Amazon: the high-margin online retailer

(This is not an actionable idea.)

From researching dollar stores, one of the things that struck me was that you can purchase a pregnancy test for a dollar.  Amazon’s #1 best seller pregnancy test costs $12.33– a magnitude more expensive than dollar stores.  Amazon is clearly not competing on price!!

By comparison, a more discounting-oriented online retailer like Newegg has razor-thin gross margins of between 8 to 11% (before overhead).  Newegg sells computer parts online.  Its financials are available via the  S-1 filing on EDGAR due to Newegg’s aborted IPO.

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Ignore the cloud / the future is cloudy

In my opinion, investors should mostly ignore the hype around “cloud” computing.

There are different definitions of so-called “cloud” computing.  In a literal sense, cloud computing refers to computers attached to a network.  Such technology has been around since the 1960s.  The current interest in cloud computing largely has to do with the pervasiveness of fast Internet connections.  “Cloud” software can be thought of as “software that requires a fast Internet connection”.  The widespread adoption of broadband Internet allows certain forms of cloud technology to become more viable.  For example, backing up large amounts of data over an Internet connection now makes sense.

However, all software companies are largely on the same footing when it comes to cloud computing.  If cloud computing makes sense for a particular market segment, anybody can (re-)design their applications to take advantage of fast Internet connections.  Software has always been an arms race between competitors improving their product with new features.  Cloud computing is simply part of that arms race.  Personally, I don’t see cloud computing as being a paradigm shift like the Internet was.

CNIT resolves multiple personality disorder

From the press release filed on EDGAR [emphasis mine]:

SHENZHEN, China, March 24, 2015 /PRNewswire/ — China Information Technology, Inc. (the “Company” or “CNIT”) (Nasdaq GS: CNIT), a leading provider of integrated cloud-based platform, exchange, and big data solutions to the Chinese new media industry, today announced that the Company has completed its acquisition of Shenzhen Biznest Internet Software Co. Ltd. (“Biznest”), a leading cloud computing hardware and software company in China. As previously announced, the total consideration of the transaction is approximately $15 million, consisting of approximately $7.5 million to be paid in cash and 1,543,455 ordinary shares to be issued by the Company. The transaction consideration has been fully paid by March 18, 2015 and the modification registration of Biznest with the competent administration for industry and commerce has also been completed.

Now I think that CNIT has figured out its identity as a hot cloud technology company.  And now there is no reason for me to be confused about why Biznest’s domain name registration listed a chinacnit.com email address.  (See my previous post on CNIT’s multiple personality disorder.)

*Disclosure:  No position.  I swing trade in and out of stocks.  This may be a mistake on my part… who knows.
EDIT (3/27/2015):  As of 3/27/2015.  I am short CNIT.  I may cover my position without updating my blog.

Avid’s deferred revenue accounting

Avid sells its software through different pricing structures.  For some products, Avid offers support contracts.  Deferring revenue makes sense for those contracts.  However, Avid also sells software for one-time payments.  In my opinion, deferring some of the revenue from such sales creates a major accounting distortion.  Avid already has the customer’s money so it does not make much sense to defer the revenues and profits on such sales.

Enterprise storage will become more commoditized (EMC, NTAP, VMEM)

History has a pattern of mass-market products eventually decimating low-volume high-end products.  The cost savings from economies of scale overpower the benefits of specialized solutions.  This has happened to word processing (e.g. Wang Labs), mainframes, high-end CPUs (SGI versus Intel), post production systems (ADSK, ADBE, AVID, etc.), film/video cameras, and many other industries.

Back in Dec 2012, I wrote a post on enterprise storage.  Now, I’m starting to be more confident that enterprise storage will indeed become increasingly commoditized.

Data Centers – Part 5 – Accounting + cost of capital

Summary:

• Making overly optimistic projections about the estimated useful lives of computer equipment can be used to inflate profits.
• Data center stocks with a very high cost of capital should be avoided.

Data centers – Part 4 – The future of infrastructure?

I think that proprietary ecosystems like Amazon Web Services will continue to grow.  These ecosystems will be popular with small software developers because it saves a lot of time.  Larger developers will see less benefit from proprietary software because their problems tend to be more specialized and difficult.

The main benefit of pooled infrastructure for larger developers is higher server utilization.  Many of their workloads see fluctuating demand depending on the time of day, depending on the season, or depending on one-time events (e.g. ticketing companies will see a heavy server load when tickets for their most popular events first become available).  They should see their costs drop by taking advantage of the elasticity made possible by pooled infrastructure.