Tag Archives: Greenwald

Amazon is Disappearing Says Prof. Greenwald of Columbia GBS

big-amzn

Amazon’s Business Is ‘Disappearing,’ Columbia’s Greenwald Says

December 1, 2011 — 11:25 AM EST
http://www.bloomberg.com/news/articles/2011-12-01/amazon-s-business-is-disappearing-columbia-s-greenwald-says

Amazon.com Inc. shares are overvalued because its core business of selling books and music online is “disappearing” and it’s competing with larger rival Apple Inc. in tablet devices, according to Columbia University’s Bruce C. Greenwald.

“Amazon trading at 100 times earnings is almost a joke,” Greenwald, a professor of management and asset management at the New York-based university, said today at the Bloomberg Hedge Fund Conference hosted by Bloomberg Link. “If Amazon doesn’t deliver profitability in the long run, it’s not going to stay at 100 times earnings.”

Amazon, based in Seattle, trades at 103 times reported earnings for the past year, down from this year’s peak of 129.8 in October, according to data compiled by Bloomberg. The company’s shares gained 2.5 percent to $197.16 in New York trading, and have climbed 9.4 percent this year.

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Bruce Greenwald: Amazon Is Trading on Vapors

Bruce Greenwald: Now, Amazon I think is completely different. I think, if Apple is a current profit machine, Amazon is trading on vapors. [laughs]

They make no reported profit; the whole story is a growth story. They’re buying customers on the theory, presumably, that those customers are going to be profitable in the future. Now, for customers to be profitable you have to dominate segments.

The segment that Amazon has traditionally dominated is, of course, books, music, and video. Well, we know what happened to the music business when it went digital, which is the profit vanished and even Apple doesn’t make any money on iTunes.

The same thing is happening to books, with the connivance, by the way, of Amazon. The same thing is happening to video, so their core business is dying. The business that they dominated, where they made all their money, is dying.

What have they decided to do? Go into a lot of businesses where they have no competitive advantage. First they’ve gone into every variety of retail: TV sets against Wal-Mart and Best Buy, who have better distribution economics…

They can buy the business, but in the long run, unless they can get bigger share than those companies, their pricing is going to be at a disadvantage to those companies, because those companies can distribute the TVs and other devices more cheaply.

Then what did they decide? They said, “Oh, that wasn’t a big enough challenge. Let’s go after the Oracles and the IBMs and all the companies that do cloud computing, and the SAPs and so on, and the Googles,” and they went into that business.

Now, if you think they’ve got a competitive advantage in that business while they’re going after everybody in retail, lots of luck. But then they decided that was not enough, so they decided to go after Apple and the others in the device business.

This looks, to me, like a company that makes no reported profit, which I think is fair, that’s trying to buy growth in all sorts of areas where, because it has no competitive advantage, the growth is going to be value-destroying, not value-creating.

http://www.fool.com/investing/general/2013/01/04/bruce-greenwald-amazon-is-trading-on-vapors.aspx

Amazon is on a p/e of 500 – but I’m happy to keep my shares

Amazon launched its first smartphone last week – the Amazon Fire phone.

It doesn’t represent any sort of leap forward in smartphone technology, according to reviews. So it probably won’t take a huge amount of market share from Apple or Samsung/Google.

Meanwhile, both Apple and Google are eating into one of Amazon’s traditional core businesses, selling music and video content.

So is Amazon’s new smartphone just a desperate bid to preserve market share? Or is it another ballsy, far-sighted move by Amazon’s boss, Jeff Bezos – one that will pay off in the end?

I think it’s the latter. And that’s why I’m willing to hang on to my Amazon shares – even although they trade on an eye-watering price/earnings ratio (P/E) of 500.

You might think I’m mad – but let me try to persuade you otherwise…

What’s Amazon’s new phone like?

I’ve not seen one of Amazon’s phones, but it sounds like they’re pretty similar to your average iPhone, but with two fresh add-ons.

One is a semi-3D capability that has been greeted with a ‘meh’ reaction by most reviewers. In truth, I don’t really understand how this 3D function works – I’ll have to wait and see a phone before I can do that.

The other improvement is a ‘recognition engine’ which has been received much more warmly.  It’s called Firefly and is a sort of audiovisual search tool. It recognises books, various consumer goods, music, video and more. And once the phone has recognised the item, you can immediately put it in your Amazon shopping basket.

“Not only was it effective”, says Gizmodo, “it was kind of beautiful”.

So it’s pretty obvious that Amazon is launching the phone in an effort to sell more stuff. Purchasers of the phone will also get a year’s free membership of Amazon Prime, which normally costs £79.

