Welcome back, everyone. We recently had two huge
earnings reports, Starbucks and Amazon.
These two companies also had very, very different outcomes.
For example, Starbucks today is down 17% after earnings.
To say that this was weaker than expected is accurate, but it's
also an understatement. This was a disastrous earnings
report. We're going to go into the
details. We're going to share what's
going on with this story and we're going to observe my claim
that I made four months ago. Four months ago, I made a video
saying that I believe we are entering in to a caffeine
bubble. It's something that's not
getting talked about enough. Not enough investors are
focusing on this little niche caffeine bubble.
But I've seen it. I've spotted it.
And I believe that this is the first real material evidence of
that bubble manifesting today. So we're going to be looking at
Starbucks. We'll also be looking at the
Starbucks CEO. Just today, he went on an
interview with Jim Cramer. And let me tell you, that
interview did not go well. I know that a lot of people have
opinions about Jim Cramer, but he grilled the CEO in this
interview. It is devastating.
It was difficult to watch, but we're going to, we're going to
soldier through it. I'll take you through the
interview. I'll give you my reaction when
watching it, and we're going to go through the numbers on
Starbucks and see if there's any hope for this company in the
future and see what what the future looks like.
The other company, of course, we're going to be looking at is
Amazon. It's up a little bit today on a
red day, which is is good. The Nasdaq's down .6% and
Amazon's up 1 1/2 percent or 1.1%.
So that's always a good day. It's up a little bit, but this
wasn't the monstrous quarter that we expected.
It's not up 10 or 15%. Amazon's just holding on to its
gains. But there's a lot more to this
story. There's a lot more takeaways.
After time of looking at the earnings report, listening to
the earnings call and going through what I think are the
biggest indicators of Amazon, I'm going to give you a full
update. I'm going to give you a full
review of the financials in context with what's going on
with Amazon and how I view the company for the remainder of
2024. So this is going to be a lot of
fun to go through both of these companies.
I hope you enjoy this type of content.
If you do, just on a side note, to gain access to Qualtrum,
which you get all of this pretty data, you get access to hundreds
of exclusive episodes. You can join the Patreon today
risk free. If you join today, you get the
entire month for free as a free trial.
So if you haven't already, try it out.
Today's the time. Let's go ahead and start off
with Starbucks. Like I said, it's down 17%
today. Now the first thing I want to
say about Starbucks is this is a company I really like.
I think it's a really strong company.
Fundamentally. It has great brand value.
It does have pricing power. It's a company that has a great
loyalty program. Starbucks has one of the best
digital assets with millions of members using it every single
day. And it kind of works as a form
of a bank. They get a lot of capital from
their app that they can use in future investments.
So I've been someone that's actually been bullish on
Starbucks in the past, but there's been something that's
changed my mind over time, something that caused me concern
about Starbucks in the future. I saw this across the horizon,
getting closer and closer and closer and I finally decided to
sell my position because I feel like the risks were increasing
for Starbucks. We can see that in my trading.
If we look at My Portfolio here, you can see my trading history
with Starbucks. I was buying it in like the 70s
and 80s, around 2022 and then I started to sell the company
early 2023 so we can look at these cells here.
I sold 1000 of it here for 105102 right there.
My my last sell my big one, July 24th, 2023 I sold 3700 dollars
of the stock. The last of my position at 103.
The reason I sold out of Starbucks was because I felt
like we're getting into a caffeine bubble.
Four months ago I made a video on this.
You can go back and watch the video.
I basically explained in this video that I believe there's too
many companies entering into Starbucks is fair, too many
companies. We have McDonald's having
Cosmics, a new Starbucks like drink type of concept where
people just go through in lines around me locally.
There's multiple places where you can go through Dr. Thrus and
get your caffeine for the morning.
You have Panera Bread actually killing two people at their
highly caffeinated energy charge drinks.
You have Jack-in-the-box coming out with an energy drink.
You have other companies that are fast food companies
transitioning to energy and caffeine based drinks.
They all want to get part of this high margin industry which
is the caffeine addicted consumer group.
