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Larry Sarbit is one of Canada's best-known investors with a long-standing reputation of being a patient value investor. Darren Coleman is a respected senior portfolio manager and veteran of the North American wealth management industry. Larry and Darren are also great friends who love to get together to discuss investing. The result is Simply Sarbit!
Intro 1 0:01
The opinions expressed on simply SARbit are those of Larry sarbit and Darren Coleman, and are for general information purposes only. It does not constitute any legally binding engagement between the podcasters and anyone else. Always check with your advisors to obtain your own investment advice.
Intro 2 0:22
he was 22 when he met well known mutual fund manager Larry sarbit, a disciple of Warren Buffett, a true value manager. Larry shared some core investing principles, such as buying companies with wonderful businesses that have some ability to control their prices, like Larry says, investing isn't about being mostly right. It's about not being really wrong. Today, Darren Coleman and Larry are still close friends, occasionally getting together to discuss investing. Welcome to the simply Sarbit podcast.
Darren Coleman 1:01
Hi everyone, and welcome back to another edition of simply Sarbit the podcast. My name is Darren Coleman, and once again, we're joined by the legend himself, incredible value investor, American equity investor, Larry Sarbit. Larry, Hi.
Larry Sarbit 1:13
Good to be here. Great to see you again, Darren.
Darren Coleman 1:16
nice to see you. We're going to be continuing on our journey. We talked in our last episode about applying the concepts of what is a wonderful business, and that's really important. These are things that Warren Buffett has been talking about for decades around as investors, the first thing you want to look for is find a wonderful business, then figure out what price you want to pay. We're not going to talk about the price of securities today, and none of this constitutes a recommendation. We're simply going to work our way through what is a wonderful business, and we're going to use the Magnificent Seven as a bit of our classroom, as exhibits in our laboratory, because these are the most common stocks at the moment that are being traded around the world. So they've been dominating the performance of the s, and p5 100. We've seen all the investors seem to be putting their same quarters in the same slot machines. So we're going to look at each member of the Magnificent Seven. We're just going through alphabetically, no favoritism, and today it's Amazon's turn. So we're going to spend some time today on looking at Amazon from the perspective of, is it a wonderful business, and is it worth an investor's attention. Again, not a recommendation. We're not going to talk about the price people want to pay for it, because that's really important if you're going to buy it. We're just going to talk about how well can we see the discipline the lens of a wonderful business, and does Amazon fit that? I think everybody knows what Amazon is, but Larry, would you mind setting the table?
Larry Sarbit 2:36
Well, they are one of the few prime winners of the internet highway that was built in the 90s and and the 2000s
the 1000s of miles of internet fiber that was put down just as all the railways were put down,
Darren Coleman 2:54
yeah, or the or the highway system across The United States and Canada,
Larry Sarbit 3:01
that's right. And the highway system, you know? And what goes across the highway system, the interstate and then the rail lines, what goes across? Well, they're carrying everything, right?
Darren Coleman 3:14
So back in the 90s, we had the infrastructure put down all like millions and millions of miles of fiber. I remember I remember going back then we talked about this thing called dark fiber, which was they laid down so much fiber optic cable they weren't even able to use it yet. So the light wasn't turned on. So it was called dark now we're using all of that, plus that enabled Amazon to be created.
Larry Sarbit 3:35
And when we talk about Amazon, we have to talk about one, one person, that really comes down to one person, a guy named Jeff Bezos, who, back in 1994 started Amazon, and I think he worked for a private equity firm. He was in the financial area, and he and his wife packed up and moved to Seattle, of all places, not Silicon Valley. He didn't want to be close to that. He wanted to be separate. So they they set up in Seattle.
Darren Coleman 4:10
It's kind of like he started his business in his garage, right? Like there's an interesting parallel there with Apple, right? Just as homemade business.
Larry Sarbit 4:17
Funny story. Funny story. I mean, they're starting from the beginning, what did, what was the first thing you sold books? Yep, that's right. Today he'll sell everything from books to music to clothing to I heard him say, Tiki huts.
