. Josh considers himself a value investor and believes there is value in Amazon; you just need to have a very long time horizon. There is value in growth, however, when the bulk of a company’s value lies in the significant growth of future cash flows. But your confidence level in the sustainability of high growth has to be incredibly high, as a small change in growth assumptions will tank the stock.

The Amazon story is interesting to me for a different reason. Not unlike the Apple iPhone that went through and rearranged all the players in the cell phone industry, Amazon is like a huge plow that is ripping through the retailer industry and transforming it and other industries (it has already changed the book business). I wrote recently about Best Buy, but Best Buy is the low-hanging fruit, the obvious casualty. I keep thinking, which industry will be next?

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