The last time Amazon had a decline like this, it dropped 80
percent in 2000. In the people that bought did
pretty well, I would say for that trough.
Now, the question is, is it done dropping its down about fifty
percent on the year? That is the question.
That's the question. Everyone's asking themselves as
of now, is Amazon. Finally done?
Dropping. We have articles now from CNBC
pointing out the Amazon has come full circle, all the way back to
the covid lows during the pandemic.
Amazon dropped all the way down to $84 per share and that was
considered a still. We're here, we are, we find
Amazon currently trading at 85 dollars and fourteen cents and
it's dipped below that 84 dollar Mark.
So now we have Amazon right back to where it was and 2020.
It's made the loop like so many other companies.
But Amazon is a pretty unique company.
Amazon is a well-established Juggernaut of a company that
does 500 billion dollars in Revenue.
Half a trillion dollars in Revenue in one year in this
company's trading at the lowest point.
It has in years. So we know that Amazon is this
vast complex company that can be very difficult to understand
because it has a lot of moving Parts.
What I want to do is boil down this company into something
that's easier to understand. We're going to be looking over
the good of Amazon and the bad of Amazon and my predictions of
where this company is headed in 2023.
So, I hope you'll get a better idea of where Amazon currently
is standing and what it's facing in 2023.
Now, before we jump into Amazon, specifically, I have to do a
quick portfolio update. This is real money.
The story fund is, A tech portfolio that I started in 2021
like most tech portfolios. It hasn't done well this year.
So, when I look at the Holdings page here, this gives some
clarity into the situation. Basically, what I have here are
companies and I've waited them a certain way or I put more money
into the companies that I have a higher long-term conviction of
these businesses. So, my top Holdings right now,
the ones that I have, the highest level of confidence and
conviction are first. Amazon, the company in question
today and then Netflix, that one's a little Of a contrarian
pick, but I have a very long-term thesis on Netflix that
I see playing out really well in the future.
But we have Amazon here with the majority of the money invested.
And this one is where I have lost or rather have unrealized
losses. Right now the most I'm twenty
one thousand seven hundred dollars in the red.
Now most of my losses in this portfolio which I'm currently
down 31%. Most of this is unrealised, in
fact, almost all of it is which means the companies have come
down in value. But I have not been selling out
of them. I've just kind of held onto him
and if my thesis plays out over the long term, and these
businesses do, well, I think the price will recover so you can
consider this lost money as of now, but really, it's unrealized
losses. Amazon is down, 21,000 Netflix
is down, 12,000, even Google is down, four thousand.
So it seems that really no companies being spared right
now. Even Apple is is getting close
to getting in the red, so there you have it, there's a
portfolio. If we look at it compared The
S&P 500. This is what it looks like here.
The S&P 500 is in, read the story fun is in blue.
So you can see, I'm trailing it about the Same by around 20%.
So I'm lagging behind the S&P 500, the goal is over the next
five years to hold on to these companies.
Hopefully, they'll do really well and I can have the
portfolio recover and surpassed the S&P 500 because I'm using
this, as The Benchmark, spy is incredibly difficult to beat.
It's something that a lot of fun managers and Individual
investors struggle to be. So that's the challenge.
It's a very high bar to try to beat the S&P 500 right now.
We're a little bit behind, but I do think we still have a chance.
I really do. We're down 31% and I'm still
optimistic. I think we have a lot of time to
be able to catch back up. So let's go ahead and take a
look at some of the news here and why people are discussing
Amazon again. And all of a sudden this company
is in focus from investors, this headline from CNBC paints, a
very clear picture of what's going on with Amazon.
The stock is given up the Estimates pandemic gains after
almost a 50% slump, and 2022, and that almost 50% slump.
It's 50% where they're so. This is the the full circle.
We went up around and right back to where we started.
We've seen this with so many tech companies.
They're right back to their pandemic lows.