Darren Coleman 4:34
Oh, listen, if there's, if there's something I want to buy, the first thing I do, personally is I go on Amazon and go, where would I even good? There's things I wouldn't even know what store to drive through or drive to to find it. I go on Amazon, obscure thing, and there's nine of them in four different colors,
Larry Sarbit 4:48
yeah. Or you go to Google, which we talked about last in our last session.
Darren Coleman 4:54
But it's interesting that we talk about Bezos first, because one of the criteria that we've been taught to look for in. Wonderful business is management, and as you described in our last call, this is the number one. Used to be further down the list, but now Buffett thinks it's actually the single most important criteria
Larry Sarbit 5:09
to me. To me, it just kept moving up the list. But I still think what you're looking for is a barrier to entry, as buffet would say a moat filled with crocodiles and poisonous snakes that prevent you from swimming across the moat and creating a competitor. Can't do it with Amazon. You're so far past that you can go to the bay online, or you can go, there's lots of places to keep the goal, but nothing, nothing compares to Amazon,
Darren Coleman 5:45
just but let's before we jump to the moat, because I think there's some really interesting moats around the business that we'll cover. But let's just stick on management for a minute, because this is unusual, that we have a company of this size, of this tenure, that's still being headed by the entrepreneur who invented it. So talk about management like, this is the person who started in his garage. And you were going to tell a story, I think, about boxes and and one of his right?
Larry Sarbit 6:09
They started by Philip putting the books into boxes on the cement floor of the garage, yeah, and the guys were complaining, like, my knees hurt and my back hurts. You know, the first innovation was somebody, some guy, said, why don't we buy tables? Let's put the boxes on the tables and put the books into boxes that'll save our backs, that'll save our knees first. I guess that was one of the first, first first ideas.
Darren Coleman 6:41
But that's an interesting one, because you can see that what would seem like pretty simple problem solving continue to be applied across Amazon's growth right? Like, at some point he said, What do I have people filling up? I'll go get robots. And, you know, we want to have stuff get to us in less than a week. So that'll be next day. Or maybe, how do we don't want to have trucks? How do we do we do by drone? I know they were playing with that idea. I was actually waiting for that in Canada because I'm desperately looking to order a tube of toothpaste to get delivered by drone, just because that'd be funny.
Larry Sarbit 6:44
Well, I, if I, if I sit here long enough and look out my front window, there'll be an Amazon car, a truck that'll come by. But we'll talk about that in a minute. So he started 1994 and they began selling in 95
no advertising budget. It was all word of mouth. Within a month, books were selling in all 50 states and 45 other countries. So this thing took off without vengeance.
Darren Coleman 7:45
I remember when Amazon went public and we were trying to and I remember analysts at the time trying to figure out how to make any sense of Amazon's valuation. And it was really telling looking back now on the vision that Bezos had that no one else could figure out, because I remember reading an article that talked about at the time the valuation of Amazon made no sense, because they would have had to have like, 99% of this of the book market in the United States, and at the same moment in time, Americans would have to buy three times more books. So the analyst was like, this valuation makes no sense. It's crazy for a bookstore. But nobody, apart from Mr. Bezos, understood this wasn't about a bookstore. The rest of us just kind of thought it was one thing. He had a completely different long term vision for where this was going.
Larry Sarbit 8:26
We'll talk a little bit about this in a minute. But he thinks long term. He's a visionary. And as far as the mode goes, I mean, there was a stat that I got that 30% of US households have a gun. I thought it was higher than that, but 64% of Americans have Amazon Prime. Amazing. That's a franchise that is a moat.
Darren Coleman 8:54
And I'd argue that, well, I'd argue that in the pandemic, when people were in lockdown, especially in certain jurisdictions like ours in Canada, if you didn't have his Amazon Prime account, I don't know how you did anything like that kept a lot of us going being able to actually acquire the things we needed. We couldn't leave our houses, really. So stuff came to us so enormously powerful benefit.