Prime offers free delivery on many purchases, the opportunity to ‘borrow’ books to read on your Kindle, and access to a wide selection of video titles. Amazon says that Prime customers spend four times as much on Amazon as other users, and that half of Amazon’s sales are to Prime customers.

So if the Fire phone can significantly boost the number of Prime customers, it will probably prove to be a savvy move by Bezos.

Now, not everyone is convinced that the phone launch is a smart move.



For example, Bruce Greenwald, a finance professor at Columbia Business School, made some negative comments to the Guardian. “This sequence of crazy initiatives in areas where they have no competitive advantage is about sustaining an unsustainable stock price… Amazon owns the books market, but what is happening to the value of that monopoly? They have a core business in which they are dominant, it’s going away and they are thrashing around trying to justify their $150bn market capitalisation.”

Is Greenwald right? I don’t think so.

Yes, Amazon faces growing competition. In digital content, it is competing with Apple, Google, music streaming service Spotify, and many others.

And on the physical consumer goods side – in other words, items that are delivered from its warehouses rather than online – the likes of Tesco, Argos and Walmart are all growing smarter about online retail. These chains also benefit from owning large store networks which are useful for customers who like to “click and collect.” Amazon isn’t so well placed for ‘click and collect.’

Greenwald is also right to highlight Amazon’s high valuation. However, I believe that valuation can be justified and that’s why I’m happy to hang onto my shares.

Why Amazon’s ‘crazy’ share rating is justified

No other online retailer offers such a large variety of products for sale. And Amazon is still growing its sales faster than the growth rate for overall e-commerce around the world. Last year, Amazon was the ninth-largest retailer in the world. Consultancy Kantar expects it to be the second-largest by 2018.

Amazon’s network of warehouses is also a very useful asset. It has 106 ‘fulfilment centres’ around the world, of which ten are in the UK. It is also trying to improve its ‘click and collect’ capacity by offering collection points at some London Underground stations.

Amazon also has a great record of investing for the long term. When Amazon launched Amazon Web Services in 2005, many observers doubted that the company could become a major player in this field – providing services to businesses. But, according to The Motley Fool, it now controls more than 30% of infrastructure for the ‘cloud’.

The point is, there will come a time when Amazon can afford to slow down the pace of growth and allow its profits to rise dramatically. When that happens, today’s valuation won’t look so crazy.

I’ll freely admit that Amazon is probably the highest-risk stock in my portfolio, but I’m happy to hold for further growth to come. And the Fire phone will play its part in achieving that growth.

So what do YOU think?  How would you value Amazon?  What major adjustment would you need to make? What is the business trying to do?

If you need a hint: http://ben-evans.com/benedictevans/2014/9/4/why-amazon-has-no-profits-and-why-it-works

Does anyone want to bet $200 that Prof Greenwald will NEVER admit he might have miscalculated or misunderstood Amazon’s business?

What if he read their annual report: amazon-shareholderletter97

cuba-vs-singapore_03252015

What caused the above?

DEEP VALUE Videos on Net/Nets and Investing

Closing Arg

How is it possible that an issue with the splendid records of Tonopah Mining should sell at less than the company’s cash assets alone? Three explanations of this strange situation may be given. The company’s rich mines at Tonopah are known to be virtually exhausted. At the same time the strenuous efforts of the Exploration Department to develop new properties have met with but indifferent success. Finally, the drop in the price of silver last year has provided another bearish argument. It is this combination of unfavorable factors which has carried the price down from $7  1/8 in 1917 to its present low of $1  3/8 in 1923.

Granting that the operating outlook is uncertain, one must still marvel at the triumph of pessimism which refused to value the issue at even the amount of its cash and marketable investments; particularly since there is every reason to believe that the company’s holdings in the Tonopah and Goldfield railroad, are themselves intrinsically worth the present selling price. (Ben Graham on Investing)

VIDEOS

Marty Whitman criticizes Graham and Net Nets (3 minutes Must see!)

Marty Whitman: They Just Don’t Get it.  (23 minutes) Marty says many analysts on Wall Street do not understand credit analysis.   We will explore later in this course whether the quality of credit provides a better assessment of the true cost of capital for a firm rather than “beta.”

One investor’s experience investing in Net/Nets (3 minutes)

Net/nets as value traps (5 minutes)

Good advice on behavioral investing (3.5 minutes)

Prof. Greenwald on UGLY and Cheap or Graham’s Search Strategy (8 minutes)

Greenwald on the Balance Sheet (risk of financials) (10 minutes)

Pop Quiz on Competitive Advantages–What Would You Advise?

