Ryan Henderson's avatar
$20.6m follower assets
Random Thoughts on Amazon
We're researching Amazon for our next podcast, and I thought I'd share some mental notes here. There are a lot of moving parts with the business but so far, I have a hard time seeing how this doesn't end up turning into a great investment (EV ~$1T).

The hang-up for most investors right now appears to be the lack of profitability in Amazon's retail business. Keep in mind, since 2020, Amazon doubled their workforce, doubled their fulfillment capacity, and built out the majority of the transportation network they were expecting to build over the next 6 to 10 years, to try and meet the excess demand from covid + stimmy checks. However, around late 2021, consumer spending reverted and at the same time, all their major supply chain costs soared (linehaul, air freight, ocean freight, fuel). This led to operating losses across both their North America and International business lines, which I think were also being buoyed by the profits in their advertising division.

However, in reading through the last 4 CC's and listening to Jassy speak at conferences, it seems like most of the inflationary pressures they were seeing should subside or in many cases are already subsiding. Pretty much all the transportation costs aside from fuel have come down, they've laid off ~18,000 corporate employees, and said they were seeing clear improvements in productivity across their FCs. Not to mention, Buy with Prime is being rolled out to all eligible merchants in the US by Jan. 31, which should help fill some of those excess capacity concerns. It seems likely that retail will return to profitability over time, especially with advertising still growing at 25% YoY.

As for AWS, the division looks incredible. The business is on an $82B revenue run rate with fluctuating operating margins around 30%. They recently increased the useful life of their servers from 4 years to 5 years, which decreased the amount they can depreciate annually but should indicate gradually improving economics for each datacenter. Additionally, their utility costs have risen at their global datacenters due to the rising price of natural gas, but this has quickly subsided in recent months. Either way, 30% or 35% OM's, it really doesn't matter, it's a business that has all the tailwinds in the world and could easily generate $50B in OI within 5 years. That alone would warrant the current EV, assuming retail isn't worth less than zero.

My only real concern here is stupid spending. Alexa, Luna, Video Content, the iRobot acquisition, these all seem excessive. They've got 152 job openings in their devices division (most attributable to Project Kuiper) which is nearly as much as they have for AWS. I know this willingness to take risks got them to where they are, but sometimes it feels like billions of $ are just designated to pet projects for Bezos.
Heavy Moat Investments's avatar
Agreed, long $AMZN, #2 position after yesterdays rise. On the iRobot comment, at $1b it was reasonable I think. If it gives them data into households then its fine. $1 billion is not a needle mover anyways for Amazon.
Benjamin Tan's avatar
At least they stopped Bezos's obsession with single cow patties years ago ! That was apparently a pet project that went out of hand and never took off !
Joshua Simka's avatar
@consumeowntech So I just had to look this up! Then I realized--single cow burger! 💩

In August 2015, the Washington Post published an unappetizing article about how a single hamburger might contain the meat of up to a hundred cows. Sourcing a burger from just a single cow could theoretically produce a superior-tasting patty but that “would be hard and expensive,” a meat distributor told the paper.

That caught Bezos’s attention. He seemed to have increasingly adventurous tastes, later sampling an iguana, for example, at a meeting of New York City’s Explorers Club. In another brainstorming meeting with senior vice president Doug Herrington, he suggested they find a ranch to produce a “single cow burger” and make it a unique item that customers could only buy from Amazon. “I really think you should try this,” Bezos told Herrington, who recalled thinking at first it was a joke. “How hard can it be?”

The project was assigned to a new culinary innovations team inside Amazon Fresh and immediately established as an S-team goal—a high-priority benchmark monitored closely by Bezos and the leadership council. A product manager named Megan Rosseter was then charged with finding a way to actually produce it. The meat vendors she initially contacted told her that such a thing was totally impractical and would in fact be disruptive to their operations. “I felt like I was always getting crazy daunting goals that seemed almost impossible,” she said.

Somehow, Rosseter and her colleagues found a ranch in San Diego County, near the Mexican border, that could produce the burger. They worked with the ranch that spring, devising ways to freeze the meat for transport and designing packaging that wouldn’t leak when it was defrosted. In June 2016, Amazon splashed Single Cow Burger promotions on the Fresh website and smartphone app, advertising half-pound Wagyu beef burgers with 80 percent lean meat and 20 percent fat. The company also prepped Alexa with an answer should anyone ever ask it for a definition: “Single cow burger: a beef burger made with meat from just a single cow.”
Benjamin Tan's avatar
@tomato It is not a joke - Bezos did push for it, as ridiculous as it sounds now ! And yes, I learned that from Amazon Unbound, the book by Brad Stone. Great read
Rihard Jarc's avatar
$AMZN is a no brainer for me for the long-term as well. I think once they cut some fat with costs and cut the operations that are just burning cash they will surprise the Street with their overall profitability. Also think their business model in the next 10 years is prime to be even more optimized and robotized in a way that it can bring significant profits also from e-commerce and other segments.

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