Larry Sarbit 9:13
I don't have the most up to date stats, but this is 2016
21% of retail growth in the US could be attributed to Amazon. Almost a quarter of retail growth was Amazon alone. And I don't know about you, but, but if you go you go into WalMart, for example, what do you do? You see an item that's interesting, you pull out your phone and you look at Amazon, and how much of they saw is the is it available on Amazon, and how much am I going to pay for it?
Darren Coleman 9:52
Which is interesting, because it used to be well, used to the Walmart was the low price, price setter. Now Amazon is the price that.
Larry Sarbit 9:59
Yeah, they still are, but you got to drive there. You got to find a parking spot.
Darren Coleman 10:05
You got to hide from the greeter who wants
Larry Sarbit 10:08
maybe you know where the product is in this huge store. I can find it. I can't find it, but on Amazon, all you got to do is look up what you want, and it takes you down the aisles of Amazon. Yeah. And there it is, well.
Darren Coleman 10:23
And I remember seeing this over a decade ago. I was my brother lives in United States, and I went to visit him, and we had Amazon Prime in Canada, but it still took a week to get delivery or more. And I was shocked when I went to visit him, and he would have, like, a box show up every day with something, and he wanted a new TV. So he said, Let's go to Best Buy. And I said, Okay, so we went, looked at a television. He liked one. And while we're standing there, he looks on his phone, he pulls up Amazon, and he goes, Oh, I'll just get it on Amazon. It's like, $5 cheaper. And I'm like, but it's right here. Why don't we just get it right now? We could just take it in the car. Goes, No, they'll deliver it tomorrow. I'm like, for what? It's right here. We're standing right in front of the box, like, we just take it down. He's like, for five bucks. It'll be at my house tomorrow. I'm not worried about it. That was the first time I saw somebody do that. And now I'd say it's so common that many of us do that. Well, I don't even leave the house to shop for a lot of the stuff anymore, which really is interesting. You mentioned Sears and how that's an old fashioned retailer around for 100 plus years, gone, gone, because the world changed.
Larry Sarbit 11:19
The world changed. I'll give you an example. Just happened to me. We ordered on Amazon water filters for Sub Zero fridge, which we had never changed in 13 years. God knows what we were drinking over that period of time. And to return it, it just said, take it to Canada. Post with this. Here's, I mean, we'll give you the label and everything, and you must have one of our boxes kicking around. So no, I didn't, I didn't need a box. I was gonna say, now you don't even need that slip. I took the product as it was. There were two of them. They came in a box, and I got refunded within two days.
Darren Coleman 12:01
Amazing. Well, this is all part of the mode around the business. So let's move and talk a little bit.
Larry Sarbit 12:05
The mode is. His prime driver is the customer. He says, If I have to choose between the competitor and the customer, I don't have to think twice. It's the customer. Always, we're here for the customer.
Darren Coleman 12:21
Yeah, that's rule number one, right? Is He obsesses over the customer.
Larry Sarbit 12:24
That's his prime rule. He's obsessed about the customer, taking care of the customer. If he, if you, take care of the customer, they'll come back. They'll keep coming. More of them will keep coming.
Darren Coleman 12:37
What's rule number two?
Larry Sarbit 12:38
Rule number two, where's my rule? Number two, infant, create. Sometimes the the customer won't have the idea. But give an example, Kindle. Kindle was something that they created. It's become a giant, an absolute giant. We could talk about that more, maybe in a in a couple of minutes, come back to it.
Darren Coleman 13:03
Well, that, but that idea of inventing, because they've invented product categories that didn't exist, like the Echo Dot and these smart devices. They've also invented service capabilities that
Larry Sarbit 13:15
Alexa, yeah, which I don't have in my house, and I will never, I don't want these guys listening to what I'm doing and what I'm interested. They are listening. I mean, they harvest that information and they use it to sell you stuff that you're talking about.
Darren Coleman 13:34
Well, this is all part of building that moat, which we're going to talk about in a second.
Larry Sarbit 13:37
It's, it's, it's a little to 1984 for me, it's very much that.
