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Is Amazon Ocean Shipping Worth Millions In Free Cash Flow?

With annual ocean shipping hauling in $350 billion a year in revenue, there is good reason why Amazon.com ( AMZN ) is interested in the business. E-commerce leader Amazon is planning to launch a global shipping and logistics operation that will compete directly with UPS ( UPS ) and FedEx ( FDX ), Bloomberg reported Tuesday, saying it had reviewed documents for the plan, called “Dragon Boat.” Bloomberg wrote that the new operations would expand Fulfillment By Amazon (FBA), which provides storage, packing and shipment of goods from third-party sellers. Such sellers make up a significant portion of its e-tail growth. An ocean shipping business alone could generate substantial returns — more than $100 million in free cash flow, Flexport CEO Ryan Petersen told IBD. That’s assuming the goods would be ingested into FBA’s supply chain — which aims to eventually squeeze out the middlemen, paperwork and headaches from logistics and delivery. The cost savings Amazon expects to see by owning the supply chain end to end, and the charges it could levy third-party sellers (or other merchants) would generate that free cash flow, generally defined as cash generated by operations minus capital expenditures. “It’s attractive for Chinese merchants to get into Fulfillment By Amazon centers right now,” Petersen told IBD. “Even with my conservative model, which would not make Amazon a large freight forwarder (though) less than a fraction of 1% of the overall ocean shipping business, it could easily earn more than $100 million in free cash flow.” Peterson says Amazon’s 90 or so fulfillment centers in the U.S. would easily be able to handle 450 containers every week. (The number of fulfillment centers is from Flexport’s data, Amazon does not disclose that). Based on current shipping costs, that would easily net Amazon $100 million in free cash flow, Petersen says. His estimate also assumes ocean shipping prices dig themselves out of the current slump. Rates are about half of what Petersen expects in the long run. San Francisco-based Flexport provides software and expertise that simplifies the international shipping process. Alibaba, Amazon Competition Grows The Bloomberg story said Amazon’s Dragon Boat program also will pit against its Chinese counterpart Alibaba ( BABA ) to gain share of cross-border e-commerce, which is expected to grow to $2 trillion by 2020. The world’s largest retailer , Wal-Mart ( WMT ), already does something similar when it takes possession of freight in China. But Wal-Mart doesn’t re-sell the freight shipping service, and Amazon might, according to analysts. Wal-Mart did not return requests for comment. Southington, Conn.-based Ocean Audit founder Steve Ferreira agrees with Petersen that ocean shipping could be lucrative for Amazon, and he says the company could well disrupt the shipping market. Ocean Audit specializes in detecting errors in ocean freight billing errors. The fact that Amazon last August filed initial paperwork for what might be the Chinese-side of Amazon’s ocean shipping division, Ferreira told IBD, suggests to him that the company is far along in developing its shipping operations. Amazon Would Be ‘Game Changer’ Ferreira calls Amazon’s potential entry into the ocean freight business a “stunning game changer.” He says the Seattle-based e-commerce firm could “theoretically enter the market and start moving goods at below the current market cost.” Amazon might well be gearing up to do just that. Ferreira says he believes Cong Pan , a Beijing-based Amazon attorney, is getting all the “paperwork” for Amazon Ocean set up. He says Beijing-based Amazon Vice President Brian Xue would run the ocean freight operation. Amazon did not return requests for comment. Amazon CEO Jeff Bezos has often repeated his mantra of putting customers before profits. Additional free cash flow could be used to lower the cost of Amazon’s goods or begin to offer essentially free parcel shipping for shoppers willing to wait, says Peterson. “If I had to read the mind of Jeff Bezos, he might not go after the free cash flow,” Petersen said. Baird analyst Colin Sebastian agrees with Petersen’s assessment. “I would caution that Amazon likes to use projects and other things to subsidize its core business,” Sebastian told IBD. “Amazon might not see any free cash flow because it would be absorbed into other businesses.” Sebastian says  he expects Amazon will move in stages into the transportation and logistics sector. “Amazon takes an incremental approach to new businesses, and they’re not going to create a competitor to DHL right away,” he said. But Sebastian says he sess enormous potential. “There’s a lot of potential disruption,” he said, “if Amazon plays its cards right.”

Will Apple Ad-Blocking, China Expansion Worries Curb Criteo?

