S2E07 – Amazon Stock Review

Transcription

[00:00:00.250] – Sean

So recently, Amazon came out with its earnings report and the stock went down by about 15% in one day. And now it’s down about 36% from its all time high. So should you give up on Amazon? In this video, we’ll talk about why that may not be be a good idea. Let’s dive in.

[00:00:22.230] – Sean

So per usual, we will do a four Ms analysis on Amazon to really understand what’s going on with his business and where it’s going. Of course, just to summarize, we’ll look at the margin of safety first. That’s the math part of investing. And then, of course, we always look past the numbers and we’re going to look at the meaning, mode and management of this business. So right off the bat, when you log in to Tykr, you can see that Amazon has a score of eleven out of 20, which is decent.

[00:00:48.180] – Sean

We’d like to see it a little bit higher, but it is enough to make the stock on sale. You can see here with the margin of safety of 69% shows some definite upside potential with the stock. Right now, the share price is 2500, give or take. And then the sticker price or fair value is currently a little over $8,000. So can a stock go that high?

[00:01:10.920] – Sean

Well, absolutely. We’ve seen stocks go there before. Berkshire A, for example, is well over that number. But let’s jump over to the financials tab here and just have a quick look and see what’s going on.

[00:01:24.850] – Sean

The latest earnings report. And just to pause here for a second, the latest earnings report showed the EPS or the EPS was expected to be at around a little over $8 EPS. And this is the quarterly statement, and it came in at negative seven. The reason is there’s a recent investment in Rivian Auto. Amazon has about 20% stake in that company.

[00:01:48.690] – Sean

In 2019, they announced they would buy 100,000 electric vans from Rivian Auto and the EV manufacturer. So that investment took a toll on the income statement of this business. If you look at the revenue, net income and EPS year over year looks absolutely fantastic. It’s that textbook charts going up year over year, which is what we want to see. But if we jump to quarterly, this is where things get a little scary and I don’t think it’s going to last.

[00:02:21.590] – Sean

We do see that net income jump from like we saw here the previous quarter, 14 billion and went to negative three. So is this going to be the consistent trend here with Amazon? I definitely don’t think so. Of course, with the net income that relates to the EPS, which is just your net income divided by your outstanding shares. So roughly the same metric, when we jump down to free cash flow, we do see it went up a little bit, which is great.

[00:02:52.030] – Sean

And then the balance sheet still looks really strong. Like if we jump here to quarterly, we can see it’s pretty consistent with your assets going up just a little bit. Liability somewhat flat, debt somewhat flat, equity increasing a little bit. So things still look really good. It’s just that income statement is where things get a little scary with the business.

[00:03:14.280] – Sean

And that’s okay. We’re going to go into the business a little bit. We’ll talk about here where this business is going. But overall, from the financials, even though that EPS was a big miss, don’t be too alarmed. If you’re a shareholder in Amazon, things can correct, which allows us to segue here to the business model.

[00:03:34.570] – Sean

This is the exciting part of this business for those who are long time shareholders. You know a lot of this information, but let’s just do a run through all the different revenue streams. Okay. So with the Amazon business model, of course, the big revenue driver we’re all familiar with is that ecommerce engine. So where they’re selling all the products and services, they break up their ecommerce in three categories.

[00:03:58.880] – Sean

You have first party, second party, and third party. So first and second essentially means that a manufacturer sells directly on Amazon. They’re classified as ships from and sold by Amazon. Then you have second party sellers, which are those who rely on the distributor partner to sell products. And these are called sold by brand ship from Amazon.

[00:04:23.590] – Sean

That makes up 48% of the revenue. That’s a lot of products, of course, that we see on that whole site, which is obviously one of the biggest e commerce engines in the world. There’s a third category, the third party seller, which is classified as quote unquote, sold by merchant and fulfilled by Amazon. Essentially what this means is the customer service is handled by those third party sellers. So Amazon doesn’t do that.