Darren Coleman 13:43
But on the inventing things like they've invented things like zero click ordering, which is coming, which back to Alexa, they want to take all the friction out of being a client, out of being a customer. How do we make it easy to buy things? We will give you tons of selection. Everything you can think of is on there, and every color you can imagine. It'll be at your home tomorrow, or in some cases, it'll be there later today. Unbelievable, how fast they go, and then they're trying to, we talked about this another time, with this idea of zero click ordering, where they just know you ran out and they'll send you another one. It's like, I didn't have to think about ordering it. Unbelievable.
Larry Sarbit 14:18
I guess I'm old, a bit old economy. So I find that a little a little intimidating, but I get it, and people, people are going for it, so,
Darren Coleman 14:30
and we'll see what else you invents next. But this other idea about then, this third one, is thinking long term, right?
Larry Sarbit 14:35
Rule number three is, think long term. For example, you know they're building these warehouses like I want to win a fake for God's sake. Of all places, this sounds like old economy because it sounds like bricks and mortar. They're putting up bricks and mortar, but they're filled with robots. Robots are going to what was the stats
that we had there on on robots.
Darren Coleman 15:03
Oh, I have it here. So the number of so they've been increasing their number of robots by over 50% like almost every year. They just keep adding more and more and more.
Larry Sarbit 15:12
And people who, at checkouts represent, still represent a large portion of the working America.
Darren Coleman 15:21
Yeah, it's about 3% of the workforce in the US does retail
Larry Sarbit 15:25
and the and they're, yeah, they're going to get rid of them. I mean, not get rid of them, but their numbers
not going to increase. And the and the other competitors are going to have to follow suit. There's no escaping it. So, yeah, robots, in 2016
they were up about 50%
robots, yeah, here it is 3.4 million,
or about 2.6%
of US workforce are employed as cashiers. How long before that? You know, it just keeps dropping and dropping a drug. You go to the store and you have the choice of check out. I'm the cashier. I'm happy to go and check out myself.
Darren Coleman 16:12
Well, because at least, you know, at least you know to put something on top of your own eggs and or put something on top of your own loaf of bread. Because, you know, at least I can script. I grew up in a grocery store. So you know what you're doing, that you know how to
Larry Sarbit 16:23
Yeah, but people are comfortable with it. They love it for quick order for 10 items or something. Why would I stand in line and wait 1520 minutes? I'll just go through the self checkout line. I'm in and out in five minutes, got my stuff and I'm back in that same thing.
Darren Coleman 16:44
So, so and those stores, and here's the thing with Amazon. So even the few stores that remain, many of those are going away because someone will bring it to your house in your front door. But back to this thing about thinking long term, and how the investments that he's made in infrastructure with trucks and warehouses, because to get stuff to you the next day or same day, you have had to invest in distribution warehouses all over the place. I find it unfathomable how much content, how much stuff they have to have in each one, because I've ordered the most random things and I get them the next day. I can't believe they even had it in the shop or in the warehouse somewhere. But to build that out required vision that is amazing. And I remember there's a TED talk that you can Google I see if we could find the name of the lady who did it. She used to work for Mr. Bezos, and she described how he would take a couple of days off every year or every quarter or something, and he would lock himself in the cheapest hotel room he could find and didn't even want a television in it, and he would have a whole bunch of moleskin notebooks, and he just anyway he had nothing in the room. And the idea was he wanted to get so bored that he had nothing to occupy his time and attention except writing notes in the notebooks and coming up with every crazy idea he came up with. And she said that years later, there are things that Amazon were doing, things like you know, overnight delivery and drones that were in those notebooks from years before. So he had thought of this stuff a long time, and it took years before he got the business where he could implement it.
Larry Sarbit 18:11
So there's his long term thinking, right? So there.
Darren Coleman 18:13
So back to management. The person who thought of that stuff, who wrote in those notebooks, was the same person who put those who got those boxes off the floor and put them on tables. Is the same person running the whole thing now. So that continuity management is amazing. So let's, let's move from him and what he did to let's talk a bit about some of the ways the moat is around the business, right? Because that's a really important component to any wonderful business. Can it have sustainable advantage, and what are the things that Amazon's done that allow it to maintain, or theoretically would allow it to maintain its incredible dominance in the marketplace? So we talked about a few of them. So one is just the distribution channel.