CHANGE18-tv-paper

QUIZ: Discuss in a few words the mistakes made in these recent acquisitions in the newspaper business. If you wanted to develop an advantage in newspapers how would you do it.  (Hint: What is the most profitable news magazine in the world–or close to it?)

How would you advise Bezos to enhance his purchase of the Washington Post?

Good luck.

Case Studies on Newsweek and Boston Globe

For those struggling, I suggest reading, The Curse of the Mogul: What’s Wrong with the World’s Leading Media Companies by Jon Knee and Bruce Greenwald

I will weigh in at the end of the week.

 

A Reader’s Question on Greenwald’s Valuation Slides

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A Reader’s Question

Hey John,
 
Thanks for sharing and giving advice on my previous query. I am interning in a fund that practices value investing philosophy now and learning at a much faster pace than as a retail investor. Institutional investors certainly have more firepower when it comes to gathering more information. Had me pointlessly worrying why my knowledge of industries was so shallow as a retail investor ha ha  ha. But no excuses for not read up broadly and extensively! 
 
Came across these slides.
One of them is on Jae Jun’s site. Not sure whether you have came across it. The reunion presentation slides contained some workings which I think is Greenwald’s? (Downloaded it off Columbia’s site)
 
I believe they could shed some light on how Prof. Greenwald measures business returns. (You audited his classes before, maybe you would know better)
 
Some questions that I have:
 
From EPV slide:
1) Slide 35& 42: I don’t quite really understand the steps. For slide 42, I think this might be the workings for slide 35. Don’t quite really understand them either. How did he get cash and the growth rate. And what is option.
2) Slide 36: Why does he use 2 methods to calculate the expected return for each respective market?
 
From the reunion presentation slides: It is largely similar to the EPV slides except the last few slides that are handwritten. For Gannett, I can’t decipher the workings without any context. No idea how to get distribution, organic growth or reinvestment. Needless to say, clueless for the Walmart and Amex returns as well.
 
I think a more quantitative approach to calculate the expected rate of return would be more useful in determining intrinsic value and Greenwald presents us his way of doing it.
 
How I would value a company is for instance, Company W earns $50million for FY 2012. By determining the expected return (X), we can take 50/X to determine the value of the business. Reading the way how Buffett valued Mid Continent Tab, he seems to approach valuation this way. But of course, he has a deep understanding of the industry such that he is able to project an accurate return. 
 
Not sure if you or your readers could help out. 
 
My reply: Ok, CSInvesting readers are the smartest in the world, so I will let them have first crack at your questions before I chime in. …I will be back later to answer. 
Pump and Dump Alert: Pump and Dump_SEC
 

VENICE – The run-up in gold prices in recent years – from $800 per ounce in early 2009 to above $1,900 in the fall of 2011 – had all the features of a bubble. And now, like all asset-price surges that are divorced from the fundamentals of supply and demand, the gold bubble is deflating.

This illustration is by Barrie Maguire and comes from <a href="http://www.newsart.com">NewsArt.com</a>, and is the property of the NewsArt organization and of its artist. Reproducing this image is a violation of copyright law.
Illustration by Barrie Maguire
Good Advice:http://www.321gold.com/editorials/moriarty/moriarty060313.html    Buy gold mining shares…………..

Gold XAU

More Greenwald Videos; Canadian Value Inv. Blog; The Panic of 1893 (The Silver Panic)

Videos on Greenwald (2012) and Other Investors: http://www.grahamanddoddsville.net/

A GREAT VALUE INVESTING RESOURCE: http://valueinvestorcanada.blogspot.com/    (Check it out!)

The Panic of 1893

In  the years preceding the outbreak of the panic, the nation’s money was victim to flagrant mismanagement by the Federal Government. The policies of Washington drove gold out of the country and hence undermined the sanctity of gold contracts, raised the distinct possibility of an abrupt switch to a depreciated silver standard, and introduced a confusing system of no less than nine different currencies. Worst of all, however, the federal government engineered a currency and credit expansion which made panic and depression inescapable. The day of reckoning arrived when the weight of these political interventions brought the economy to its knees. The Panic of 1893 was a crisis of political interference.


The Panic of 1893 and other factors had a lasting impact. The depression of the 1890s did not fully abate until 1897. One response to the series of failures and bankruptcies was an upsurge in business consolidations.

Video Lecture: Valuing Growth: Liz Claiborne

I posted this before November 7, 2011, but now I embedded the documents for easier access. Also, there is a link to the video. I will keep putting links to videos rather than have a value vault so everyone can have access and I don’t have to keep sending keys.

