THREAD AWS $AMZN
AMZN has 15Xed in 6 years (~$60bn->~$1tr). Along the way there have been many investor concerns, which have in hindsight been "can't see the forest for the trees" nitpicks: 1) AWS not profitable; 2) AWS price cuts; 3) Depr acctg; 4) Too much start up exposure.

First to establish valuation. I don’t think it is controversial to say that AWS is worth ~$1tr+ today annualizing nearly $50bn in revs this past Q, ~35% GAAP Op Margins growing ~30% in COVID times. In 2021, AWS will likely put up around ~$58BN in revenue (MSe).
While IaaS is not SaaS, applying even the lower end of Software universe multiples to this level of growth (not to mention profitability or any analysis of how great the business is) would get you to a $1trillion value: 16X EV/Sales ~$60bn in revs ~= $1tr.
And AWS is a lot more profitable than most software companies (today). On a P/E basis, this equates to ~60X 2021 GAAP EPS (assumes 20% Tax rate).
 
Looking back on it, it is funny to think about a few of the past AWS bear cases/worries:
1) AWS not profitable
AMZN first disclosed AWS financials on the 1Q15 print. Before AMZN disclosed AWS revs/EBIT, the consensus was the MORE unprofitable AWS was, the better it was for AMZN’s stock because it meant the retail business was even more profitable than people thought.
"If AWS had double digit negative margins, AMZN retail could even be more profitable than Walmart (OPM%, not gross $)!" - one sell side report
On April 23, 2015 AMZN reported 1Q15 results breaking out AWS revs/profits for the first time. AWS reported $1.5bn in revs growing ~50% y/y (accelerating to 80+% next Q). Shockingly AWS was profitable. Very profitable. 17% Adj Op Margins with 50% adj. EBITDA margins!
And investors loved it as the stock was up nearly 15% the next day or $26bn (strong retail results helped). Even with the surprisingly good numbers/profitability, one bank (MS) only put AWS value at $34bn, or 10X the just reported quarterly EBITDA run rate. JPM $60bn. GS $85bn.
Using $60bn for 2015 valuation, If AWS is valued at $1tr today, this means that 6 years later, AWS’s value 15Xed, or compounded 60%. What does this mean for AMN Retail? It implies retail biz was valued at ~$130bn and today is worth ~$600bn, 360% return, or 29% annualized.
2) AWS Price Cuts. In 2015-2017, I remember tracking the number of AWS price cuts and sending various tables to clients trying to estimate the impact (AWS announces them on their blog https://t.co/EN8KPaFrnt).
How much will price cuts impact growth this year? What about margins? It did cause lumpiness in the earlier days (1Q15s 50% growth rate accelerated to 80+% in 2Q after lapping a price cut among other things).
It also created a barrier to entrants. We have the Big 3 today with AMZN still bigger than the #2-5 combined, and it aided AMZN's moat as it built higher value add (and margin) products on top of S3/EC2 (RedShift, DynamoDB, etc). Try to find Price Cuts impact to growth here.
3) AWS accounting shenanigans with depreciation
After AMZN disclosed the AWS metrics, valuation hawks jumped all over the AWS disclosures. 50% adj. EBITDA margin were masked by 1) capital leases and 2) depreciation shenanigans.
Servers were being capitalized and depreciated over 3 years because that’s how the GAAP accounting rules accounted for typical server and computer equipment but Public Cloud was different given the higher utilization levels and actual useful lives were actually likely <3 years.
A 2 year useful life would increase depr costs by 50% making Op margins effectively 0%. In late 2019, AMZN announced that due to better server useful life than they had previously though, it would extend the depr schedules from 3 years to 4 years. MSFT soon followed suit.
Does this matter? Not for cash flow (in the ST, LT yes as capex should be more efficient). But AMZN’s GAAP OI has improved ~500bps this year to 35% largely from this accounting change. More importantly, this change proved the 2 year useful life theory wrong.
4) Too much start-up exposure, how would AWS handle the 2015/16 tech downturn
I remember the 2015/16 tech downturn vividly. I was on the sell side covering smidcap internet. Almost half of my smidcap Internet names down 40+% earnings in November 2015.
People were saying this was the tech Bubble all over against. PrivateCo valuations were poo pooed. I questioned if smidcap Internet was even worth covering. And for AWS, investors questioned how much this downturn would hurt.
This was when AWS was seen as renting storage and compute for cheap for those that couldn’t afford servers of their own. Enterprise adoption was very early days.
Having fast growing, innovative companies was seen as a WEAKNESS rather than a customer base that would grow and be future leaders (nice customer base to have if you can get it). A few quarters later, smidcap internet/software rebounded and numbers started looking good again.
Conclusion? If you have a great business growing fast with strong unit economics that you think COULD be the future of something big (Public Cloud), Don't Sweat the Small Stuff.

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The Dutch regulator and DNB as financial supervisor are a tough cookie to deal with. In essence they hyperregulate EU-rules into goldplated Dutch rules which go beyond what is prescribed in Europe.

All NL-customers at British banks may thus be kicked out on brexit.

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If we start with the capital requirements directive, it says attracting deposits is forbidden. In article 9.

https://t.co/RYl7SXligC


Now the translation of that rule into Dutch law is slightly expanded to not only prohibit attracting deposits, but to also prohibit, having those deposits under custody ('ter beschikking hebben').

That's not in EU law, but it is in our Dutch law.

https://t.co/PsbWfNY3PA


So if you wonder how this would work out for UK banks and Payment institutions servicing Dutch customers. Have a read at the technical explanation of DNB, the financial supervisor and their summarising table.

https://t.co/LL0fAnYkRJ

Passive servicing of Dutch is not allowed!


Any bank or PSP in the UK that continues to serve Dutch customers (as in retail customers, professional players are excepted) can thus be subject to fines and policing under Dutch law.

Meaning we not only have Accidental American issues in payments, but also Accidental Dutchies
Ok here is the explanation. Grab a cup of coffee and read on. If you have not read/noticed this, you will see intraday options movement in a new light.


Say we have two options, one 50 delta ATM options and another 30 delta OTM option. Normally for a 100 point move, the ATM option will move 50 points and the OTM option will move 30 points. But in a high volatile environment, the OTM option will also move nearly 50 points

To understand why this happens, first understand why an ATM option is 50 delta. An ATM option has the probability of 50% of expiring as ITM. The price just has to close a rupee above the strike for the CE to be ITM and vice versa for PEs

Now think of a highly volatile day like today. If someone is asked where the BNF will close for the day or expiry, no one can answer. BNF can close freakin anywhere, That makes every option of an equal probability of being ITM. So all options have a 50% probability of being ITM

Hence, when a huge volatile move starts, all OTM options behave like ATM options. This phenomenon was first observed in the Black Monday crash of 1987 at Wall Street, which also gave rise to the volatility skew/smirk

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