Larry Sarbit 18:55
Let's ask the question, could somebody today start a competitor to Amazon? And the answer is, there, there are competitors. I mean, I can go on Best Buy, yeah, but it's very it's containerized,
Darren Coleman 19:11
yeah, it's got to be a really specific niche, like a specialized and that's clothing or something that I that.
Larry Sarbit 19:16
But to recreate a company that can sell virtually everything and have it delivered to your house same day, next day, next week at the latest. I was used to that, not anymore. It's same day delivery or next day in Winnipeg. I mean, I'm old enough to remember this is really dating myself. But we used to get, you know, when I was managing money here, we used to get the New York Times on the Wall Street Journal delivered, and they came two days later, same day that, like today's Wall Street Journal talk two days a day or.
Two days to arrive at my house. And today I, you know, at midnight, I'm reading today's Wall Street, the new Wall Street Journal. And that's what these guys have done. Are doing long term building out these what else are they?
Darren Coleman 20:18
Well, one of the things that's important in this. And we talked about this a little bit with Google, that becomes another attribute of a motor on the business, which is the trust the customer has in it. So with alphabet or Google, we talked about that's become the, basically the book of record. That's the store of knowledge. When you want to know something, you go to Google to get it, and you have such trust in it. We talked about that just a minute ago. With Amazon, if you're in a store and you want to buy something, you check the price, because Amazon becomes the price checking thing. That's the store of knowledge for the price of the product and the availability of the product. So Amazon is just both a level, the characteristics of it and the reviews of it and the review Yes, though. So that's a very good point. Reviews become part of the mode around the business. You get to see things that and have an in an insight and education on the product that no one else can give you. And Amazon owns that
Larry Sarbit 21:08
and and what else is, he's investing in tractor trailers to be able to move stuff across the country in mass quantity. He's He's leased 40 cargo planes. His question is, how can I serve my client? How can I get everything, whatever they want, delivered to them as fast as possible, anywhere in the world? This is not just an American idea. This is a global idea, right? He owns the business.
Darren Coleman 21:43
and I got my Amazon Alexa listening to on your phone and the device in your car, so I'll know what you want before you you even know what you want, and I'll get it to in your favorite color. Unbelievable. I want to go to Kindle for a minute, because we talked briefly about Kindle and the way in which they dominate. Because they started in the book selling business. They dominate the printed book market, right? So, so how many books Amazon sells? What? Like, something like 40% of all the books that are sold the United States are through Amazon.
Larry Sarbit 22:11
But they have 22 varieties, wow, of candles. They got at least 2018
they had night there. There were 90 million e readers, right by 2027
the number of e readers is expected to be about 1.2 billion. Wow. I mean, these numbers are just they're staggering.
Darren Coleman 22:32
How much money would that generate? How much money did this generate?
Larry Sarbit 22:35
It generated in 2024 the worldwide ebook market, which is mainly Amazon, is about over about 14 and a half billion dollars. It's become a pretty serious business, and then people can self publish
Darren Coleman 22:56
Because they've broken the traditional publishing model by creating their own so like, I published a book, and we used Amazon as our distribution method, right? So even though I have an ISBN number and everything else and a publisher, Amazon is the mechanism. So they print on demand. They don't have a library of or a warehouse of my books, and they don't they kind of print them one at a time, which is an amazing capability. So now anybody does can write a book. They don't have to go and get a manuscript to get a publishing house to say, yeah, we'll take it. This is just democratize the entire process, and they own, yeah.
Larry Sarbit 23:29
I mean, if you want a book, if you want a physical, like a paper, and I'm still stuck in paper, because I like, I like to be able to take them with me and move them around, they sell at least 300 million print books every year, which is the business they started in, right? So that represents about 40% of print book sales in the US. I mean, if that isn't a barrier to entry, I don't know what is I mean, they wiped out the small bookseller.
