AMAZON: Underperformance vs the Mkt is completely understandable. This is so badly
analysed and fundamentally misunderstood. 59x buy ratings, not a single HOLD or a Sell.
Nutstuff has been clear over the last 18 months. Amazon is a great company, great to be a Prime customer and clearly here to stay but at the same time it is a very dangerous investment, it is expensive, does not have scalable software, doesn’t generate cash, is highly capital intensive and is in a war with the strongest set of competitors on the planet (Microsoft, Google, Alibaba, Walmart, Netflix, Disney).
Every year, analysts salivate over the sales number but downgrade their forward earnings and cashflow (talk of JAWS widening but never happens and analysts still seem to fail to recognise why).
Now the sales number is slowing. Jeff Bezos has exited (nb note that his family which historically owned 10% could have sold c.$150bn over last 18 months and nobody would have known) while AWS pricing and imput costs (=power!!!) look like they are turning decidedly negative.
Ok, We have a lockdown quarter and Amazon might beat a downgraded number giving a short term pop (especially if Nasdaq has a bounce over the next two weeks) but there are big risks to forward guidance and Nutstuff expects much greater scrutiny from commentators outside the highly paid 59 strong Wall-Street tech posse (never good on accounting or detailed analysis)
Key points..
1. Amazon doesn’t produce any material cashflow after finance leases and equity compensation
2. AWS EBITDA margin has been in decline for three years and cashflow margins appear just
single digit
3. A price war and/or increase in power costs could quickly take cash margins negative
4. Amazon Retail advantage and growth was built on sales tax avoidance - game has
changed. Its in a fight.
5. Amazon Retail lacks scale outside North America
6. Amazon marketing revenue appears to reflect its marketing spend, not a 100% margin
business!
7. Amazon lacks killer primary software, it remains capex intensive with no monopoly
8. Amazon headline sales growth is slowing to single digit
How nasty could it get over next 12 months? I am going to put this simply if Amazon slows to
single digit in retail and the market wakes up to the profit dynamics and pressures behind AWS. Amazon could trade at 20-25x $40 eps, lets be clear, it is not the quality of Microsoft or Google as it does not have balance sheet nor the cashflow nor the walled garden of being an essential monopoly that is $800-$1000, still a $500bn company, and don’t get me wrong there are some efficiency and utilisation benefits to be had, but there are much bigger forces at work.
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