{"id":39750,"date":"2023-07-24T08:45:56","date_gmt":"2023-07-24T12:45:56","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/amazon-stocks-profligacy-is-destroying-shareholder-value-nasdaqamzn\/"},"modified":"2023-07-24T08:45:59","modified_gmt":"2023-07-24T12:45:59","slug":"amazon-stocks-profligacy-is-destroying-shareholder-value-nasdaqamzn","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=39750","title":{"rendered":"Amazon Stock’s Profligacy Is Destroying Shareholder Value (NASDAQ:AMZN)"},"content":{"rendered":"
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A Very Long Runway Ahead<\/h2>\n

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FourWeekMBA<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

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We’ve spent a fair bit of time analyzing what we’re seeing, and I’ve spent a good chunk of time myself looking as well, and we like the fundamentals of what we’re seeing in AWS. The new customer pipeline looks strong. The set of ongoing migrations of workloads to AWS is strong. The product innovation and delivery is rapid and compelling. <\/span>And people sometimes forget that 90-plus percent of global IT spend is still on-premises. If you believe that equation is going to flip, which we do, it’s going to move to the cloud.<\/strong> And having the cloud infrastructure offering with the broadest functionality by a fair bit, the best securing operational performance and the largest partner ecosystem bodes well for us moving forward.<\/span><\/em><\/p>\n

Andy Jassy, CEO, Amazon Q1 2023 Earnings Call<\/p>\n<\/blockquote>\n

Distilling Amazon To Its Very Essence<\/h2>\n
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On the advertising side, we’re continuing to buck wider advertising trends and deliver robust growth.<\/strong> I think there are a few reasons for it. First, even in difficult economies, most people still shop. And with the largest e-commerce shopping venue, we have a lot of customers that companies seek to reach. That, coupled with our very substantial investment in machine learning to make sure customers see relevant ads when they’re looking for various items, have meant that these advertisements have performed unusually well for brands, which makes them want to advertise on Amazon.<\/em><\/p>\n

It’s also worth noting that we’re still very early in our efforts to find a way to thoughtfully place ads in our broader video, live sports, audio and grocery properties. We have a lot of upside still in advertising.<\/strong><\/em><\/p>\n

Andy Jassy, CEO, Amazon Q1 2023 Earnings Call<\/p>\n<\/blockquote>\n

My thesis for Amazon (NASDAQ:AMZN<\/span>) is very simple:<\/p>\n

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  1. Amazon generated ~$41B in TTM ad sales (as of today)<\/em><\/li>\n
  2. Amazon generated ~$85B in TTM AWS sales (as of today)<\/em><\/li>\n<\/ol>\n

    These combined lines of business generate about 70% gross margin, and, over the long run, will generate a 25%+ free cash flow margin (and 25% free cash flow margin very well could prove to be conservative).<\/p>\n

    Three Year Growth Of Ads and AWS<\/h4>\n

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    Amazon’s 10-K<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

    Using these assumptions, by year 10, Amazon will generate about $130B in free cash flow globally via these two lines of business alone.<\/p>\n

    Using a reasonable 25x EV\/FCF multiple by that time, Amazon would trade at $3.2T, and, by that period, I still<\/em> do not believe AWS would be done growing. I believe the business has decades of growth still ahead of it.<\/p>\n

    As Mr. Jassy remarked, on-premises workloads still account for 90% of all workloads, and, over time, it’s quite likely that that equation flips such that the majority of workloads occur natively in the cloud.<\/p>\n

    AWS Is A Juggernaut Cloud Computing Platform With Decades Of Growth Ahead<\/h4>\n

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    Amazon’s Q1 2023 Earnings Presentation<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

    Notably, for my Amazon thesis, we do not need any of Amazon’s other lines of businesses to generate profit. They will only need to breakeven. This includes Amazon’s Prime Business, Amazon Shipping & Logistics, its ecommerce 1P\/3P product businesses, and its services businesses.<\/p>\n

    These could all be $0s, in a sense. They just need to breakeven from a cash flow perspective, and Amazon should be a successful investment from here.<\/p>\n

    Now, if we get fiscal discipline, which I believe will actually enhance<\/em> innovation within Amazon, alongside a disciplined, sustained share repurchase program, I believe Amazon will be arguably the best performing megacap tech stock of the next decade.<\/p>\n

    In the next section, we will further explore this contention.<\/p>\n

    Amazon’s Profligacy Is Destroying Shareholder Value<\/h2>\n

    Over the last few years, I’ve grown increasingly dissatisfied with Amazon’s use of its gross profits and free cash flow, a.k.a., shareholder capital, and this is not about the share price stagnation. I am okay with 6 years of share price stagnation, but, as Amazon begins producing “otherworldly” levels of gross profit, I believe its capital allocation mindset must shift.<\/p>\n

    A portion of the businesses I buy are stewarded by visionary Founder-CEOs who aggressively reinvest gross profits into the business to the extent that there’s scantly any profitability in the near term; so I am broadly okay with businesses not being exceptionally profitable as they grow at 20% to 30%+.<\/p>\n

    Historically, Amazon was the quintessential example of this paradigm. It was the paragon of a business operated by a man and his team who were so competent as to redeploy shareholder capital into areas that created simply stunning growth for Amazon.<\/p>\n

    But I do not believe Amazon should behave this way at its current stage of maturity.<\/p>\n

    I do not believe any man or woman has the capacity to properly redeploy $70B (and growing quickly) in gross profits into areas that produce sufficient ROI for shareholders, year in, year out, for decades at a time.<\/p>\n

    As a demonstration of this train of thought, over the last 3-5 years, Amazon vastly over-invested in its business, ultimately leading to “lighting shareholder cash on fire.”<\/p>\n

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    Did Amazon over invest in logistics? – Ada Insights<\/p>\n<\/figcaption><\/figure>\n<\/p>\n