Amazon ($AMZN) – Product & Investment Updates – June 29, 2024
Product News:
Amazon is building a low-cost marketplace to rival Chinese competitors such as Temu and Shein. This will be a subsection of its current marketplace and will target international consumers, while utilizing Chinese fulfillment capacity to meet demand. It will start onboarding merchants this summer. Like Temu and Shein, Amazon will tap into a tariff loophole that will allow it to sidestep this tax for any package under $800 (so all of them).
Next, Project Kuiper is nearing commercial viability. Under this program, Amazon will reportedly ship its first broadband satellites in the coming months for a Q4 launch. Finally, Amazon is reportedly building a ChatGPT competitor. This should complement its other GenAI applications such as its code writing products (Q and CodeWhisperer), its shopper companion (Rufus) and its planned GenAI Alexa subscription. When combining this batch of products with its powerful Bedrock foundational model, its work on training and inference chipsets and its large Anthropic investment, Amazon is certainly holding its own in the world of GenAI. I’m excited to see what kind of financial impact its GenAI apps will have on its current subscriptions and new offerings. The GenAI monetization wave will shift from hardware to software in the coming quarters and years. Amazon will be ready to benefit.
- Amazon and Microsoft’s Xbox are partnering to integrate cloud gaming into Amazon’s Fire TV hardware.
- Visa and Amazon are partnering on buy now, pay later (BNPL) in Canada.
Investment Case Update:
Amazon broke out to new highs this past week. Since I started the position 12.5 months ago, the stock has rallied by more than 70% and I wanted to update Max readers on my updated view of the risk/reward here. Simply put, I’m not at all interested in trimming my large position. Why? The company is still near 10 year lows for forward EV/EBIT at 33x. This is why tracking forward profit estimates is far more valuable than tracking share price. The stock went up. The multiple went down.
It’s also expected to compound EBIT at a 27% clip for the next three years, and a 1.2 EBIT growth multiple is far from unreasonable here.
But I don’t even think 1.2 is accurate. This company is the margin puppet master. It has built a world-leading revenue base over the last few decades, without much focus on profit. That focus shifted about a year ago, and we’ve seen explosive profit upside and revisions play out since then. While that has led to the fun stock run that we’ve seen, I still don’t think sell-side estimates have caught up to reality. I don’t think they’ve come close. The shifted focus leaves us with many, many margin accretion levers for Amazon to continue pulling.
Third party selling proliferation is continuing (which is margin accretive). Supply chain localization continues to cut price per package fulfillment, with more room to run. Its push to local fulfillment centers is still playing out. It continues to create more and more services out of its world-class supply chain to better utilize excess capacity and trim deadweight loss. Its flex driver program is giving it more labor hours on more favorable terms. Its thriving ads business is highly supportive of margins, as Amazon uses existing digital real estate to harvest more profit. Its nascent work on fulfillment center robotics is showing signs of bearing real fruit. Its Kuiper program and other new bets still have not begun to meaningfully monetize. Growth for its cloud computing and e-commerce businesses is bottoming to deliver more value from those fixed cost bases. The list goes on… and on… and on in terms of how many profit tailwinds this company is currently enjoying.
Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases
Yes, CapEx will rise in 2025. But that’s fully known and fully reflected in estimates. What isn’t fully known or reflected is everything else we’ve just covered. It’s very hard to model sharp changes in operational philosophy and margin inflections. Analysts are usually a bit timid to stick their necks out when things are difficult to forecast. None of us want to look silly. As these tailwinds continue to play out, I see analysts continuing to become emboldened and continuing to raise estimates. Up & to the right.