Liz Claiborne

So what is the company worth? Show your work. Don’t cheat yourself–do the work BEFORE clicking on my notes or the video lecture!

Jan 01, 2000 10-K for Liz Claiborne. Liz-Claiborne-10-K-Jan-1-2000

Video Lecture: just click and download the Greenwald video lecture: https://www.yousendit.com/download/T2dkOGNVdGpPSHdVV01UQw

Solution and Lecture notes to valuation of Liz Claiborne: Greenwald-Class-Notes-5-Liz-Claiborne-Valuing-Growth-2

Compare this lecture to a standard overview of valuation techniques: Equity-Research-and-Valuation-B-Kemp-Dolliver

Valuation from a Strategic Perspective, Part 1: Shortcomings of the NPV Approach to Valuation

Review

For beginners and a review of Present Value—see these 10 minute videos: http://www.khanacademy.org/finance-economics/core-finance/v/introduction-to-present-value and  http://www.khanacademy.org/finance-economics/core-finance/v/present-value-2 and http://www.khanacademy.org/finance-economics/core-finance/v/present-value-3

and Discounted Present Value: http://www.khanacademy.org/finance-economics/core-finance/v/present-value-4–and-discounted-cash-flow

Prof. Damodaran’s Handout on NPV:DCF Basics by Damodaran

Prof. Greenwald Lecture Notes (See pages 10-13 on NPV Valuation):OVERVIEW Value_Investing_Slides

And The Dangers of Using DCF (Montier and Mauboussin)

CommonDCFErrors (Montier) and dangers-of-dcf (Mauboussin)

Part I: What are the three major shortcomings of using the Net Present Value Approach (“NPV”) to valuing companies?

The NPV approach has three fundamental shortcomings. First, it does not segregate reliable information from unreliable information when assessing the value of a project. A typical NPV model estimates net cash flows for several years into the future from the date at which the project is undertaken, incorporating the initial investment expenditures as negative cash flows. Five to ten years of cash flows are usually estimated explicitly. Cash flows beyond the last date are usually lumped together into something called a “terminal value.” A common method for calculating the terminal value is to derive the accounting earnings from the cash flows in the last explicitly estimated year and then to multiply those earning by a factor that represents an appropriate ratio of value to earnings (i.e., a P/E ratio). If the accounting earnings are estimated to be $12 million and the appropriate factor is a P/E ratio of 15 to 1, then the terminal value is $180 million.

How does one arrive at the appropriate factor, the proper price to earnings ratio? That depends on the characteristics of the business, whether a project or a company, a terminal date. It is usually selected by finding publicly traded companies whose current operating characteristics resemble those forecast for the enterprise in its terminal year, and then looking at how the securities markets value their earnings, meaning the P/E at which they trade. The important characteristics for selecting a similar company are growth rates, profitability, capital intensity, and riskiness.

This wide range of plausible value has unfortunate implications for the use of NPV calculations in making investment decisions. Experience indicates that, except for the simplest projects focused on cost reduction, it is the terminal values that typically account for by far the greatest portion of any project’s net present value. With these terminal value calculations so imprecise, the reliability of the overall NPV calculation is seriously compromised, as are the investment decisions based on these estimates.

The problem is not the method of calculating terminal values. No better methods exist. The problem is intrinsic to the NPV approach. A NPV calculation takes reliable information, usually near-term cash flow estimates, and combines that with unreliable information, which is the estimated cash flows from a distant future that make up the terminal value. Then after applying discount rates, it simply adds all these cash flows together. It is an axiom of engineering that combining good information with bad information does not produce information of average quality. The result is bad information, because the errors from the bad information dominate the whole calculation. A fundamental problem with the NPV approach is that it does not effectively segregate good from bad information about value of the project.

A second practical shortcoming of the NPV approach to valuation is one to which we have already alluded. A valuation procedure is a method from moving from assumptions about the future to a calculated value of a project which unfolds over the course of that future. Ideally, it should be based on assumptions about the future that can reliable and sensibly be made today. Otherwise, the value calculation will be of little use.

For example, a sensible opinion can be formed about whether the automobile industry will still be economically viable twenty years from today. We can also form reasonable views of whether Fort or any company in the industry is likely. Twenty years in the future, to enjoy significant competitive advantages over the other automobile manufacturers (not likely). For a company such as Microsoft, which does enjoy significant competitive advantages today, we can think reasonable about the chances that these advantages will survive the next twenty years, whether they will increase, decrease, or continue as is.

