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.