So that's the basic reason. Why a lot of investors are once
again, considering Amazon stock, it hit this nice little landmark
of the 2020 lows and that brings it in the news again.
But what I think investors need to siddur is there's a lot of
concerns that I have about Amazon going into 2023 that.
I think some investors might blindly just buy the dip in
Amazon and they won't have the conviction to hold for another
year because I think this next year could be challenging.
And what I did was I spent some time and I wrote out what I
think are the bad parts of Amazon.
Right now, simply put the parts that drive investors away and
why I think this stock could continue to trade down lower.
We had the CNBC guy. Earlier say, will the stock go
lower? I think, yes.
I think there's a very good chance of that, and these are
the reasons why let's just start off with number one here, High
P/E ratio. Let's take a look at Amazon
we're using qualtrics insights. This is a website that I
developed over the past couple of years and we're doing a lot
of improvements to it. You can try it out as part of
the patreon membership but we see here is that Amazon trades a
day high P/E ratio, its trailing P/E is 80, that's very high.
And then the Ford PE is 44 a 44? Ford PE that makes basically
every other company look cheap, it even makes companies like
Tesla look inexpensive, it makes meta.
And Google, look Dirt Cheap from a P/E ratio, Amazon looks
expensive. And right now we're in a market
that does not like expensive stocks.
I don't know if you've gotten the memo but if you've been
paying attention to investing at all, any company that has
anywhere near a 30 or 40 PE? Has not done well over the past
year, just any of them named any company with a high PE, it
likely hasn't done well. Number two, Amazon's free cash
flow has been - for two years straight now.
So you might be thinking, all right, we look at companies make
it look at the price to earnings ratio, but that's not always the
best indicator of how much cash. They're actually generating
because the earnings can be gamed a little bit.
But the cash flows, the free cash.
Flows are what you can look at? Well, Amazon's free cash flow
yield currently based off the Past year is minus three
percent. That doesn't look good.
When we look at the free cash flow chart here, this is the
free cash flow of Amazon. Since the very beginning of this
company, going all the way back to 97, it's almost always been
free cash flow positive except for the past two years starting
off in 2021 if we cross to this territory, Amazon's free cash
flow is - both years so far - there's only one quarter where
they actually posted positive free cash flow out of the past,
eight quarters. This is Amazing investors are
not only looking at a company that has a high P/E ratio.
Now, they're looking at a company that has no free cash.
Flow number three, Amazon has slowing Revenue growth.
This is going to be one of the key things that investors are
looking at in 2023. One of the big concerns for a
company that trades at a high P/E ratio implied.
In those earnings as fast growth, that's what investors
want. They're willing to pay more for
a company. As long as there is an assumed
level of growth. That makes makes sense as long
as a company, is going to grow into that multiple.
With a 44 PE ratio and - free cash flow.
There's a lot of growth implied in the stock Amazon.
And what we're looking at right now is a company that has growth
in question growth may be slowing over the next year.
We look at the revenue growth year over year and last year it
was 14.7% if you factor in currency, it's a little bit
better but that's been a head when for them, but overall 14.7%
not terrible. In my opinion.
I don't think that's too bad but it's not anything like how
they've been growing over the past decade and the past decade
Amazon is averaged a 25 percent Revenue, compound annual growth
rate 25% and it's been decelerate, mm, down to 14 and
15 percent. So growth is starting to slow
down, and in 2023 growth, is going to be a major question
mark. I think that if growth slows
down at all lower than analysts, expectations, that could be very
bad for this stock. So, so far, we have a company
with a high P/E ratio, two years of - free cash flow potentially
slowing Revenue growth, which is something investors are going to
be paying attention to a lot and then growing stock-based
compensation. This is another thing, that's a
growing problem for Amazon. The expenses of the company when
we're looking at a company's free cash flow, it makes sense
to factor in the amount of stock-based compensation, the
company's paying because that's a real expense to pay that they
have to dilute the current shareholder base.
