amazon just posted their first loss in
seven years of 3.8 billion dollars this
caused amazon stock to tumble 14 in a
single day which is their biggest one
day drop since 2006.
this drop itself paints quite a bleak
picture but if you zoom out on amazon
stock you'll see that the stock has been
struggling for quite some time now
it's not that amazon has crashed 50 or
70 percent like netflix or paypal
however they've just been going sideways
for roughly two years
this doesn't sound that bad until you
consider that all of their peers were
going parabolic till the start of this
year for example since the start of 2019
google has outperformed amazon by 80
microsoft has outperformed amazon by 120
and apple has outperformed amazon by 230
to make things worse amazon just broke
down from its sideways channel which has
resulted in nearly a 40 selloff from
their all-time highs
and given the size of amazon the
sell-off correlates to a 745 billion
loss in market cap i don't think mr
bezos is a big fan of this move given
that he is personally down 50 billion
dollars year-to-date so what happened to
amazon
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starting with the most notable concern
regarding amazon we have underwhelming
growth figures in their last quarterly
report amazon projected that second
quarter revenue would only grow three to
seven percent compared to last year
not only is this a smaller growth
percentage than even the s p 500 but
more importantly it's lower than what
analysts estimated
analysts were hoping for
125.5 billion dollars in q2 but with
only three to seven percent growth we're
looking at closer to 116 to 121 billion
dollars this marks the slowest growth
for amazon since the dot com crash way
back in 2001
and at this rate it won't be long before
amazon ends up posting a full year of
single digit ghost figures
aside from nearly non-existent revenue
growth it seems like amazon is also
struggling with prime member growth as
well
this is really not that surprising given
that basically everyone who wants primer
already has it also this isn't some new
phenomenon either prime users have been
leveling off for many years now and it
looks like it's just going to slow down
even more amazon hasn't really made this
issue much better given that they've
been constantly hiking prices for
example you might have recently heard
that prime subscriptions are going up to
140 dollars per year but for a
significant number of prime members this
price hike is even more painful
you see it that 140 number is for annual
subscription holders but the thing is 52
percent of subscribers pay for a monthly
subscription and the monthly
subscription actually cost 15 per month
or 180 per year now personally i don't
think we can really blame amazon for
this fee increase given the rampant
inflation we've been experiencing but
that doesn't really matter
whether amazon's price hikes are
justified or not their membership cost
is simply becoming unaffordable or not
worth it for many people and this is
extremely bad news for amazon given that
they're a growth company i think a lot
of people forgot about this given all of
the hype surrounding tesla stock and its
sky high pe ratio but before tesla stock
went to the moon amazon was by far the
biggest growth company in the world
after all amazon has regularly had a p e
ratio of a 100 or higher for most of
their history it wasn't till the last
few years that amazon's p e ratio has
consistently come in at less than 100
but even now amazon's p e ratio stands
in the mid 50s which is extremely high
for a company as mature as amazon and
given their poor growth forecasts it's
very possible that amazon is even more
mature than we originally thought
amazon is literally posting growth
numbers that are worse than apple google
and microsoft yet their pe ratio is more
than two times higher than any of these
companies by this logic amazon stock
could drop another 50
and it would still be more richly valued
than the other fan companies and unless
amazon is able to get their growth story
back on track it's likely that amazon's
pain has just begun
usually companies like to substitute for
a lack of revenue growth with strong
growth in profits and that's what amazon
was trying to do as well
till the end of 2017 amazon's net income
was a laughable amount compared to their
revenue given that their net margin was
literally less than one percent this is
because jeff bezos preferred to reinvest
all of their excess income back into the
business but in late 2017 he had a
change of heart he finally decided to
turn on the profit switch and amazon's
net income went through the roof until
now
the most a you would point out that
amazon wouldn't have even lost money
this quarter if it wasn't for their 7.6
billion write-off on rivien and while
this is absolutely true even if we
ignored this their bottom line isn't
looking that great if we take a look at
the quarterly report we'll see that
total net sales jumped from 108 billion
dollars to 116 billion dollars from q1
2021 to q1 of 2022 yet despite this
their operating income over half from
8.8 billion dollars to 3.6 billion
dollars and it's not like this reduction
can be attributed to any one factor
either rather we're seeing amazon's
operating costs increase across the
board also and it's not like these
increases are that substantial either
we're looking at 10 in one category and
15 and another but given amazon's single
digit net margin these increases add up
quickly and the worst part is that most
of this is not under their control for
example their cost of sales increased
from 62.4 billion dollars to 66.5
billion dollars if you're not familiar
with cost of sales it's basically just
the cost to produce a given product or
service and given that the prices of raw
materials and semiconductors are
increasing substantially this is not
that surprising similarly amazon's
fulfillment costs rose from 16.5 billion
dollars to 20.2 billion dollars likely
one of the biggest factors driving up