And not only do you have the fast food industries, the Jack
in the Boxes, the Panera breads, the McDonald's moving into
Starbucks's category, but you also have a whole other category
that I think has significant overlap.
The category there are the Celsiuses, the Monster Energy,
the Red Bull. Now you have C4 Energy.
You have so many other companies moving into this energy drink
sphere. So when I saw that on the
horizon, I just thought, you know what, Starbucks is at a
healthy valuation right now. It's fully valued.
I've done well in the stock. I made money on it.
I'm going to sell out now and move this money into companies
that I feel a little bit more confident in.
So that's my initial concern with Starbucks.
And like many of these theories, you don't know if they'll really
hit. You don't know if Starbucks is
just going to go right through these concerns and maybe I sold
prematurely and Starbucks would continue to go up and have great
same store sales or it might go the other direction where these
concerns start to manifest through the numbers.
Ultimately the numbers will show you the truth.
And this quarter in particular for Starbucks is the first time
that I've seen real evidence of this caffeine bubble thesis
starting to play out. I think we're starting to see
real evidence here. Now before we even go through
the Qualtrum numbers, which look really ugly this quarter, I
first want to show you some of the breakdown of just how bad
this quarter was. This isn't just a stock selling
down because of volatility or selling down because of a simple
overreaction. These are really ugly numbers.
We can look at the adjusted diluted EPS, that's the normal
EPS number you want to look at. The Wall Street expectations
were for $0.80. They came in at $0.68, so 15%
below Wall Street's expectations.
Revenue was also a miss, so they missed on the top and bottom
line revenue and especially earnings.
We have same store sales percentage.
This is a major KPI that you track for any type of
restaurant, any type of retail location.
You have it here at -4%. Now overall, Wall Street was
expecting +1.46%. So Wall Street was pricing in
that they're going to grow same store sales slightly, it came in
-4%. This is also distributed
throughout the entire globe. So this isn't some type of issue
just between international or China or just the US.
This was everywhere -3% in the US, -6% internationally, -11% in
China. So China's getting crushed.
The US is going negative and everywhere else is going
negative as well. Not great.
And you can see that Wall Street was pricing in growing same
store sales everywhere but China, they had minus same store
sales everywhere including China and way worse in China than
expected. You have the transactions was
also a huge miss. Wall Street was expecting it to
be roughly equal kind of in line the same -.27 and it came in at
-6%. So traffic volumes are going way
down both in North America and internationally.
Again, you can't blame this on one single country or one single
geography. You have ticket growth.
So transaction is the amount of traffic, people coming in and
out of stores and then you have ticket growth which is due to
pricing, how much people are paying.
Traffic is way down and people are paying slightly more but
still amiss on paying. Their ticket growth was 2%.
Wall Street was pricing in 2.4, North America was 4%, Wall
Street was pricing in 4.15. So that's one of the only
metrics that they really hit. They came in with their ticket
growth in North America, not to mention they missed North
America's traffic by set by over 8%.
Internationally it was down big ticket growth was much smaller
internationally -3% then even in the new store openings.
So you expect the company to continue opening up new stores,
That's how they get new customers.
Net new locations in North America was 134 compared to 144
expected. So they missed that by 7%.
International was 230, expected was 429, they missed that by
46%. So they're not opening up as
many locations as expected. And this is what I'm referring
to. No matter which way you slice
it, no matter which way you look at this, Starbucks missed on
everything. They missed on every aspect of
every part of their earnings. There are no good highlights
about this. There's really, it's really hard
to find anything to be really happy about this report.
So in some cases I see stocks selling off and I shrug my
shoulders. I have a hard time finding where
the weakness is. In this case, I think the sell
off is largely justified. I think that investors were
totally blindsided by what happened here and I think that
Starbucks did a really bad job guiding investors expectations
into this quarter. This was a huge communication
breakdown between the management and their expectations and
guiding and guiding investors in the right direction.
Obviously investors were caught way off guard.
Now we go down to the other metrics here and we can see this
show up in the longer term context.
We look at the revenue here, I'll zoom in a little bit so you
can just see this more clearly. See this last quarter its way
down even from a year ago, you had it climbing and then all of
a sudden it fell rapidly. So the latest quarter it's down
big, big time decline there. It looks unusually low.