Darren Coleman 24:04
Well, you know what's funny? Years ago, I was in Seattle, and I got a giggle because they'd wiped out most of the Barnes and Noble locations. And then Amazon started setting up a couple physical locations, and I thought that was kind of funny, like, we completely destroyed you. And what they did actually, they really used those locations. There were some hardcover books, but they were really using it to sell their tablets, which I thought was incredible. They just really want you to come in and buy a tablet, and then you get everything like this. And by the way, this is over 10 years ago, you could buy an Amazon Fire tablet Now, granted, not as good as an iPad, at least the one I was looking at, not as good as an iPad, but this will astound you could buy one. You could buy one. You could get on the internet with it. You could read books on it. And it was great. It was $29.99 it was effectively free.
Larry Sarbit 24:47
and when you buy the book, it's a fraction of the price, right?
Darren Coleman 24:52
But the point is, I could buy a device that looked like an iPad, did all the same stuff on iPad, not as great, but it was 30 bucks. The cover for it was the.
$35 This is insane. So it was kind of the Gillette model of like you buy that you will make the handle cheap, and the blades are expensive. That same idea. So and unbelievable what they did in doing that. Let's also move on to what is else is he doing to protect the moat around the business? And this is where I want to move into what's he doing with the Washington Post, which very germane now is we're going into the US election, actually, into, which is in a week or two, and then what is he doing as a lobbyist? Because when you get this big, and we talked about this with Google, you run a risk of your biggest competition is it another company? It's the government saying you're too big. So how is Mr. Bezos trying to fight that fight?
Larry Sarbit 25:38
And he spends hundreds of millions of dollars on talking to politicians in lobbying and so on. And of course, what he did very recently, in the last few days, and we have to date this October, yes, 31st 2024
he did an editorial in the Washington Post saying, we're not going to endorse any any candidate for president, and there are two choices. And he said, we're not doing that. Other papers do that. Yep, they're not doing it. They're staying out of it.
Darren Coleman 26:20
And there's a and there's a view that his silence is actually tacit support for somebody like instead of taking one side by being silent, he's not right.
Larry Sarbit 26:27
He's been very critical of of the Biden administration. He's been vocal. Anyway, I it just he bought it because the company was in financial difficulty. But things have have changed.
And so he spent, what a $20 million
annual lobbying budget is what he could, yeah, so this is to make sure he's, you know, he still has a power and an increasing amount of power, right?
Darren Coleman 26:59
So he's there to make sure he's got crocodiles in the votes, right? You will not. So all that lobbying is to protect what he's built.
Larry Sarbit 27:04
I don't know where he stands in the in the list of richest people today, but he's, he's in the top three, four or four,
Darren Coleman 27:13
yeah, he's Zuckerberg and musk. I think take choice just one any given day, any one of them's in the lead. So this is interesting, so if we kind of go back through our checklist, right? So management, fantastic, because the leader is the guy who put the boxes on the floor and then put them on the table, same person running the thing. Now, very long term vision, very focused on the customer, has put an incredible moat that is so deep and wide in so many ways, and it's unique. Really impossible is for us to imagine a competitor showing up that is going to even match Amazon, let alone beat them. And then one of the other criteria that we look at for wonderful business is basically fortress, like financial strength, like this absolutely indomitable financial powerhouse. And let's have a look and say, Where is Amazon compared to other retailers, are they big? Are they bigger than? Are they almost as big as? What is their size? I think we know the answer to this, but I think it's fun to kind of put this in a comparison, because the other big retailers in the US would be Macy's, Nordstrom, Walmart, Costco. That will be the biggest ones.
Larry Sarbit 28:19
Yeah, of the top four. Amazon's market value is now over $2 trillion which is over two times the value of all all the four that you listed, Macy's, Nordstrom, Walmart, Costco, over two times the value of all four. They dominate, they dominate retail, right?
Darren Coleman 28:43
So all four combined, it's not like twice, all of them together come by, unbelievable.