But it is hard to forecast exactly how fast Ford’s sales will grow over the next two decades, what its profit margins will be, or how much will be requires to invest per dollars of revenue. Likewise, for a company like MSFT, projecting sales growth and profit margins is difficult for its current products and even more difficult for the new products that it will introduce over that time. Yet these are the assumptions that have to be made to arrive at a value based on NPV analysis. (See page 10 of Greenwald notes-link on blog post).

It is possible to make strategic assumptions about competitive advantages with more confidence, but these are not readily incorporated into an NPV calculation. Taken together, the NPV approach ‘s reliance on assumptions that are difficult to make and its omission of assumptions that can be made with more certainty are a second major shortcoming.

A third difficulty with the NPV approach is that it discards much information that is relevant to the calculation of the economic value of a company. There are two parts to value creation. The first is three sources that are devoted to the value creation process, the assets that the company employs. The second part is the distributable cash flows that are created by these invested resources. The NPV approach focused exclusively on the cash flows. In a competitive environment, the two will be closely related. The assets will earn ordinary –the cost of capital—returns. Therefore, knowing the resource levels will tell a good deal about likely future cash flows.

But if the resources are not effectively, then the value of the cash flows they generate will fall short of the dollars invested. There will always be other firms that can do better with similar resources, and competition from these firms will inevitably produce losses for the inefficient user. Even firms efficient in their use of resource may not create excess value in their cash flows,  so long as competition from equally environment, resource requirements carry important implications about likely future cash flows, and the NPV approach takes no advantage of this information.

All these criticisms of NPV would be immaterial if there were no alternative approach to valuation that met these objections. But in fact there is such an alternative. It does segregate reliable from unreliable information; it does incorporate strategic judgments about the current and future state competition in the industry; it does pay attention to a company’s resources. Because this approach had been developed and applied by investors in marketable securities, starting with Ben Graham and continuing through Warren Buffett and a host of others, we will describe this alternative methodology in the context of valuing a company as a whole in Part II.

HAVE A GREAT WEEKEND

VALUATION from a Strategic Perspective: Improving Investment Decisions

Chapter 16 from Competition Demystified

By now you realize that you need to focus most of your attention as an investor on understanding the particular business, the industry and the competitive interactions within an industry before plugging inputs into whatever valuation model you use. Seek first to understand then value. Often Wall Street places the cart before the horse with its analysts’ projections of earnings and price targets.

After finishing our tour through Competition Demystified, I will ask readers if they want to go deeply into valuation. This chapter gives you a preview of the major issues.

Here are your study questions:

  1. What are the three major shortcomings of using the NPV approach to valuing companies?
  2. In an earnings power calculation, what are the six (6) adjustments you need to make to the current cash flow to arrive at an accurate estimate?
  3. What are the two ways to value a company’s assets?
  4. The difference between the asset value and the earnings power value is evidence of what?

For those who want a thorough review of valuation case studies from this blog, here they are. If you go through these carefully, you will have the foundation of an MBA course on valuation.

Preview

Greenwald VI Process Foundation_Final

Greenwald_2005_Inv_Process_Pres_Gabelli in London

SEALED AIR VALUATION

Sealed Air 1998 10-K

Greenwald_Class_Notes_6_-_Sealed_Air_Case_Study

Sealed Air Case Study_Handout

 Hudson General Valuation

Hudson General Case Study_Read this First

Valuing Hudson General and Analysis

Liz Claiborne

Greenwald Class Notes 5 – Liz Claiborne & Valuing Growth(2)

See you at the end of this week!

Prof. Greenwald Video at Creighton Business School

Students ask questions of Value Investors

Prof. Greenwald discusses the inanities of using DCF; the lure of lottery ticket investing and the success of Columbia’s value investing students.

http://business.creighton.edu/news/creighton-vip-draws-financial-experts Scroll down and the video link (1 hours) is at the bottom of the page.

Buffett’s 13-F

http://sec.gov/Archives/edgar/data/1067983/000119312512234582/d352241d13fhr.txt

Joel Greenblatt’s Article on his Magic Formula

Go here and read several articles on Joel’s Magic Formula Investing: www.greenbackd.com

Joel’s Adding Your Two Cents May Cost You A Lot Over The Long-Term

 

Valuing Growth

Try saying Profits without “Quotation Marks.”

Valuing Growth

A reader, Arden, asked an intelligent question about how I value growth. Since I am on the road and will not post again until Tuesday, I wanted to post Prof. Greenwald’s Lecture Notes on valuing growth.

Valuing Growth_ManagingRisk

Read through these and post your thoughts.

Have a happy Easter!