 Good day fellow investors. Welcome to the Value Investing School Episode 2. Today we're going to discuss all the various forms value comes in and we are going to take the very recent example where Berkshire acquired a significant stake in Amazon. It is now valued just below 900 million. It was not done by Buffett but by his two asset managers there, Ted or Todd. We don't know who bought it. However it's an excellent example to explain the following. When it comes to value investing and what value is and the last conference call Warren Buffett gave an excellent definition of what value actually is when it comes to investing and the definition is as following. Value is defined by the cash flows from today to judgment day that the business is going to deliver. So when we look at Amazon the Berkshire purchase many are worried that Berkshire will skew from the value investing principles when Warren Buffett is gone and that Amazon is not a value investment. However we have to put the cash flows into a perspective that keep in mind the thing that Berkshire is buying businesses and put that perspective on Amazon. So let's try to value Amazon from a value investing perspective where value is cash flow, value is growth and value is the ecosystem, the business and the mode. Let's start. So the things we're going to learn in this episode are valuation based on cash flow. Something very interesting with Amazon is a negative or very low working capital business model. Growth is part of value, risk and reward investing. Why didn't they buy Amazon sooner? Value is what you get, price is what you pay. The recent 13F filing is where these financial institutions holding declared their US holding so you can see all the holdings of the bigger funds of the bigger institutions in their disclosures 45 days after the closure of the quarter. So recent new disclosure they own 483,300 shares of Amazon. Now when it comes to Amazon's valuation we have to focus on cash flows. What Buffett said is to focus on cash flows from today to judgment day and Amazon's cash flows just keep growing. Trailing 12 months free cash flows are now at 23 billion. When you compare 23 billion to the current market capitalization of 900 billion it seems like a small number but don't forget the growth. It is also about the margin of safety and future cash flows. Let's discuss Amazon's margin of safety before estimating future cash flows. When it comes to Berkshire and buying businesses they look at the business. What is the value of the business? How much would it cost to rebuild what the business has built up till now? So when they bought Coca-Cola they estimated okay what would it cost to rebuild the brand like Coca-Cola in the 1980s? So the price was what 20 billion it would cost 100 billion so it was cheap for them. So what would it cost to rebuild what Amazon has now if you started now? Walmart is trying and you see okay it's very very expensive to grow e-commerce and compete with Amazon. So that's one mode that Amazon has built till now which will probably lead to more and more cash flows in the future and they are building this ecosystem of strengths of scalability that simply does very well and is an amazing business. Nobody can say that Amazon is not an amazing business. If we focus on the last conference call they are trying to go from two-day free shipping to one-day free shipping so really scaling so really growing being the front runner in the industry and their unit growth rate sales is a 10% but that is not even their fastest growth business as there is AWS advertising subscription etc etc that is growing growing fast based on their ecosystem. The market share in e-commerce in the United States for Amazon has been and is expected to continue to grow. This is how big how strong Amazon is and the management even says that given their 20 years of laser focused logistics and fulfillment experience they will use it to consistently improve etc grow the company scale the company and that is where investors can expect positive cash flows. On top of the improvements there is also the e-commerce growth tailwind now at 9.9% of US retail sales and if it continues to grow like this we have a double in the next what 10 years for sure as more and more people buy online plus the services we can expect that Amazon will continue to grow steadily and safely. Now when it comes to growth there are some companies like Tesla that need their capital intensive they need to spend a lot of money to grow and the profitability is questionable however Amazon has had the negative working capital business model and now it's a low working capital business model where it is financed actually by the suppliers let me explain the net working capital is the difference between current assets and current liabilities when the working capital is negative or extremely low in Amazon's case thus the current liabilities are higher or equal to the current assets actually the suppliers of the company are financing the business Amazon is growing on free money a look at their balance sheet shows that Amazon has a total of 75 billion in current assets of which 42 billion in cash cash plus marketable securities and 68 billion of current liabilities where the largest account is accounts payable with 48 billion when