Why I Bought Amazon Stock

A look at the key growth factors

With Prime Day this week I figured it would be a perfect time to discuss the latest addition to the portfolio: Amazon. I started a position a month ago and while it’s already up 10% since, it still seems like a very cheap stock with tremendous upside.

This will be the 9th annual Prime Day and you can see how much of a phenomenon it has grown to be, with under $1 billion in sales in 2015 vs $12 billion in 2022.

Amazon VS Peers

For starters, aside from Tesla, it is the cheapest mega cap stock when you factor in which companies are actually showing growth. The Magnificent Seven - Meta, Google, Microsoft, Apple, Nvidia, Tesla, Amazon - have largely been responsible for the market’s recent run up. For the last 2 quarters, Apple’s trailing twelve month’s (TTM) revenue has declined. Microsoft’s TTM revenue is up single digits. Google and Meta’s have been relatively flat. Nvidia’s has declined a lot and Tesla is growing the most. Amazon brought in nearly $525 billion of revenue in the last 12 months and as you can see below, TTM revenue is steadily growing.

Amazon’s Revenue 2010-2023 https://www.macrotrends.net/stocks/charts/AMZN/amazon/revenue

I think there are a lot of reasons to be excited about Amazon. It’s currently trading at the same price it did 3 years ago, yet revenue has almost doubled. Apple brought in $385 billion of revenue in the TTM to Amazon’s $525 billion. It is a behemoth of a company. While Apple has higher margins, I believe Amazon’s margins will begin to greatly improve as their Services segment continues to grow and brings higher margins. Amazon has a market cap of just over $1 trillion to Apple’s $3 trillion, which I think gives an idea of the potential upside. While Amazon was a huge pandemic winner, it has been in the dog house since we emerged. 2022 was an especially difficult year as margins crumbled in the face of inflation and increased fuel costs, among other issues like overbuilding and over-hiring to meet pandemic level demand and having to scale back when trends shifted.

The Really Exciting Stuff

Take a look at what’s happening in the Q1 results. While Amazon’s online stores bring in the bulk of revenue, there are a lot of other segments growing rapidly and with much higher margins. 3P or Third Party Seller Services brought in nearly $30 billion in revenue in Q1, with 18% growth year over year. Subscription services brought in $9.6 billion and 15% growth.

Advertising services, $9.5 billion and 21% growth. Google and Meta make the bulk of their money from advertising and have seen relatively flat revenue. Amazon has high conversion rates on their ads at just under 10%. Amazon brought in $38 billion in advertising revenue in 2022 and is estimated to account for 10% of total digital ad spending worldwide in 2023. It is a major advertising player in the making. As was outlined in the 2022 shareholder letter, Amazon’s Advertising business is uniquely effective. CEO Andy Jassy stated, “Unlike physical retailers, Amazon can tailor these sponsored products to be relevant to what customers are searching for given what we know about shopping behaviors and our very deep investment in machine learning algorithms.”

Chips and AWS

I believe chips will be integral to how much companies are able to innovate over the next decade. We see the tensions building between the USA and China in large part over chips built in Taiwan. Chips are at the center of every technological device and are becoming increasingly important in the world of artificial intelligence and machine learning. Amazon has been investing in specialized chips for machine learning training and inference. This area starts to get very technical fast, but I’ll leave it with this quote from Jassy in the 2022 shareholder letter.

“With the enormous upcoming growth in machine learning, customers will be able to get a lot more done with AWS’s training and inference chips at a significantly lower cost. We’re not close to being done innovating here, and this long-term investment should prove fruitful for both customers and AWS. AWS is still in the early stages of its evolution, and has a chance for unusual growth in the next decade.”

The book “Chip War” is on my reading list and this is definitely an area I plan to dive deeper into. We saw Apple’s recent M1 and M2 chips vastly improve the performance of the Mac computer. It seems the companies with the best chips can offer the best products.

Conclusion

“Overall, we remain confident about our plans to lower costs, reduce delivery times, and build a meaningfully larger retail business with healthy operating margins.” - CEO Andy Jassy, 2022 Shareholder Letter

Amazon has the means to become bigger than Apple. They are already bringing in significantly more revenue and margins will improve. Third-Party Seller services, Subscription services, Advertising services and AWS are high margin segments of the business and growing quickly. While the consumer business did $434 billion in revenue in 2022, 80% of global retail still occupies physical stores. There is a long runway for growth. Amazon continues to innovate with a simultaneous focus on continuous improvement in the customer experience while driving down costs. It sure seems like a recipe for tremendous success over the next decade.