We look at the free cash flow and this looks like it's growing
overtime. So the free cash flow I'll give
them looks OK, but there's other issues with the free cash flow.
A lot of this money that they earned this quarter is already
spoken for and I'll go into that a little bit later.
When we look at the earnings per share, here's the other big
miss. You can see earnings per share
declining year over year. If I zoom in a little bit here,
you can see this more clearly. This is the most recent quarter
we go back four quarters ago. That's what it looks like right
there. So it went from $0.79 down to 68
decline and EPS year over year. Now they were guiding for around
15% earnings per share growth and now analyst estimates are
wondering even if they can become flat, even if they can
just keep their earnings per share.
That's how much of A blind side this was.
When we look at the cash and debt, they took on more debt
last quarter. So long term debts going up
during a time where interest rates are higher, meaning that
their interest on this debt is going to be much higher and
that's a problem for Starbucks. When we look at dividends,
they're keeping their dividend, but this dividends becoming an
increasing amount of their cash flows, taking up a bigger and
bigger proportion of their cash flows leaving less amounts for
things like paying down debt and doing buybacks.
When we look at the shares outstanding, we can see a
decline year over year, but it's not going down quarter to
quarter. The shares outstanding was
completely flat from this quarter to last quarter because
they cannot afford to do buybacks.
One of the key things I look for in my companies are ones that
can afford to do buybacks if the share price plummets because
that's always a thing that can buoy the stock back up.
It's a little bit of a margin of safety.
If you have a company that has a ton of cash flow and sells off
big time, they can just buy back their stock over and over again,
improving all of their per share metrics, making it so that it's
really a matter of time until the stock goes back up.
That's why I like investing in companies like Texas Roadhouse
or MasterCard or Intuit. All these companies can pull a
buyback lever if the stock price ever falls.
The issue for Starbucks is they can't do buybacks.
They can't afford to. This year, Starbucks is going to
generate around 3 to $4 billion of free cash flow, OK, So they
have 3 to $4 billion of free cash flow to do buybacks with.
Seems like that's a good thing. They can buy back with $4
billion, but remember, 2 1/2 billion dollars of that is
already going to dividends. So 2 1/2 billion dollars is
spoken for going to dividends. Then they have debt payments,
interest payments on their debt of 1 1/2 billion dollars.
So right there, all of their money that they're generating in
free cash flow is already going to interest payments and
dividends, leaving them no money for buybacks.
So as the stock price falls, they have no tool in their tool
belt to really buy back the stock.
The only way that they could really afford it right now is by
issuing more debt. But that wouldn't make sense
because then they're increasing the amount of interest payments
they have in the future. So this is also a company that
doesn't really have an easy tool to be able to fight back on this
share decline, and that makes this situation even tougher for
them. In order to do buybacks right
now, they'd need to cut the dividend, and I don't think they
want to do that. So there's a brief overview of
the numbers this quarter of the fundamentals.
And anytime a big company like this posts 1/4 this bad, this
unexpectedly terrible, investors want an explanation.
And they want an explanation of the leader of the company, of
the top executive, the CEO of the company.
They want to hear his side of it.
What is going on with our business?
What what's happening here? Now I have my explanation.
My thought is that it's a caffeine bubble.
I think it's very clearly a caffeine bubble.
I think caffeine's too expensive.
There's too many products, too many competitors, and we're
finally seeing evidence of a breaking point.
But that's just my opinion. What we see here is the CEO
coming on to CNBC and being interviewed by none less than
Jim Cramer. Now say what you will about Jim
Cramer, but this interview, this one was a rough one.
He Jim Cramer really pressed him in this interview.
I I think it's great, but I also think it's it's a tough one.
Let's go ahead and just tune into it.
I'll bring it up here. We have here the the CEO of
Starbucks being interviewed by Jim Cramer and right there he
has a face where he's looking pretty upset and I think
rightfully so because again, Starbucks investors went into
this and got blindsided. Let's go ahead and start off
here. Jim, it was a very tough
quarter. Thank you for having me.