How ad tech firm Criteo ( CRTO ) fares in Wall Street’s eyes after reporting Q4 earnings on Wednesday morning hinges on the company’s outlook for 2016 after the Paris-based firm transitions to reporting in U.S. dollars, an analyst says. “The key issue into earnings is the 2016 guidance,” wrote Cowen and Co. analyst John Blackledge in a research note on Monday. He said Paris-based Criteo will cease reporting in euros after Q4. The company is transitioning to a U.S. domestic issuer and will be adhering to GAAP reporting in U.S. dollars. Blackledge said he is looking for 2016 revenue guidance ex-TAC at 20-25% year over year, assuming a “5% foreign exchange headwind.” For Q4, he also expects Criteo’s customer additions to rise a “strong” 10% year over year to 10,000. Criteo embeds browser cookies — tiny text files that let websites recognize users and their preferences when they return to a site — for about half of the 100 largest retail and travel websites in the U.S. Criteo gets paid for serving ads only if a user clicks on them and collects a bigger cut if the user goes on to buy a product from or otherwise engage with that advertiser. Wall Street is also keen to get an update on how an  Apple ( AAPL )‘s decision to allow browser ad blocking on iPhones for the first time is impacting Criteo, said Blackledge. Apple began letting users install apps that prevent ads from appearing in its Safari mobile browser last year. Apple’s action is seen as a potential blow to Criteo. which gets paid for serving ads only if a user clicks on them, and it collects a bigger cut if the user goes on to buy a product from or otherwise engage with that advertiser. Analysts have said reducing the ad supply could impact Criteo’s growth. However, Jefferies analyst Brian Pitz wrote in a note on Oct. 2 that he doubted “the enabling of ad blockers for Apple iOS 9 will meaningfully impact” Criteo, which “has stated that a majority of their mobile revenue is driven through Alphabet ( GOOGL )-owned Google Android products rather than Apple.” Criteo is “creating one of the largest cross-device advertising mousetraps, which will complement advertisers’ ability to measure performance outside of Facebook ( FB ) and Google,” said another analyst, RBC Capital Markets’ Rohit Kulkarni, in a November research note. Another major point of interest for investors this week is Criteo’s strategy in China and whether Alibaba Group ( BABA ) emerges as a major client in 2016. Blackledge said he also wants an update on how the company is faring with the mobile Dynamic Product Ad inventory on Facebook as well as what new search products may be ahead. In Q3, Criteo posted revenue minus traffic acquisition costs — what it must pay other websites to carry ads — of 120.3 million euros, about $134 million at current exchange rates, up 55% year over year in local currency. That beat the 117.9 million euros analysts polled by Thomson Reuters had been expecting. For Q4, the company guided revenue minus traffic acquisition costs of between 134 million euros and 139 million euros, up 39% to 44% year over year in local currency, equal to about $153 million at the midpoint at current exchange rates. That Q4 revenue guidance was short of the 141.63 million euros that analysts had wanted to see. Analysts polled by Thomson Reuters are expecting Criteo to report Q4 revenue minus TAC — traffic acquisition costs, or what the company pays other sites to carry its ads — of 138.2 million euros, up 43% year over year in euros. Analysts are modeling Q4 EPS ex items of 0.40 euros, up 8% year over year in euros. Criteo stock was down 8% in midday trading in the stock market today , near 25.50. Criteo stock is 35% below where it was trading this time last year and is off 58% from its all-time high of 60.95 touched in early March 2014.

Baidu Spending In Its ‘Online-To-Offline’ Push Will Be Focus In Q4

When Baidu ( BIDU ) reports Q4 earnings after the close on Tuesday, investors will get another look at how the aggressive online-to-offline e-commerce push of China’s largest search company is faring. In June 2015, Baidu announced that it would invest $3.2 billion over the next three years to bolster its lineup of O2O by fortifying group-buying website Nuomi, which Baidu acquired for $160 million in 2014. Baidu has said its big spending effort will pay off because its vast abilities in search will eventually translate to revenue from business commissions. The O2O business model aims to attract customers online, then direct them offline to physical stores and to services including health care and food delivery. “Ultimately, what Baidu is building and offering is much broader than a daily-deals business,” Baidu CEO Robin Li told analysts during a conference call after the company posted Q3 earnings in October. “We are creating an online-marketing and transaction-services platform, bringing to bear the power of our entire platform across search, maps, Nuomi, Takeout Delivery and Baidu Wallet. Our platform benefits from shared synergies, with traffic and data from search and maps enhancing the growth of our newer products.” Banking On O2O To Compete Baidu is banking on its O2O business to help it compete in China’s burgeoning e-commerce arena vs. China e-commerce leader Alibaba Group ( BABA ) and others. But Alibaba, too, has invested heavily to develop its online-to-offline retail capability. Other major China Web companies fortifying their O2O offerings include JD.com ( JD ) and Tencent Holdings ( TCEHY ). Analysts also want to find out how Baidu’s efforts to penetrate into the lucrative market of mobile apps are coming along. Baidu has been slow to advance into mobile apps, while China tech heavyweight Tencent has emerged as the top rival to Baidu in mobile search, according to a report on Jan. 22 from Nomura, which handed Baidu a price target cut and rating downgrade. ‘The Potential Threat’ “Who is the potential threat for Baidu on mobile? We believe it’s Tencent, rather than any of the existing search engines,” wrote Nomura analyst Jialong Shi in that industry note. “Baidu is trying to penetrate into mobile apps, but so far progress has been slow. Based on our checks with industry experts, the challenges for in-app search mainly lie in two aspects — immature technology and reluctance of app developers.” Nomura lowered its price target on Baidu stock to 180 from 200 and cut its rating on Baidu stock to neutral from buy. For Q4, Baidu has guided revenue of between $2.864 billion and $2.95 billion, up between 29.5% and 33.4% year over year in local currency, to between 18.2 billion and 18.75 billion Chinese renminbi. Analysts polled by Thomson Reuters are expecting Baidu to report Q4 revenue of RMB 18.59 billion, up 32% year over year in local currency, with Q4 EPS (GAAP) of RMB 6.60, down 26% year over year. For Q1, analysts polled by Thomson Reuters are expecting Baidu to report revenue of RMB 16.47 billion, up 29% year over year in local currency, with Q1 EPS (GAAP) of RMB 5.48, down 18% year over year. Internet Finance Initiatives Credit Suisse analyst Dick Wei boosted Baidu’s price target to 251 from 210 in mid-December, pointing to positive “traction” in both Baidu Nuomi and the company’s iQiyi video wing. Wei said iQiyi went from 5 million paid users in June to 10 million paid users on Dec. 1, while Baidu Nuomi had attained 11.2% of the online movie-ticket-booking sector. The company’s new Internet finance initiatives are also growing, Wei said. In November, Baidu announced its partnership with China Citic Bank to establish a direct sales bank, Wei said, while by the end of September, the number of registered users for Baidu Wallet reached 45 million, a 520% increase year over year. “We are positive on Baidu’s continued investment in this space,” he said. Baidu stock closed at 145.34 on Friday, down 4.8%. Instability in the Chinese stock markets and investor concern about the company’s O2O spending have helped drag down the price of Baidu stock 33% since this time last year.