So when I toggle this toggle right here in the middle, it
brings up this Bar, which is a little purple.
Bluish bar here, that shows us the amount of stock-based
compensation that Amazon is doing quarter-over-quarter.
If I zoom in on this, we can make it a little bit clearer.
If you can see the trend here, the amount of stock-based
compensation is going up dramatically a really rapid pace
and that's while the free cash flows are going down.
So we have expenses going up, we have cash flows going down at
the same time. Obviously, this is not what
investors want to see. This is a number of things you
need. Seek to Amazon.
If these aren't problems that every company has, I can name a
lot of companies that have positive free, cash, flows, and
they don't pay much in stock-based compensation.
But Amazon is facing all of these issues at once.
And on top of that, Amazon is a tech company always thrown in
and the tech basket with the QQQ and what our tech companies
facing right now, they're facing a high interest rate
environment. This is another thing, that's a
real concern for Amazon. If we look at the federal funds
rate here, this illustrates this, I think the clearest We
have in 2016 federal funds rate going up.
Interest rates climbing a little bit as the economy was doing,
okay? Then and then we get up to
around 2.4 percent over like a three-year period.
So it took three years to get interest rates up two and a half
percent. And what does the FED been
doing? Look how steep this climb is one
year. We have interest rates going
from 0 up to three point, seven, eight percent.
Then the FED just said in their most recent meeting that they're
not done interest, rates are going to keep going up.
So we have that major macro. I had one as well of higher
interest rates and potentially teetering into a recession next
year, which of course, Amazon is a company that sells a lot of
stuff to Consumers. A recession would not be good
for Amazon, but overall, this is a list of the bad things that
you should know about. If you're deciding to purchase
this company, if you're just going to buy the dip, you
shouldn't be surprised. If the stock continues to go
down in price. There's a lot of things that
Amazon is currently facing that. I think it's going to continue
to face for the next year. Now that we've highlighted all
the bad parts of Amazon. It paints a pretty Grim picture
of Company. But there are some good things
and good things that I think are worth highlighting.
I actually went through made a list of the things that that
keep me invested in this company.
The reason why I continue to hold it and will probably be
continuing to add to my position.
Let's go through these one by one.
First of all, inflation is a problem.
It's driven down Equity prices to a substantial extent, every
investor needs to acknowledge the role that the FED plays.
It's had a big impact on Amazon, as well as every other every
other company the market, but especially companies like
Amazon, the Good news with inflation, is that it does seem
to have flattened. I really think inflation is
starting to at least Peak and flatten and if anything it's
headed on a downward trajectory we've had month after month
after month of inflation coming down steadily quicker than
expectations, that's great news. That's a great Tailwind for
these type of companies over the next year.
And not only that. But we looked at the chart here
of the federal funds rate spiking upwards at this insane
rate. That's true.
But again, This is in the past and the federal funds rate is
likely going to be leveling out at around four point, seven,
five, five, five point two five. That's the range that the FED
thinks that they'll have to go. And if anything I'm in the camp
where I don't think they're going to have to go that high.
I believe Jeremy Siegel is more accurate with his predictions
and I certainly don't think the federal funds rate will keep
skyrocketing like it has over the past year.
So I view, this is a positive thing for Amazon.
Over the next year, I think that the inflation story will largely
ugly be playing out in a positive way.
Inflation will go down the federal funds, rate will level
out and that gives us a bit of an anchoring point and something
more stable to look at than just wondering how high these numbers
will go. Now, number two, Amazon has
grown substantially since 2020. Remember Amazon right now is
trading at the same share price, that was in q1 Q2 of 2020.
But the business has grown, and every way possible, let's go
ahead and just look at the Top Line.
Growth of the company. We can switch to annually here.
This is what it looks like. Revenue of the company in 2020
was 386 billion. So the revenues gone from 386 to
this year, it's going to be above 500 billion, half a
trillion, you break that down and it said, 70 80 percent
increase in Revenue. But more importantly, Amazon is
growing quicker in the right places.