There were three reasons for for this.
First, we saw unexpected pressures on our occasional
customers more intense than we expected that impacted their
visitation. Second, the choppiness of the
recovery in China continued with a more intense price war and
what we expected. And 3rd, challenges of our
business in the Middle East that impacted us not just in the
Middle East but also in other geographies.
Another thing he mentions here is conflicts in the Middle East
and that weighing on the business, there is some
protesting and some boycotting of of Starbucks.
I think that's having an impact, but I think companies like to
blame stuff like that more than it actually is causing a
concern. Starbucks is being impacted by
some boycotts, but they're everywhere.
They're in every geography and you're seeing the same type of
thing happen in every geography. These protests are not happening
in every single geography, so I don't believe that's really a
valid excuse for the overwhelmingly and diversified
poor performance from Starbucks. Now we continue on with this
interview and it just gets rougher and rougher.
I understand. Now what I'm trying to figure
out Sir, is why did you not feel the need to pre announce this
shortfall given the fact in the previous quarter your CFO said
that you she felt that you could have a a earnings per share
growth in the range of 15 to 20%.
This is a substantial decline from that and given the fact
that you said on the call that April did not end well, I went
to know why you did not feel the need to come out and say our
quarters going to be substantially worse than
expected at least four weeks ago.
I think, Jim, we've been working on action plans to address these
headwinds. And So what we wanted to come
back with was not just the announcement, but also the
action plans that we have in place which.
So just three months ago, the leadership of Starbucks was
saying they were going to grow earnings by 15%.
Now analysts are wondering if they're going to grow earnings
in the mid single digits, 4 or 5%.
So the estimates are being dramatically changed.
By the way, are not business as usual and I'm happy to talk
about them. Well, let's let's finish 'cause
I know that investors are trying to figure out why they should
hold on to the stock. What I Some of the things that I
am confused about. I checked with all the major,
both public and private companies that are in a similar
business to you and no one saw a 3% decline in com stores because
of weather and none of them saw a negative number except for
you. Is it possible that your coffee
is just too darn expensive? Such.
A good question. Again, criticize Jim Cramer for
what you want, but this is such a great question.
He did all the comps of all the similar businesses, all the ones
selling expensive caffeinated drinks, and all of those are
seeing growth. Starbucks is the only one seeing
declines year over year in their sales.
So how is he going to explain this?
Jim, I think that if I look at the US occasional customer,
they've clearly cut back on, on visits to us.
If you look at the value for money scores we have, they're
still strong, but there's no question that the occasional
customer is cutting back on visits to us.
We have not been able to communicate to them the value
that we provide. So what we are doing about it is
it's not business as usual, but there's an action plan we have
in place in order to do that, to reach them and to communicate
the value that we are providing. This, this line, he sees the big
problem with Starbucks right now.
Not that their prices are too high, but it's a it's just a
miscommunication of the value that they're providing.
They haven't communicated correctly the value they're
providing. The correct answer here for this
CEO is to just say we took too much pricing.
We raise prices little too fast, a little too soon.
And so we're going to ease off the the gas pedal a little bit,
give breathing room, We're going to hold off on price increases.
That's exactly what other companies do when they get a
little head with pricing. They say, you know what, we took
a lot of pricing. We're seeing some pushback from
customers, so we're going to ease off.
We might lower prices slightly in some markets to regain
customer traffic. There's nothing wrong with that.
There's nothing wrong with a company admitting that they
raise prices a little too fast for customers.
But instead of doing that, he blames it on a miscommunication
of value. They aren't communicating
correctly that the price of a drink going from $4.00 to $6 in
a matter of a year is still not great value for customers.
I don't think any way that they communicate the value to
customers, whatever he means there is going to fix this.
There's too many alternatives. Starbucks is not the only game
in town selling a morning drink that gives you your buzz, that
gives you your energy for the morning.
So I think this is a big misstep by the CEO here.
He had an opportunity to say you know it.
We think it's mostly due to just taking too much pricing.