[00:04:51.160] – Sean

In other words, you’re empowering a lot of small business owners and independent business owners to source products or find products from other suppliers around the world, sell them on Amazon, and handle the customer service process at the same time. So they’re leveraging the Amazon engine and it’s really a network. But a lot of the work is put on that small business owner. It’s a really smart business. In this case, that makes up 22% of the revenue of the company.

[00:05:17.510] – Sean

My favorite revenue stream in this business model relates to my tech background, which is AWS. So this is the Amazon Web services. This is the cloud hosting. Some of the competitors in this space, and we’ll get to that in a second include Microsoft and Google. But AWS is one of the biggest players in the world in this space.

[00:05:36.940] – Sean

To give you an example, here are some of their customers. This is just the smallest, but they have Netflix, SAP Salesforce, Pfizer, Disney, Sony, Hitachi, BP, Volkswagen, Pinterestfinra, Ancestry.com, Expedia, Johnson, GE. So there’s a lot of big names here, and we’ll get to some of the news about the business in a moment. But with cloud hosting in any kind of software as a service or in this case, this is infrastructure as a service is essentially what a hosting platform is. They’re really sticky at this level, the enterprise level.

[00:06:12.940] – Sean

So one of these customers, let’s say it’s SAP. They’re not going to try this platform out for a month or two, which is what you’ll see in the consumer level. People go try a platform, they’ll leave it. In this case, they’re doing a long period of due diligence leading up to buying. So it can be six months, twelve months, sometimes longer.

[00:06:33.480] – Sean

But when a contract is signed, that contract can expand 5710 years or more. And in some cases, you never lose a customer. So it’s a really sticky business. But that part of the business. My favorite.

[00:06:46.910] – Sean

That’s 13% of the revenue. Then you have the advertising. So of course, you can buy ads right there on Amazon. It’s like, why not? It’s kind of like Google and Facebook.

[00:06:57.190] – Sean

You might as well make money there. So that’s 7% of the revenue. Then they have the subscription services, which include prime. They have Prime, Student, Prime Video, Amazon Music, Kindle and Audible. And then they make 3% of their revenue off of physical stores.

[00:07:15.410] – Sean

So there are 600 physical stores in the US. Most of those are Whole Foods, because years ago Amazon bought Whole Foods. So grocery store chain. They also have their own branded stores like Amazon Fresh, Amazon go, Amazon four star, which they only sell four star and higher products. Amazon Books and Amazon pop up.

[00:07:36.920] – Sean

And then the remaining category is about a half percent of revenue. They own other businesses, and there’s just a few in here. I’ll include like Amazon Maritime, which allows Amazon to manage its shipments to and from China. They also have another project in here called Euro, which is like a WiFi mesh. They’ve got a lot of different products they actually own and they actually categorize that in this other category.

[00:08:02.530] – Sean

So that’s the business model I like out of everything here, obviously, the AWS is my favorite, but I’m really impressed by the third party sellers taking 20% of the revenue. That’s a big deal because you’re putting that work on these small business owners. They want to make some money. They want to build their own brand, can do it through the Amazon engine. That’s a great business model.

[00:08:25.970] – Sean

Of course, in this case, Amazon, they’ve got a really automated process, supply chain, process and distribution process in place already. So you can kind of lock into that. So before we talk about the moat, in other words, the competitors in this space, let’s talk a little bit about the news. So with the news, we know that the earnings report was a big miss on the EPS. That’s the thing to pay attention to most is every quarterly statement, there’s the expected, and then there’s the reported.

[00:08:56.020] – Sean

And they usually look at number one, EPS, followed by number two, the revenue. In this case, that EPS was a big miss. Stock went down 15% about in one day. And it’s just been brutally beat up. Like most stocks, as mentioned earlier, it’s down about 36% this year.

[00:09:14.610] – Sean

So I was curious here. Okay, so Rivian, there’s the investment. They own 20%, 100,000 EV vans. In this case, I was like, okay, what does this business look like in Tykr? Because when I see other businesses buying other businesses, for example, Microsoft recently bought Activision.

