Why I'm Buying Amazon Stock RIGHT NOW | Episode #17

TL;DR

The hosts believe Amazon stock is worth buying because its wide moat, strong balance sheet, and growth optionality outweigh its near-term cash-flow pressure. At the time of recording, Amazon was down 23% from its 52-week high, held $61 billion in cash, and generated revenue through first-party commerce, third-party commerce, and AWS. Read on to examine the business, financials, valuation, and risks behind their view.

Transcript

Amazon is one of the biggest stock  market winners of all time but this   mega-cap tech stock is currently down  23% from its 52-week high, and its cash   flow has been under tremendous pressure  despite that short-term pain we think that   right now is a great time to open up a position  in the everything store why here's everything you   need to ... Read More

Key Insights

• 🥶 Amazon's revenue growth has slowed to 16%, with negative free cash flow due to infrastructure spending.
• 🇨🇷 The company's strong moat includes network effects, switching costs, and low-cost production capabilities.
• ✳️ Risks include competition, regulatory scrutiny, and valuation concerns.
• ❓ Amazon's optionality and operating leverage provide opportunities for future growth.
• 💪 Historically, Amazon has outperformed the market and rewarded shareholders with strong returns.
• 🥺 The company's financial health, led by a robust balance sheet, offsets concerns about near-term profitability.
• 🥳 Evaluating Amazon's valuation requires focusing on metrics like price-to-sales ratio due to its current cost structure.

Questions & Answers

Q: Why are the hosts buying Amazon stock right now?

They believe Amazon’s wide moat, strong balance sheet, optionality, and operating leverage outweigh its short-term financial pressure. At the time of recording, the stock was down 23% from its 52-week high, and both hosts had been Amazon shareholders for almost a decade.

Q: How does Amazon make money?

Amazon has three primary revenue categories: first-party e-commerce, third-party e-commerce, and Amazon Web Services. First-party sales include Amazon-owned inventory such as Amazon Basics, while third-party revenue includes transaction fees, warehousing, and advertising; AWS provides public-cloud services.

Q: What gives Amazon its competitive moat?

The hosts identify network effects, switching costs, low-cost production, and the Amazon.com brand as key advantages. They consider low-cost shipping and delivery the strongest moat because Amazon’s fulfillment centers allow it to deliver packages faster at a lower internal cost.

Q: How strong were Amazon’s financials at the time of recording?

Revenue growth had slowed to 16%, and the company’s gross margin was 13%. Amazon remained profitable on a net-income basis and had a strong balance sheet with $61 billion in cash, although free cash flow was negative.

Q: Why was Amazon’s free cash flow negative?

Amazon had spent heavily to expand its fulfillment network and had overbuilt that network in recent years. The hosts describe the negative free cash flow as a consequence of this infrastructure investment rather than evidence that the balance sheet was weak.

Q: Why can Amazon’s net income be misleading?

Amazon must reflect changes in the value of its investment in electric-van maker Rivian in its reported results. Consequently, earnings per share and net income can move with Rivian’s stock rather than solely with Amazon’s underlying business, which is why the hosts historically favored free cash flow.

Q: Who leads Amazon, and how much ownership does Jeff Bezos retain?

Jeff Bezos founded Amazon and, at the time discussed, served as chairman rather than CEO. Andy Jassy had taken over as CEO, while Bezos still owned more than 10% of Amazon’s shares.

Q: What risks and valuation issues should Amazon investors consider?

The identified risks include competition from large technology companies, regulatory scrutiny, and valuation concerns. Because infrastructure spending had made free cash flow negative and Amazon’s cost structure affected current profitability, the page suggests emphasizing the price-to-sales ratio when assessing valuation.

Summary & Key Takeaways

• Amazon, worth $1.5 trillion, makes money through first-party e-commerce, third-party e-commerce, and AWS.

• The company has a wide moat with network effects, switching costs, and low-cost production.

• Financially healthy with negative free cash flow due to investment in infrastructure, high operating leverage, and strong shareholder returns.