We're going to lay off of that. Instead, he focuses on this
communication talking point. What we're doing for that is we
are making it attractive for them to come back into the
Starbucks app and join it. On the app, what you will see is
you will see value that they haven't seen because they've not
been part of that environment. There are drops that are going
to happen every Monday. There are bundles that we're
putting in place that are attractive for them, For
example, a beverage and a drink at a certain price.
And So what you're seeing there is the effort we're making in
order to ensure that our occasional customers get to see
the value that we provide a loyal.
Customers school program go from 30.
What customers want to hear is that that things are expensive
right now and executives realize things are expensive.
They want to hear that people are paying attention to their
concerns about the ever rising price for everything.
So if you communicated that a little better here, that he
realizes you know that things are expensive so they're going
to pay attention to that, I think that'd come across so much
better. But this continues on.
And again, it just it gets worse from here.
I promise. 34.3, the 32 point, 32.8 in linked quarter, I mean
those people are not occasional, those people are hardcore.
Why did your members and I know your membership was up 6% year
over year. I'm not concerned with that.
I'm concerned with linked quarter, why you had not the
occasional but the hardcore drop off?
Julie, if you look at the most loyal customers, they actually
continue to come in. They continue to buy as
frequently they compete. They continue to customize and
upgrade. It's at the tail of the loyalty
program, particularly those that are you know in the 90 day
active as we call it. The folks that didn't come back,
they again are very similar to the occasional customers.
We have an action plan in place right now to communicate
directly with them with offers that have gone out even as
recent as this week in order to ensure that we can reverse the
visitation losses that we have seen with them and to bring them
back. And yes, you're right, overall
program did grow by 6%, right. So instead of lowering prices, I
think the plan here is to give more freebies, offer more little
discounts, perks, you know, bundled items and that type of
thing. Which is something I think
that's a good route to go down. It's better than doing nothing.
That's necessary. But what's more important, I
think it's the link quarter decline.
Now let me before I turn it over to my colleagues, you said it's
not business as usual. I want to make a point here,
Sir. You are still expanding as if it
is business as usual. You add for instance, on the
quarter, you talk about opening stores in Honduras and Ecuador.
Is it not time to pause, Sir, and figure out what's really
going wrong and spend a deep dive and making it so that this
decline in comp store numbers does not continue because it is
perilous to the actual existential existence of
Starbucks? Jim, thank you for the question.
I what I would tell you is if you look across the world, our,
our system sales in Latin America expanded double digits.
Our sales in Japan expanded double digits.
Our business outside of Malaysia and Indonesia and Asia Pacific
showed growth if you look at the US business and look at the
fund. We just went through all the
numbers, see, see the difference between the story he's painting
and just the raw numbers. We saw that everywhere in the
world, same store sales is in the negative, but when you
listen to them, it's like you're hearing just the complete
opposite than the actual numbers in front of you.
Bundles of the US business, we are holding share in the US We
are still the largest. That's what he says.
We're holding share in the US. Starbucks is holding market
share in the US? Really.
Starbucks, you're holding your market share in the US?
Really. In out of home coffee, if you
look at some of the metrics that we have and.
Tim Horton said you were not holding share, Sir.
I regard them as being Seminole companies that are just as good
when it comes to McDonald's says you are losing share.
I can't go against those three companies.
They are too good and too honest and too big for me to dismiss.
We are the leading. So, so Jim, this is again, this
is an excellent line of questioning.
Say what you will about Jim Cramer, I know, but his
questioning here is fantastic. He highlights that the other big
companies you have Dunkin' Donuts, you have McDonald's
saying that they're taking share from other other drink
companies, they're taking share from Starbucks and then you have
Starbucks saying we're keeping our share while same store sales
are going down. Obviously one of them is
misrepresenting the situation here.
Category player in coffee, I'm talking visitation share and
what we have if you look at our in home coffee business, it grew
share 140 basis points. But if you look at the business
under underpinning US tea grew 8%, cold grew 1%.
So there are elements in here. If you look at our partner
sentiment and what we have inside stores, attrition is down
to its lowest levels. So there's worth going in.
The thing we didn't do enough of is really attack the occasional
customer with delivering and communicating value to them in a
more aggressive manner. That's what the plan we have
does. And and there you have it.