Larry Sarbit 28:49
And even Costco. I mean, I thought Costco was going to be huge, and they are. I mean, they sure their business is fabulous. They'll deliver to your drawer as well, but it won't be next tomorrow or be later today. I I'm lazy, and if it's winter in Winnipeg, which is highly likely event within the next few days, I'll just go on their website and order and have it delivered. And if I need something different, I mean, you sent me. Yeah, you ordered it in Toronto, and it got delivered here next day or the day after you could
Darren Coleman 29:29
you don't even have to order your own stuff anymore. You can order for other people. I do this for a birthday gifts for my niece and nephew. I order them stuff here and it gets sent to their house in Massachusetts, exactly, which is also time. So there's services that they offer that nobody else really does. There's also, and this is what I think is all is very interesting. There's also lines of business they're not in yet, but you could see, if they chose to, they may dominate them as well. So for example, Amazon does not yet. Maybe they will, maybe they won't. But what if they started offering banking or internet service?
Is or cell phone process. It's all there for the taking. Macy's is
Larry Sarbit 30:04
maybe an Amazon or maybe an Amazon phone. Or do they already have?
Darren Coleman 30:09
Well, they don't, but they could, like, I don't get my cable package from him, but I could. I don't get my, oh, you got Amazon Prime. So they're in that business. Excuse me. But the thing is that there's, there's businesses they dominate. There's even more they could, if they chose to. Now we also didn't get, let's do a little bit of the the mass. We've talked about a big they are and dominant they are. One of the problems for all retailers is margin. And you being, you know, from the retail grocery business, you know, a couple pennies on the dollars, but all you could probably squeak out in terms of margin. What are the margins look like? And the what does the profit picture look like for Amazon. Look last couple years. Does it look healthy or not?
Larry Sarbit 30:46
Net margins, I think these are pretty current.
Are about 8% which for a retailers, phenomenal, yeah, phenomenal. And that they're up. They're up from above 5% a year before, and as far as profit goes, they are making money. They are generating cash. Estimates for 2024
and I'm reading this will up from about 30 billion in 2023 to $51, billion in 2024 so he's an extraordinary guy, and that is, I mean, he's the guy that created this. How many more years he'll be there? Everybody's got a, a an expiry date on them, yeah, but when he hands it over to somebody. They'll be somebody who will have the same passion, the same drive, and the franchise will be there. You know, the question we always ask is, can you look out three years, three years, yeah, in a business and say that they're going to be still profitable, still still growing, still a key element in the business. The answer for this, I think, I think I could say with 90% degree of of certainty is they'll be around. They'll be bigger in three years. They'll be more powerful in three years. He's just going to keep driving this well.
Darren Coleman 32:22
And there's other businesses that we didn't even get to yet in this we're almost out of time, but we like for example, I remember years ago when we started looking at Amazon to add to some of our portfolios and trying to figure what the valuation was. I talked to an analyst who said, Darren, by the way, there's this other business they have. Was a guy who was in the tech space, and he said, there's a whole business they have that no one's even valuing. It's currently basically a zero on their balance sheet, but it's worth a huge amount of money. And I said, What's that? He goes, it's called Amazon Web Services. I'm like, What the heck is that? And explain to you that's cloud computing. Now this is years ago when we didn't, you know, unless you were a tech nerd, you didn't know what this stuff was. But he explained to me how Amazon was beginning to outsource the back office technology for all kinds of companies, because if you're an organization and trying to maintain your tech platform, your computers, your servers, your cyber tech, cyber security, was becoming extremely expensive to do that on your own. So Amazon's like, we'll do it for you. You outsource your back office technology, and we'll do it with our servers, and we can do the latest so if there's a new if they need a new hard drive or whatever it is, we'll just do it. You don't even have to know. And if it goes from you guys having to maintain all this stuff to just a service, and we have the best and latest cyber security and all the other things, and that business has become an enormously profitable and growing one for Amazon. And as I say, years ago, before people really understood it, you basically got that for free when you bought the stock.
Larry Sarbit 33:42
So the tentacles, they just keep going, go out, yeah, not just, not just suppliers.