The company is growing faster. In the most profitable portions
of the company is growing slower.
In the most low-margin parts of the company.
The parts that have grown particularly fast over the past,
Year, our Amazon's web services ads and third-party sales all
this service portion of the business that has a highest
margin. We can break this down on their
earnings report. Let's go ahead and look at Q3 of
2020. This is when Amazon first broke
out their ad business before this, they didn't reveal the
numbers, but they finally gave us our advertising Services here
in the actual numbers. It was four point nine billion
dollars in Q3 of 2020. Now, we look at the same
business line, but we zoomed a current day.
This is the advertising services, and we have Three hair
9.5 billion dollars. So the advertising Revenue, this
business has grown by 90%, since Q3 of 2020, 90% bigger, but the
stock is trading at the same price.
We can also look at third party sales again.
This is the more lucrative more high-margin part of Amazon's
retail business. And it was doing twenty point
four billion dollars in Revenue in Q3 of 2020.
We compare that to current day, and we have right here Q3 of
twenty twenty two, Twenty Eight billion 600, Ian, that is a 40
percent increase in the amount of third-party sales and then we
can look at another piece of data here and see how fast their
other profitable business has grown, which of course, is
Amazon web services. This chart shows two different
things. The red line is the actual AWS
Revenue. So this is the one that
everybody looks at the red line is the revenue and the revenues
actually growing incredibly fast.
I know it doesn't look like it on this chart, but if we just
looked at it on its own without the other data there, this is
what it looks like, Fast Revenue growth and Quarter by quarter
growth but we add in commitments that is the amount of contracts
that are 1 plus years of AWS. That's actually growing at a
faster rate than the revenue. AWS is revenue in Q3 of 2020
was. Eleven point six billion Q3 of
2022. It was twenty point five.
So it's grown nearly 90 percent since then.
Again, this is at a point where the stock is trading at the same
price, but the company and their, their biggest components
of the company are growing 40 90 and 80% then we look at the
amount of commitments to make sure that we have customers
lined up in the future. These are contracts that are
Beyond 12 months and Q3 of 2020. Amazon had forty four point
eight billion dollars in AWS commitments and Q3 of 2022.
They have 104 billion that's gone up over 100 percent.
And on an interesting related note, Amazon is actually growing
their Cloud business commitments.
While Google is struggling to you can look at them in contrast
here since Q4 of Dear, Google's commitments to their Cloud
business have basically flatlined.
They haven't really grown at all.
And Amazon's have continued to grow at a steady clip growing
from 80 billion now, to 104 billion.
So that's just an interesting thing to see.
This shows that the companies that have the Head Start, the
all the developers already know how to work on.
Oftentimes they're the default choice.
So so far we have two good things for Amazon, inflation
does seem like it's already peaked.
It's on the way down the federal funds rate.
Might go up a little bit, but they're going to come down as
well. And then we have On the story of
the slowing growth, I don't think paints a clear picture
most investors will focus on the top line revenue growth.
Like all revenue is equal but if you look a little bit in what's
actually going on the revenue that's growing, the fastest AWS,
the ads business and third party sales is the most important
Revenue, the overall revenue of Amazon may slow down.
But that's from the first party sales, that's very low margin
Revenue. So in my opinion this point two
is very important, I think. The parts of Amazon that are
growing, the fastest are the most important parts.
Now, the third Point here is that Amazon is addressing these
Rising stock based compensation expense.
And employee expense, Amazon has had a ton of hires over the past
year. They doubled the size of their
Workforce. They hired like 600,000 people,
they expanded their Network double, I mean, it's crazy what
they've been doing. And that's what's really cause
this stock-based compensation to just take off over the past
year. But this is something that Andy
Jesse is addressing currently, and he's going to be addressing
in 2023. Re we have reports that the
layoffs are being extended. The Amazon is looking at
cost-cutting budget cuts, everything they're doing.
