# Hao Zhou

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## Professional Experience

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## Education

Finance at Chinese University of Hong Kong
Computer Engineering at University of Illinois, Urbana Champaign

## Other Interests

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AMZN \$684
• made a price estimate 2/2/12
• tags: AMZN
•   [ less... ]

• commented 1/26/12
• tags: AMZN
• Why I believe Trefis's calculations for AMZN stock price is incorrect

One thing that really struck me when looking at Trefis's Enterprise DCF valuation of AMZN is that indirect expenses go from postive to negative, and begin to add massive "value" to amazon. By 2018, the cash generating indirect expenses is providing 25% more cash flow on top of operating income.

This flies in the face of how I understand finances. A company's gross profit is generally the revenue - the direct cost. For example, if I sold a pair of socks for \$10, and it costs \$4 to produce the socks, then the profit is \$10-\$4 = \$6. If I sold 10 million pairs of socks, then my gross profit is \$6 million. However, if I spent \$1 million on lawyers, then this would be part of the indirect expenses, and therefore my operating income would be \$6 - 1 = \$5 million dollars. From what I understand, indirect expenses are costs that decrease profits, and not the other way around.

The Trefis estimates for AMZN suggests that from 2014-2018, amazon's DCF value every year is HIGHER than the gross profit. This is only possible because indirect expenses start falling every year starting from 2012, and slip into negative territory after 2014. Going back to my previous example, this is is basically saying that after making a \$6 million profit selling socks, I will have made \$10 million in cash flow by a \$-4 million indirect expenses. Unless AMZN is somehow able to get the government, lawyers and other employees to pay it, rather than the other way around, I don't see how that is possible.

A negative indirect expense is hard to imagine, even for the most well run company. Even supposing very low overhead costs, zero management expenses, zero taxes (very good accountants), and paying those accountants nothing, that would still only achieve \$0 indirect expenses. Tax rebates, winning court cases, and I suppose suing your own employees could earn money and cause the indirect expenses to go negative. All of these things seem as likely as pigs flying, however. The most likely case I can see is winning a massive patent settlement with another company, and gaining a one-off \$1 billion. I still cannot see, however, how AMZN can do this, quarter after quarter, for 5 straight years from 2014-2018. Nor can I understand how the cash flow from this "activity" increases year after year, and by 2018 make more postive cash flow than the entire operating profit of AMZN in 2012.

Again, according to Trefis's P&L, indirect "expenses" of Amazon in 2018 will make more postive cash flow than the combined EBIT (earnings before interest and taxes) of Amazon in 2012. In 2012, Amazon's EBIT is \$1.86 billion. In 2018, indirect expenses is \$-2.22 billion, that is to say, AMZN earned \$2.2 billion dollars somehow with expenses.

The overall impact to AMZN's stock price is huge. Once AMZN's indirect expenses are projected to grow from \$800 million a year like a normal company instead falling to \$0 and then going negative, AMZN will lose more than half of its DCF value. A big part of this is due to the terminal value, which is calculated from \$8.6 - 0.8 = \$7.8 billion, instead of \$8.6 - (-2.22) = 10.8 billion. [ less... ]
Why I believe Trefis's calculations for AMZN stock price is incorrect One thing that really struck me when looking at Trefis's Enterprise DCF valuation of AMZN is that indirect expenses go from postive to negative, and begin to add massive "value" to amazon. By 2018, the cash generating indirect expenses is providing 25% more cash flow on top of operating income. This flies in the face of how I understand finances. A company's gross profit is generally the revenue - the direct cost. For example, if I sold a pair of socks for \$10, and it costs \$4 to produce the socks, then the profit is \$10-\$4 = \$6. If I sold 10 million pairs of socks, then my gross profit is \$6 million. However, if I spent \$1 million on lawyers, then this would be part of the indirect expenses, and therefore my operating income would be \$6 - 1 = \$5 million dollars. From what I understand, indirect expenses are costs that decrease profits, and not the other way around. The Trefis estimates for AMZN suggests that from 2014-2018, amazon's DCF value every year is HIGHER than the gross profit. This is only possible because indirect expenses start falling every year starting from 2012, and slip into negative territory after 2014. Going back to my previous example, this is is basically saying that after making a \$6 million profit selling socks, I will have made \$10 million in cash flow by a \$-4 million indirect expenses. Unless AMZN is somehow able to get the government, lawyers and other employees to pay it, rather than the other way around, I don't see how that is possible. A negative indirect expense is hard to imagine, even for the most well run company. Even supposing very low overhead costs, zero management expenses, zero taxes (very good accountants), and paying those accountants nothing, that would still only achieve \$0 indirect expenses. Tax rebates, winning court cases, and I suppose suing your own employees could earn money and cause the indirect expenses to go negative. All of these things seem as likely as pigs flying, however. The most likely case I can see is winning a massive patent settlement with another company, and gaining a one-off \$1 billion. I still cannot see, however, how AMZN can do this, quarter after quarter, for 5 straight years from 2014-2018. Nor can I understand how the cash flow from this "activity" increases year after year, and by 2018 make more postive cash flow than the entire operating profit of AMZN in 2012. Again, according to Trefis's P&L, indirect "expenses" of Amazon in 2018 will make more postive cash flow than the combined EBIT (earnings before interest and taxes) of Amazon in 2012. In 2012, Amazon's EBIT is \$1.86 billion. In 2018, indirect expenses is \$-2.22 billion, that is to say, AMZN earned \$2.2 billion dollars somehow with expenses. The overall impact to AMZN's stock price is huge. Once AMZN's indirect expenses are projected to grow from \$800 million a year like a normal company instead falling to \$0 and then going negative, AMZN will lose more than half of its DCF value. A big part of this is due to the terminal value, which is calculated from \$8.6 - 0.8 = \$7.8 billion, instead of \$8.6 - (-2.22) = 10.8 billion.
• commented 1/26/12
• tags: AMZN
• Is it really possible to have indirect expenses to go negative, and actually add to cash flow? [ less... ]
Is it really possible to have indirect expenses to go negative, and actually add to cash flow?
• commented 1/26/12
• tags: AMZN
• What does this mean? I don't understand why this is forcast to fall to 1% when it is currently at 3%, nor why doing so makes AMZN's stock price drop by 50%. Indeed, this one number has a larger impact than any other estimate. [ less... ]
What does this mean? I don't understand why this is forcast to fall to 1% when it is currently at 3%, nor why doing so makes AMZN's stock price drop by 50%. Indeed, this one number has a larger impact than any other estimate.