So you know this interview did not go well.
The stock price continued to fall another 3% after this
interview, which is usually not a good sign.
When the CEO comes on, they try to defend the stock and the
stock falls further. Not a great interview from the
CEO, but you hear their plan of attack.
To turn this around from the CE OS own plan of attack is to
basically offer more freebies and goodies and things to entice
people in the app. They're using their digital
property to get people back in the fold at Starbucks.
I'm not going to be buying Starbucks stock.
It's not one that I find attractive enough to jump into.
I think there's other opportunities in the market that
are far more predictable. But if you are buying Starbucks
stock, I genuinely hope the best for you.
Now moving on from Starbucks, we have to talk a little bit about
what Amazon did. They just reported yesterday as
well. And before we even jump into it,
I have to mention that I am invested in Amazon.
So this is one that I'm bullish on.
I I really like the company and it's up a little bit today.
Amazon's up around 1 1/2%, floating around in the positive
today, even though the market's in the red because the report
overall was really good in my opinion.
I just thought it was a decent report, in line with most of my
expectations, even slightly better in some areas.
We have the headline here from CNBC.
Amazon profit more than Triples topping Wall Street
Expectations. We look at the top and bottom
line here. The earnings per share was a
beat, $0.98 versus 83. The revenue was a beat 143.3
versus 142.5. So we got a beat on the top and
bottom line. But of course, with Amazon,
there's so much more underneath the surface.
Let's go ahead and take a look at their segments of their
business. We can do this by the revenue
segments. So we're looking at revenue here
broken down into different aspects of their business.
The first revenue segment we're going to look at is the first
party online sales. So this is stuff that Amazon
sells like the Amazon Basics brand, right?
You can buy their Amazon batteries.
Amazon has actually been winding down their first party brands.
There's so many complaints about them.
Anytime Amazon sells something, they're competing with someone
else. And since they're competing with
someone else that's usually selling something else on their
same website, people get really upset about it.
They say Amazon stealing all of their secrets and they're
copying them and they're selling it for cheaper.
And then Amazon quickly becomes the bad guy.
So they're winding down their first party online sales and
they're taking off hundreds of their first party brands.
This has made it so that last quarter they didn't grow their
first party sales that fast at all.
If you look at it, it went from 52.97 billion to 54.67 billion.
Now it's funny, It's funny in Amazon's case to say that it
grew by $2 billion and that's like no growth at all.
But in reality that's really minimal.
That's growth of like 2%. So this portion of the business
is not growing fast. Amazon is not focusing on it.
It's caused them a lot of grief with regulators and people
complaining about them, them competing and they don't really
need it. It's also a low margin portion
of their business. So they're not focusing on
growing this. It's not a real intrinsic value
mover for the company. Even if they make a lot more
money in this segment, it's not going to move the needle for
Amazon. Now when we move on to physical
stores, this is another part of the company that's more concept
stores trying out new things and mostly at this point, Whole
Foods. So they own Whole Foods.
They're trying to integrate that into Amazon as much as possible
and it it's not growing the fastest, but we are seeing some
steady growth with their physical stores.
I have to say there's a nice gradual line of increase ever
since 2020, it's increasing nicely, Not the fastest growth
ever. But again, this is another
portion of the business that I don't consider intrinsic value
moving. I don't think it's the biggest,
most important part of the company.
When we move over to the third party seller services, this is
really important. This is where they host other
thirdarty sellers and allow them to sell on their platform and
then they provide a variety of different services and charge
them for those services if those sellers choose to use them.
More and more sellers are increasingly choosing to use
Amazon services and they're pricing the services more
aggressively because they know the value they're providing.
Third party seller services grew by 16% year over year.
Then we have advertising. This is another pillar of
intrinsic value. This is something that will
really move the needle for Amazon.
We had high hopes here. I had high hopes that it would
be good. I didn't know the exact numbers.
I couldn't predict it with exact precision, but based off of
Meta's report, based off of Google's, based off of
Linkedin's, I knew this is going to be really fast.
And it was really fast. This grew at 24% year over year,
going from 9.5 billion to 11.8 billion.
