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The Cloud Cuckoo Land of AMZN

Updated: Oct 31, 2023

Oh AMAZON: I read commentary like this: Markets are focused on Amazon missing sales estimates for the 1st time since 2018. But the broader theme remains the company's dominance. Its 40% share of US online spending is bigger than its next 9 competitors combined. Its staff is up 52% in the past yr. .... FFS Please spare me the daily Mail analysis!


Nutstuff has long had a negative fundamental view believing THIS is the weakest link in mega- cap US tech. I was an avid avoider for most of 2020 and have amplified this call further in 2021 as I saw an end to Covid behaviour, this despite being a loyal Prime Customer and spending loads of money with them!


Last nights numbers and guidance will have turned the data algos negative as sales growth missed and guidance for both sales and profits was awful; no cashflow and little growth + Bezos in space = why own it, next stop will be the technical guys as key levels could be taken out today. I am NOT joking when I argue that AMZN could easily be at $1-1,500 in 18 months with greater value destruction than any single stock in history. A PER of 35x on EPS of 40 = $1,400 or 30x x $45. FB is on 24x with real cashflow and net cash. This makes AMZN a SELL!


The wider question is whether a AMZN collapse takes out the tech bull market; after a great run over results season (market positioned for it over last 6 weeks) and with long bond yields looking like bottomed (full opening up ahead) AMZN could not have come at a more vulnerable time.


Nutstuff is a believer in tech but it remains selective and focussed on “enablers” not “disrupters”. August looks dangerous and there is still no real discrimination. The Robinhood IPO (look at the grey market) a clear sign. Then EM, EM, and EM for growth. Ex-china of course...


On The numbers:

Sales growth came in at +27% (couple of percentage points below expectations) and it included the boost from moving prime day from Q4 (c.5%). EPS came in at $15.1 boosted by a 10% tax rate....again the healthy growth in profits was based on the turnaround at international operations.


Q3 Sales Guidance was a miserly, 9-16%, yes low double digit... well below expectations (nb first post covid quarter) and mgmt said they expected these low sales growth rates to continue for several quarters. Profit guidance was even worse at $2.5-6.0bn (v. $6.2bn last year) showing that the pricing pressures in Cloud and the unwind of Covid exclusivity in retail is biting....question now is how much red ink to analyst models....my guess as ever it will be slow for them to get off their high horses...


What was really shocking was the complete evaporation of Cashflow....AMZN produces 3

cashflow statements and Wall street focuses on headlines ...however underlying cashflow

including leases collapsed to just $0.5bn for last 12 months and that is before $10bn or so of stock compensation and a few billion of deferred tax... nothing for shareholders...AMZN spent a staggering $16.5bn in Q2 (including leases) to try and keep its top-line together... How can analysts miss this?!


The Bulls will try to cling on to AWS sales growth at +37% (acceleration from +29%) but as

shown below without looking at the cost (“Wall Street in Cloud Cuckoo Land”) AWS has

historically just been a function of capex and AMZN is just throwing money at problem. AWS

margin deterioration from above 30% to 28.3% qoq shows the pricing pressure and direction of the business.


The Nutstuff fundamental Avoid View reminder:

• AMZN is not (yet anyway) a quality IP/software model; its sales are driven by capex

intensive warehouse + datacentres...hence little op gearing or cashflow (read all 3 CF

statements!)

• ...AMZN is not a quasi monopoly; in retail, it is dominant in only online US retail and even

there now faces Walmart (and Google); in international retail operations it is much

weaker...in Cloud, it is first mover but against the strongest array of competitors in history

(MSFT, GOOG, BABA)...

• ...Internet Sales Tax avoidance was its big pricing advantage in retail (c.8% in US; 20% in

Europe); closure of loopholes means this has gone while others (eg Walmart) are now free to

move online... Advertising (c.4-5% of sales) and some efficiency gains (c.2%) true but more

than offset

• ...First mover in Cloud narrowing with pricing war ahead...like datacentres, as competition

increases pricing collapses.... pricing falls straight through to margin

• .Covid...no offline retail meant high margin retail sales...return to normality means AMZN

should lose some very high margin profitable business won over last 18 months..

• Data..if there was one point in retail that bulls can hang onto is use of data....the regulatory

threats to this are real ...if AMZN ever makes any real money..and of course labour costs...

• Amazon trades on a PER of c.80x...compared to MSFT (36x), GOOG (31x), Apple

(28x)...and yet where is the growth let alone no base monopoly + much poorer cash and b/s

profile...

• AMZN cash conversion rates are awful and its balance sheet weak...


Wall Street is frankly in Cloud Cuckoo Land...

Wall street raves about AMZN ...and backs it up with high level modelling.. however if you look at their models you will see the greatest operating jaws in forecasting history and a constant push out of cashflow... especially in the EBITDA-capex numbers ....the reason is that


Wall Street does not understand that Cloud is simplistically data outsourcing online ...hence you can only drive sales with capex (unless have proprietary killer software eg MSFT)... ....to increase Cloud revenue AMZN just throws money at new data centres..which Wall Street’s highest paid don’t seem to notice has historically been in the leasing line....:)..only in last couple of quarters has it been appeared in capex.


If Capex remains high (as it inevitably should do), Wall Street DCFs are just plain wrong...in

addition, as in Datacentre market, if Cloud capacity/competition increases as market matures

(logical and you have MSFT, GOOG and BABA breathing down AMZN neck), pricing collapses and lost revenue falls straight through to margin..and EBITDA-capex margins quickly turn negative.....DCFs of $1 trillion dollars quickly look more like $100-200bn (2-3x invested capital).


Please see our disclaimer here: https://www.nutstuff.co.uk/disclaimer

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