VZ \$84.85
• made a price estimate 1/18/11
• tags: VZ
•  Mobile Subscriber Plan Pricing
Verizon's Share U.S. Mobile Subscribers
[ less... ]
Mobile Subscriber Plan Pricing
Verizon's Share U.S. Mobile Subscribers

T \$48.35
• made a price estimate 1/18/11
• tags: T
•   [ less... ]

MSFT \$74.20
• made a price estimate 1/14/11
• tags: MSFT
•  Microsoft Office Operating Margin
Windows OS Operating Margin
Windows Server & SQL Server Operating Margin
Xbox Average Selling Price
Windows' Market Share of Global Servers
Windows Pricing for PC Makers
Server Software Price per Server
[ less... ]
Microsoft Office Operating Margin
Windows OS Operating Margin
Windows Server & SQL Server Operating Margin
Xbox Average Selling Price
Windows' Market Share of Global Servers
Windows Pricing for PC Makers
Server Software Price per Server

GOOG \$795
• made a price estimate 1/14/11
• tags: GOOG
•  Content Partner Revenue per Page View
Percent of Paying Google Apps Users
Price per Paying Google Apps User
Google Share of Global Mobile Phone Market
Revenue per Page View
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Content Partner Revenue per Page View
Percent of Paying Google Apps Users
Price per Paying Google Apps User
Google Share of Global Mobile Phone Market
Revenue per Page View

INTC \$34.11
• made a price estimate 10/4/10
• tags: INTC
•   [ less... ]

• made a price estimate 9/22/10
Packaged Software Gross Profit Margin
Acrobat Software Pricing
[ less... ]
Packaged Software Gross Profit Margin
Acrobat Software Pricing

RIMM \$15.39
• made a price estimate 9/18/10
• tags: RIMM
•  Push Email Service Revenue per Retail Subscriber
Push Email Service Revenue per Business Subscriber
Retail Subscriber Mix
BlackBerry Mobile Phone Market Share
Push Email Gross Profit Margin
[ less... ]
Push Email Service Revenue per Retail Subscriber
Push Email Service Revenue per Business Subscriber
Retail Subscriber Mix
BlackBerry Mobile Phone Market Share
Push Email Gross Profit Margin

NYT \$11.41
• made a price estimate 8/6/10
• tags: NYT
•  NY Times Weekly Pricing
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NY Times Weekly Pricing

YHOO \$34.66
• made a price estimate 8/3/10
• tags: YHOO
•  Internet Users on Yahoo
Yahoo Revenue per Search (RPS)
Global Internet Users
Yahoo Revenue per Page View (RPM) from Display Ads
Yahoo's Search Market Share
[ less... ]
Internet Users on Yahoo
Yahoo Revenue per Search (RPS)
Global Internet Users
Yahoo Revenue per Page View (RPM) from Display Ads
Yahoo's Search Market Share

DELL \$13.45
• made a price estimate 8/3/10
• tags: DELL
•  Dell Notebooks & Netbooks Pricing
Dell Notebook & Netbook Market Share
Global Notebook & Netbook shipments
[ less... ]
Dell Notebooks & Netbooks Pricing
Dell Notebook & Netbook Market Share
Global Notebook & Netbook shipments

AAPL \$120
• made a price estimate 1/26/12
• tags: AAPL
•   [ less... ]