And no matter what people tell you, if someone says 24% was
slow, they just, that's just not accurate. 24 percent is very
fast growth for business doing this much this quickly.
They spawn this business out of nowhere just a couple years ago
and already it's doing $12 billion per quarter.
Last quarter before that during the holiday season, it did $15
billion. Advertising is a monstrous
portion of this company, a monstrous portion of the value
proposition. We move on to the subscription
businesses. This is another one that it was
right in line with my expectations.
I said that this one would just be steady.
I didn't predict anything spectacular with it.
I thought it would be steady just like it is throughout its
entire history. And that's exactly what
happened. It grew by 11%.
So this was steady growth from the subscription services, which
is really good as well because this is another high margin
portion of the business. Then we get to AWS.
This is what's creating the profits for Amazon today.
AWS grew quickly. It grew much faster than
expected. Analyst estimates were for it to
grow 14%. That's what Wall Street was
expecting. They grew it 17%, so far above
Wall Street's expectations. Now other doesn't mean anything.
It's not a category I pay attention to.
When we look at the high quality businesses, the ones that
Amazon's really trying to grow, the ones that drive the
intrinsic value of the company higher and higher, we have the
third party seller services growing 16%, advertising growing
24%, We have subscription services growing 11% and we have
AWS growing 17%. Re accelerating over last year's
growth. The four most important segments
of the business are all the fastest growing segments and out
of these four, I even think that these three are even more
important. These are the three most
important segments. It's difficult to say what is
the most important. They all play a pivotal role
when you break this down. You have a company that has a
high amount of concentration into really incredible
industries, concentrated into online sales, concentrated into
advertising and concentrated into cloud hosting.
They're in such an enviable position.
Every company on earth would love to be in Amazon's position.
Now, another key performance indicator we can look at for
Amazon is with AWS right here. If we go back to this chart, we
have AW s s revenue. So this is Amazon Web Services
revenue on a quarterly basis. It reached $25.3 billion last
quarter, which puts it at a run rate of 100 billion.
So you have a company now run rate $100 billion and we want to
look at other key indicators to see how this is growing in the
future. One of them that we can look at
is this right here AWS customer commitments.
These are large customers that have signed contracts with AWS
to use their business that the contract linked is over 12
months. So these are long term customer
commitments and how much unearned revenue that Amazon
has. When we look at this last
quarter, it went up again from $155.7 billion to 157.7.
Now we don't know exactly when the customers will use this
revenue, but it's going to be over like a four year period.
This is already money that people have committed to AWS.
They haven't paid yet another $157 billion.
So we break down all the revenue into those segments.
I think it looks strong across the board.
All the major segments I look for are growing at least with my
expectations. But when we look at an overview
of Amazon and all the basic financials of the company, it
also looks relatively strong from my perspective.
I don't see many weaknesses here.
The overall revenue grew 12.5% beating analysts expectations.
The reason that they continually beat expectations is because
they always set the bar low. Amazon is one that under
promises and over delivers. They always come in at the top
end of their revenue guidance. So no surprise they beat
expectations. Again the EBITDA, you know all
this stuff is improving. We can look at the free cash
flow. This one's a little bit tricky,
but if we zoom in here, we can see that last quarter it was
4.06 billion. Now I give a range between 4:00
to $10 billion. So again, this is in line with
expectations because they'll throw in a lot of expenses, a
lot of working capital into this quarter.
But we look at this on a year over year basis.
It was -9.42 billion last year on the same quarter and +4.06
billion this quarter. I believe that the remaining
quarters will be very, very big quarters, but this is off to a
great start. We look at the net income, they
posted another net income quarter above $10 billion.
So you can see the gradual increase reaching record high
after record high. This is going to continue to go
up. The earnings per share were a
massive beat. We have the company's earnings
per share climbing 216%. That's not an error.
If we go back four quarters ago, it was $0.31.
We go to this quarter it was $0.98.
If we look at the balance sheet of Amazon, they took on some
debt to pay for all of their expansions during the COVID
boom. But we look at this now and the
debt has been going down routinely over the past year and
this is something that they mentioned on their earnings
call. They don't like the debt.