Darren Coleman 33:49
And when I talk to clients of ours that are in that business, they're like, it's getting to the point where, if you're a Chief Investment Officer for a large company and you're not using Amazon Web Services for your back office, it's almost like, why wouldn't you? Because it becomes, becoming increasingly a superior alternative to doing it all yourself. So, so there's again, businesses that they're running that are below the radar, because obviously the Amazon Prime accounts and the TV channel, we see that, but the other things that they're going on, most of us don't even see it again, moat around the business, right?
Larry Sarbit 34:18
And then, you know, one last idea, which they have experimented with, are actual physical stores where you with your card, there's nobody there. You You pick your your products, and you walk out the door and and Amazon knows what, knows what you bought.
Darren Coleman 34:40
There's no cashier, there's no checkout. You just walk out with the stuff. It's
Larry Sarbit 34:46
the only people they have are people that fill the shelves. That's it, and then they're gone. And if something is out of stock, they'll fix they know about it, and they fill it up.
Darren Coleman 34:57
But the convenience store, I think.
Larry Sarbit 34:59
That's come, that'll come, yeah, because with there,
Darren Coleman 35:03
we all need a convenience store. Sometimes you just got to get a thing of milk or a KitKat bar. You'd want it now or you're on the way home. So this again, how do we make the transaction of the process easier? So back to the vision of serving the customer. You don't even have to check out, just get the thing and walk out and you're good, unbelievably fast.
Larry Sarbit 35:19
So then back to question one, is it, is it a moat? Is it a wonderful business? Will it be around three years from now or five years from now? I would venture to say it'll be around a decade from now? Yeah, I think it'll be even more powerful than it is today. So
Darren Coleman 35:41
and my and my bet, to you and everyone listening, is, I bet, if in the next 10 years, they're going to do stuff that we didn't even know they were going to do, they're like, they'll continue to surprise us.
Larry Sarbit 35:48
It's, it's in the lab. It's in the lab Exactly. It's, it's in his head, some of this, he's having fun.
Darren Coleman 35:54
He's having a great time. So, okay, so, so for those of you keeping score at home with this is our second one, as we go through the Magnificent Seven alphabet, we said, wonderful business, Amazon. Wonderful business. I know as we go through this some of the Magnificent Seven are not going to score as well, so stay tuned to see which ones we may not be as enthusiastic about, but also make the point that, again, none of this is advice. It's just trying to look at the thing as a value investor, a prudent investor would, because we're not going to talk about price, because that's a whole other thing to talk about. I think later on, later we'll get into how you should think about price as an investor, because you want to buy things surprise. You want to buy them cheap. And so we don't yet know if Amazon is cheap. We're not going to make that projection. We're just going to say, first of all, the first task I think, of any investor is just find wonderful businesses first, then we have a whole other way you approach the price of them. And we'll talk about things like the double dip return.
Larry Sarbit 35:54
And we'll talk about how how to screw things up as well. Absolutely spend a lot of time on how to how to really make a mess of your investments.
Darren Coleman 36:56
Well, you know what? That's look that. That's an entertaining one, because everybody wants to know how not to screw up. So we'll talk about the about the message you can make first
Larry Sarbit 37:04
that will teach you more than talking about what we're talking about is what's great, what's not great, what's a disaster. Look like. We're gonna have fun.
Darren Coleman 37:14
We're just getting started. So again, we're gonna use the top seven, The Magnificent Seven, just as illustrations of our point. But we have a lot more to come. You've got 40 plus years of wisdom that we're gonna try and pry out of you. And for those of you listening, thank you for your time, and we'll be back with you again as we move our way down the list. And Apple, I believe, is the next one that we're on for. So Apple is the next
Larry Sarbit 37:35
maybe, well, see when we got there.
Darren Coleman 37:39
Stay tuned for the surprises. Thanks, Larry.
Larry Sarbit 37:42
Have fun, everybody. Thank you.
Intro 2 37:45
This has been simply Sarbit with Larry sarbit and Darren Coleman, thanks for listening. If you have any questions or comments or ideas for new episodes, send us an email at simplysarbit@gmail.com
and you can find the simply Sarbit podcast on Facebook, X and LinkedIn. This series is a production of the Acme podcasting company.
Transcribed by https://otter.ai