this category is skyrocketing oil prices
moving on to their next category we have
a very similar story technology and
content rose from 12.48 billion dollars
to 14.8 billion dollars this can also
likely be attributed to rising chip
costs which have resulted in more
expensive databases and servers in the
end amazon is basically getting screwed
by inflation like all of us but just on
a much bigger scale as a business their
long-term goal would be to pass on these
costs to customers and that's likely
what they're trying to do but it's a
pretty fragile balance between
maintaining customers while increasing
costs fortunately jerome powell
continues to insist that we're gonna
have a soft landing and the worst of
inflation is behind us the market
doesn't quite believe him but jerome
being right would not only be great for
amazon but for all of us so hopefully
he's right but even if he is right it
would take a few quarters for
stabilizing inflation to reflect in
amazon's bottom line so amazon will
likely have to deal with rising costs
till at least the end of this year
aside from all these internal problems
amazon has been facing they're also
facing a major external problem which is
physical retailers for decades physical
retailers weren't much of a threat for
amazon in fact it was usually the other
way around physical retailers were
scared of losing market share to amazon
as they navigated the retail apocalypse
and this was just made worse by the
pandemic and state home orders however
as things return to normal it seems like
the innovative physical retailers are
rising stronger than ever before in fact
online retailers lost ground to physical
retailers in 2021 and i have a full
video about this phenomenon if you're
interested but the main explanation for
this shift is that physical retailers
have learned to offer the best of both
worlds historically physical retailers
were trying to compete head-on with
amazon by simply creating their own
websites and home delivery services
which were usually subpar to amazon's
however the innovative retailers have
since learned to leverage their
locations to offer something that amazon
can't this includes convenient returns
curbside pickup no delivery fees
knowledgeable customer service and a
much more interactive shopping
experience
aside from all these factors many
customers have also become quite wary of
amazon's quality the truth is that the
vast majority of products on amazon are
just highly marked up items from
aliexpress and alibaba and usually the
quality is just not that great
especially compared to items that you
can find at physical retailers
personally i found this issue to be most
prevalent amongst cheap electronics and
specifically dongles since the start of
2021 i've gone through three usbc
dongles and three displayport hdmi
converters all from amazon they simply
stop working within three to six months
considering all this it no longer seems
like online retailers are just going to
completely wipe out physical retailers
rather it seems like they've reached
some sort of balance and that things are
going to be relatively stable moving
forward and while this is great news for
physical retailers this is terrible for
amazon
up until now we've mainly discussed
amazon's retail business but the truth
is a significant portion of their
business has nothing to do with retail
while 84 percent of amazon's revenue
does come from the retail business
virtually all of their profits come from
their cloud business aws
in fact last quarter aws accounted for
100 of amazon's operating income given
that amazon.com was on that loss both in
north america and internationally this
is really nothing new given that aws has
been holding up amazon since it was
created in 2006 but over the past few
years it did seem like amazon was
finally starting to become independent
of aws as they posted their first
profitable quarters however all of that
progress was wiped out with rising costs
and this leaves us with this serious
question how long can aws just keep
propping up amazon using aws to fund
amazon's growth was a genius strategy in
the early 2010s but ain't starting to
get older now that we're 16 years in
fortunately it doesn't seem like aws
revenue is slowing down yet but it's
only a matter of time until any business
starts to stagnate and amazon's
continuing dependence on aws isn't the
most assuring of characteristics
despite all these concerns i'm
personally still optimistic about
amazon's future here's the thing amazon
has decisively won e-commerce and yes
they're a monopoly 56.7 percent of all
e-commerce sales happened on amazon in
2021 and while online retailing is
starting to stabilize i don't think
amazon will be losing their dominance
within the sector anytime soon something
else to note is that amazon just
announced a 201 stock split and this
would be their first stock split since
1999.
at current prices amazon's post split
price would be just over 100
and those talk splits don't actually
change anything fundamentally about the
company i think a stock split could
attract a lot more retail investors
i know some of you will argue that the
introduction of fractional shares has
made stock splits completely useless and
technically this is true if we just
focus on stock returns but i mean who
actually wants to own a quarter or a
third of a share also creating
derivatives on amazon is currently
unreasonably expensive for most retail
investors a stock split will
substantially help with derivatives
pricing combine this new retail interest
with the fundamental recovery from
amazon and i think it's just a matter of
time until amazon recovers to its
all-time high and makes new all-time
highs personally i liked amazon stock
when it was at 2900 per share so i
really like it now but that's just what
i think and it's definitely not
financial advice would you guys invest
in amazon right now comment that down
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logically answered but until then i'm
hari and i'll see you guys on the next
one
you