[00:09:34.060] – Sean

Activision looked really good in Tykr. In this case, Rivian is actually on sale with a twelve out of 20, which is all right. It could be a little higher, but it’s margin of safety is 80%. The business is actually looking pretty good. So that’s not such a bad investment.

[00:09:51.030] – Sean

Sometimes you’ll see businesses by other businesses and it’s a complete dud and it’s just going to be brutal on your balance sheet. In this case, Rivian might be an all right investment. Ev discussion. That’s a whole other video. I should do another one on Tesla.

[00:10:08.290] – Sean

I’m going to do a quick segue here. I feel like Tesla is a good stock today, but will it last forever? You have to be determined because there’s a lot of competitors out there in the EV space. But anyway, back to Amazon. So that news again, a little bit of a hit it took there with that investment.

[00:10:24.730] – Sean

But they did talk about here. I found an article with the AWS. Revenue was really impressive. It went up by 37% over the last year, which is outstanding again, that enterprise software is so profitable and in the case of its power to keep customers on the platform a long time is really impressive. So that will continue driving the business forward.

[00:10:49.580] – Sean

That is a strong part of the business model. That AWS. Again, my favorite part of Amazon or I did find an article in here talking about the revenue seems to be declining a little bit. This relates to supply chain problems that e commerce companies are facing around the world. So those of you who invest in Shopify at Sea, same thing.

[00:11:08.890] – Sean

People are not buying as many products just because of inflation. Just going up a little bit. With that comes all the different costs and products and materials and shipping and everything around it has gone up. Will that sustain forever? No.

[00:11:23.070] – Sean

And I’ll touch on that here as well. So in 2008, Amazon’s share price was $80. We had the recession that hit and the stock went down to like $35. So over a 50% loss. But at the end of 2009, the stock went up to about $135.

[00:11:45.580] – Sean

That’s a 285% return in a year. So you have to keep in mind when the market starts to correct, people’s buying behaviors can go through the roof. In the case of Amazon, I don’t see this company shutting down anytime soon. So I think when there’s more confidence in the market people are going to continue buying more stuff, essentially. So from an ecommerce perspective, we looked at that almost 50% of sales and then 22% is related to the third party sales.

[00:12:17.120] – Sean

I could see those two parts of the business increasing significantly. So for those again, if you’re holding the stock for that reason, just hold tight. Things might get exciting here if it kind of reacts similar to how it did in 20 08. 20. 09 well, let’s go ahead and let’s dive into the competition.

[00:12:39.610] – Sean

So what I did here is I broke down two categories. You got the ecommerce site and then the cloud hosting side. Since those are the largest revenue streams in the business with the ecommerce, I’ll just kind of go through the list. So you’ve got Amazon. We set the benchmark there.

[00:12:55.140] – Sean

You got eleven out of 20 and MoS is 69%. Shopify is a twelve out of 20 with a margin of safety of 52%. Target is overpriced. It’s got a score of nine out of 20 and a margin of safety at 45%. We like to see higher than 50.

[00:13:11.950] – Sean

Still some upside potential for those of you who are Target investors, but still not as strong as Amazon. And then you’ve got Walmart, which is nine out of 20, margin of safety of 13%. So probably the weakest of the three from a stock perspective. But Walmart and Target still not bad investments. But I would still say from the ecommerce standpoint, the strongest player here is Amazon, that third party seller program with the 22% revenue.

[00:13:39.750] – Sean

That’s the difference that I see as a big advantage over Target and Walmart. Shopify, you kind of emulate that because you empower other businesses. But I would say Amazon is still a stronger business model than Shopify. More revenue streams essentially, Shopify is they’ve got fees, but their main revenue generator is pretty much a SaaS software. As a service, you pay subscription to get access to the platform.

