Subject: Amazon
Amazon scares me as an investment because I think the retail operation is a permanent money loser. AWS is clearly the gem in the empire, and Prime provides a steady rent on access to the retail delivery and media empire. Seems like Prime price increases are sticky, if my wife is a decent indicator. Despite being a loss leader, the retail business is a gorilla that cannot be ignored. Amazon is shattering the brick and mortar retail industry. I prefer tactile to online shopping, but the lean inventories brick and mortar operations are required to keep in the face of Amazon competition make shopping a painful experience. I'm increasingly convinced that physical stores are for merchandise returns, and to drive costumers to their online platforms. Amazon has won, as far as I'm concerned, and perhaps their retail pricing will start to creep up and make the retail operations profitable.

In any case, the biggest reason for staying away from Amazon has been the impossibility of valuing it. Earnings are unpredictable, and, frankly, open to manipulation given the structure of the behemoth. Ditto cash flows, although they are somewhat steadier than earnings. Ultimately I think P/S is the way to go when valuing Amazon, and it is currently trading on the low end of its historical range at around 1.65 times ttm sales. Purchases in this price range have returned around 20% per year, although this is unlikely given the growth maturity Amazon. Rarely has Amazon gone below 1.5 times sales, which gives a target price of around $77/sh.

Anyone interested in Amazon at $82.50?

PP