you add that up the total net working capital positive is 7 billion for Amazon that's a very very low number and the key here are the accounts payable the accrued expenses that compound to 68 billion so suppliers are financing Amazon with 68 billion of free money how does this work well for example if you buy my book on Amazon modern value investing you have to pay immediately however I'll be getting something like 70% of the Kindle version and 30% of the paperback version only 45 days from now so if you buy will be financing Amazon for 45 days so Amazon is a high cash flow business and this makes it unlikely that it will go bust no matter what happens because it can rely on the huge cash flows that simply go through the business so when you have such a strong business you can scale you can use 20 billion 10 billion to buy Whole Foods try something new invest for the very very long term and that is actually what Buffett has been doing in the past buying businesses buying businesses using the free float and that's why I think Amazon is very close to Berkshire from that perspective let's now go to the cash flow valuation if you look at the cash flows you have the yellow line here so price to cash flows here has always been around 40 25 to 40 45 the price earnings ratio the line above the yellow line has been crazy even almost 1000 in 2015 but you have to see what to focus on as Amazon is investing a lot in technology that is depreciated or amortized fast so you cannot really focus on earnings what you have to focus is perhaps better than earnings cash flows and a company that is growing at 17 per year probably will go growing the double digits for a long time has a mode might not be considered expensive as a price to cash flow of 40 that's at least how I see the Berkshire purchase so when we put this into the Buffett Berkshire perspective of buying great businesses valuing them today up till infinity until judgment day then you ask where will amazon be in 10 15 20 years and then you start comprehending okay what is Berkshire doing with this purchase they are simply buying a piece of a great business at hopefully a fair price for them more on the fair price a little bit later so if we look at amazon's revenue if they continue to grow at 10 or at 15 percent I made a row 12 there it's a mistake so the revenue at 10 percent will be 625 million in 10 years or billion sorry in 10 years or 975 billion in 10 years so the red number one the earnings per share will go from the current 23 to probably 100 in the 15 percent gross scenario the book value per share will go from the current 100 to 400 the free cash flow per share will be around 100 billion or more than 150 per share so what Berkshire is doing here they are simply seeing okay in 10 years this company will have free cash flows of 100 billion probably if we pay 700 or 900 billion what they paid now when we compare the market cap it is an extreme bargain as the value of it the growth of it goes to infinity on top of everything yes they bought amazon but we don't know when perhaps they bought in december and didn't disclose it or they bought in january when the price was much lower than it is now so they are waiting they are always looking for these opportunities and when an opportunity falls into their basket they simply buy and take advantage of the opportunity that they can buy a great business as a fair price many wonder why they didn't buy sooner amazon and i think here it comes to risk and reward a promise is something when the ecosystem has been built has been tested then is when buffet likes to buy because it has a margin of safety it has a mode it has stability he doesn't like to invest on hopes and therefore it's better to him to wait that amazon or apple become established businesses because he is investing for infinity for the very long term his first rule is don't lose money and when you investing on hopes like tesla uber you can lose money which is not buffet style when you are investing in built ecosystems then the likelihood of losses is much much lower and this is the reason why i think berkshire ted or todd value investors have invested their money their assets under management in amazon because yes at some point probably in january when they bought it was a value investment thanks to scale mode growth cash flow which all create value especially in the long term in amazon's case so the key outcomes are value comes in many forms growth is an essential part of it value measures depend on the business model is it cash is the book value is it growth is it earnings the key is to buy businesses behave like an owner am i happy to pay 700 800 900 billion for the largest e-commerce global force on 25 billion in cash flows and 15 growth does the business have a mode so buying businesses investing in businesses and then the key is also just be patient the market will give you an opportunity constantly like it was amazon at 1307 in december 2018 sooner that year we had facebook that was cheap apple etc to conclude don't worry about berkshire they'll just keep on buying businesses great businesses forever and they'll do really really well let me know what you think in the comments below click like if you liked the video thank you for watching and i'll see you in the next video