[00:14:05.590] – Sean

Good business model. But Amazon, I still would stay superior with the cloud hosting. That’s where you got the three big players. You got Amazon or EWS, you got Google Cloud and then you got Microsoft, which has Azure. I hold Google and Microsoft.

[00:14:23.190] – Sean

So you can see here, we’re just going to compare those side by side. You’ve got Google 17 out of 20, margin of safety is 80%, and then Microsoft 17 out of 20, margin of safety of 68%. Much stronger financials in my opinion. If I’m looking at Microsoft, Google and Amazon today, I still put Microsoft and Google above Amazon. But Amazon is still a strong business.

[00:14:51.730] – Sean

I did list in here a few other hosting platforms. You’ve got VMware, which is decent but decent product, I should say. But the stock is an eight out of 20. The margin of safety is 1%. So no upside potential there.

[00:15:05.630] – Sean

Then you’ve got Rack Space, which is a pretty good product, but its score is ten out of 20. Margin of safety of 60%. So some upside potential. Overall, I’d still consider the stronger stock in this case would be Amazon over those two others. So just to recap what we’ve done so far, we’ve got the margin of safety looking really good there.

[00:15:28.610] – Sean

We can check that box, meaning we can check that box and then Moats looking pretty good. So I would check those three boxes so far. Let’s touch on the management. So in 2021, Andy Jassy took over as CEO from Bezos, and I looked into his background a little bit. He originally started his career as a project manager.

[00:15:50.360] – Sean

I think that’s a great place to start because you can get in and learn different businesses really fast. That’s where I spent most of my career in project management. So it’s a great way to learn how businesses pretty much operate, sell market. You can get involved in a lot of different facets of the business if you’re looking for a career out there to learn how big business operates. I do recommend project management, but he started there.

[00:16:13.160] – Sean

Then he went over to Amazon in 1997, started in marketing, but in 2003, the idea he started talking to Bezos around this cloud hosting idea, AWS, and they got to work. It took about three years. It sounds like maybe a little longer to build the platform, which makes sense. To build an infrastructure as a service product is not an easy feat. But AWS went live in 2006.

[00:16:41.440] – Sean

He served as the leader of that essentially through his entire career. He moved into or. He was awarded the title CEO of AWS, I think in 2016, and then he moved on to the CEO of Amazon. The thing I don’t see is experience with Ecommerce, and I’m sure they’ve got obviously a lot of executives and leaders in that space that he really has to rely on to make sure they continue to be competitive to the other businesses out there, especially if you have the first party, second party, third party sellers. You really want to capitalize on that.

[00:17:20.210] – Sean

Again, that third party seller program, I think is awesome to really accelerate. That is a great place to be. I did read another article that talked about their need to become more efficient. So even though they’re not generating more revenue, how do they squeeze more profit out of that revenue? So they have to streamline their operations a little bit.

[00:17:44.320] – Sean

So I’m going to be curious to see what they talk about in their next earnings report there. But overall, I think he’s a good fit for the business. He’s proven to do very well for AWS, and we’ll see what happens in the next earnings report. So if I were you and I’m an investor in Amazon, I think this is an opportunity to just hold your ground. Let’s see what that next earnings report looks like.

[00:18:07.830] – Sean

If we see some positivity around that, EPS especially, that might be a great time to get in because we know the share price is going to Hover here for a while. It’s not going to skyrocket up and it’s probably not going to tank too much more unless the market continues to go down. But it’s going to kind of stay here. So just wait for that next report. Let’s see what happens when you get in.

[00:18:27.380] – Sean

If you’re on the sidelines and thinking about investing in Amazon, put it on your watch list. Let’s see what happens in the next report and if we see some positivity, that might be the opportune time to get in. Remember what happened in 2008? That stock went down 50% but by end of 2009 that stock was up a little over 230%, I think I said so don’t give up. I think Amazon still has some potential in the future.

[00:18:57.570] – Sean

We just got to wait and see what’s going to happen on this next report. We’ll see you.