They have an expected Roi. They have a very strict
investment policy. I think this is a lot more
strict than investors are giving it credit for.
I think that Jesse is going to be a lot more strict with
cost-cutting and cost control next year than what investors
are expecting. So when I look at Amazon and
their stock based compensation and they're growing expenses, I
don't see that continuing to happen over the next year.
In fact, I would not You surprised.
If we saw this purple line here, the stock based compost art to
level out, and then even go down next year, I think that will
likely happen. And then, in addition to direct
cost cutting measures of laying off employees.
Amazon is also doing Warehouse automation.
This is something that is happening.
This is point number four. I've shown the videos of this
before. It's actually incredible to see
Amazon came out with this new robot called the Amazon sparrow.
And a lot of people look at this and they think it's cool.
But I've seen robots and Factories before.
And unless you're an engineer, and you're specifically a
robotics engineer, you probably don't have much of an
appreciation for this type of thing.
At least, you probably don't know how good it is, or how bad
it is, or how technologically advanced it is, from what I've
read from different people that specialize in robotics.
This thing is like a breakthrough.
It does picking, it does sorting it does the one thing that
robots could not do to this extent, this thing can sort
millions and millions of different Items, all unique
different sizes and shapes into different baskets.
And this is one job role at Amazon.
That's extremely common but Sparrow, this robot here.
Also addresses a bigger issue, which is Amazon has too many
employees. They simply employ too many
people at their warehouses with too high of turnover.
So it's too expensive to keep running the company this way.
So we need to see a lot of automation like this and at
least the worst jobs at the warehouse and picking is a big
one, but Amazon also has a number of different robots,
helping to automate their warehouses.
As this continues, I think that margins will go higher.
Now, the last thing that I'd highlight in this isn't really
specific to 2023, but it's something that I think is worth
mentioning with Amazon is the high customer lifetime value.
Part of the reason that I feel, okay is an investor holding a
company, like Amazon through this massive volatility through
50%, draw downs and I still feel at ease is because of the
lifetime value of a customer of Amazon, I look at the services.
This company offers Amazon Prime with the 2-day shipping with
Music with the Amazon Prime video or the sports so on and so
forth. I think the amount of customers
that are going to cancel that service over the next 10 years
are minimal. I think the amount of customers
are going to grow over time, and I think the lifetime value of a
single customer is dramatic. I've been a member of Amazon
Prime for over 10 years and I can't even imagine canceling.
It it is just a part of my life. It's it's one of the most basic
services that I'll probably have for the next two decades, then
you have AWS when you're building different websites and
you build them. On AWS, you're basically locked
in. You could try to move off of it
but it's a huge Endeavor and you'd have to have significant
significant incentive to move off of it.
So Amazon has high lifetime value and their Amazon Prime
membership. They have high lifetime value
and their AWS service. And with the Amazon Prime
business, that's also directly linked to their advertising
business. So, when I look at the different
services that Amazon offers, I think that they have a higher
lifetime value than most other companies.
Amazon is going to be around for a long period of time.
They To figure this out in six months or in one year, they have
a lot of time to be able to figure this out because they
have customers really locked into their services.
I think customers are locked into Amazon, Services far more
than other companies. I do analysis on lots of
companies come and go in my opinion.
Amazon is pretty entrenched. I think it's going to be around
for a long period of time. It has a longer Runway to be
able to figure out how to best monetize their customers.
So that's it. That's both the good and the bad
of Amazon. In my opinion, going into 2023.
I wouldn't buy the Dip today, expecting some huge rally.
I think there's too many - catalysts and things that Amazon
needs to figure out. But long-term next couple of
years, three five, six years. I'm very bullish on the company.
I think there's so many things going for it that investors
aren't paying attention to because of short-term noise.
That's all for now. Hope you enjoyed.
See you in the next one.