They want to get rid of it. They're paying off debt
steadily. In fact, one of the reasons when
we look at their shares outstanding that it's actually
going up and not down is because Amazon right now is not
concerned about the dilution in the shares outstanding as much
as getting their balance sheet in order.
They basically said, in fact it was the CFO of the company
saying, look, what we're doing right now is we're not paying a
dividend, we're not doing buybacks, but instead we're
going to get our debt paid down to a very healthy level.
They don't like having this debt and the high interest payments.
So they're going to continue paying down this debt and get
that down 1st and then I believe they'll transition to the
dividends and the buybacks. That's the order that Amazon
said they're going to go. So a lot of investors were kind
of antsy waiting around hoping that Amazon would would launch a
dividend and say this is going to be their first quarter
because we had Google do it and we had a meta do it, but Amazon
doesn't really follow the pack. They want to do things in the
order they want to do it. And that would be one of the
criticisms that I think a lot of people have about this quarter.
As of this quarter, they are not returning capital back to the
shareholder, really none of it. They're not paying any
dividends. They're not doing any buybacks.
They're paying down debt and they're investing back in the
company. So no capital return back to the
shareholder is something that you can take both ways.
You can see that that's really bad.
You want to focus on companies at capital return or you can say
that you're happy they're paying down debt and you're happy
they're reinvesting back into the company.
Two ways to look at it, but right now that's something to
keep in mind. Overall, I would say that's the
single biggest shock to me this quarter.
I thought they were going to announce either a bigger buyback
program or a very small dividend.
I thought they'd do something in terms of capital returns, but
they didn't. They just said they're not doing
either right now. They're focusing on the debt.
Now if we move further down the financials, another thing that I
think soured Wall Street a little bit is the CapEx of the
company. If we look at the CapEx over the
past 10 years, you can see that Amazon was focusing on
efficiency. Over the past year, the CapEx
was going down as revenues were growing and that painted a nice
image that they could continue doing this.
That was the talk over the past year, efficiencies and capital
efficiency, focusing on profits, turning out free cash flow, that
type of thing. So a lot of investors, including
me, thought that they would continue with this trend.
But then AI happened, AI happened, and it puts a kink in
these plans. Amazon said, you know what, we
thought we had enough server capacity.
We thought we had enough investment into AWS.
But then there's so many customers coming to us saying
that they want AI training, they want inference, they want
hosting, they want usability for AI and we don't have enough
capacity right now. So what are they doing?
What does Amazon do when they don't have enough capacity?
They build and build and build. They announced on this call
something that was again unexpected to me, that this most
recent quarter here would be the lowest CapEx quarter of 2024.
So instead of the CapEx going down, it's going up.
Now the reason it's going up is not because of low margin
retail. It's not because they're
investing in you know, random projects that the CEO wants to
invest in. It's not because they're
investing in rockets or anything like that.
It's for AWS. They're investing more into AWS
and that's where primarily their CapEx is going to be spent.
Now they also mentioned on the call that some of the spend that
goes towards AWS does support the retail business as kind of
like a a second benefit, but primarily it is for AWS and it
is because of AI. They're investing more in AWS to
support all the AI demand they have and they already said that
AI on AWS is a multi billion dollar business.
So they didn't disclose the exact amount they're making, but
they said they're already making multi billion dollars in AI
revenue, real revenues from AI. So again there's two ways to
take this. You can be bummed that they're
kind of investing more into AI. You can believe that they should
cut back on that or you can say, you know what I really believe
in, AII believe that they're going to get a very high return
on these investments. So I want them to invest more.
I want them to build out more data centers so that I make more
money down the road on this. Overall, I think that Amazon
investors should be happy right now.
They're getting the best of both worlds.
They're getting a company that's expanding margins, growing net
income, growing free cash flow aggressively year over year
while still investing in growth for the future.
They're doing both of it. Growing in the future, making
good investments today while expanding margins and growing
profitability. So I believe fully that Amazon's
still on track. I think the company is doing
great across the board and I look forward to its progress in
2024. Now that's going to be it for
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