Can Amazon Be Beaten?

During their latest episode of the VALUE: After Hours Podcast, Cochrane, Taylor, and Carlisle discuss Can Amazon Be Beaten?. Here’s an excerpt from the episode:

Tobias: Let me ask you a question, because you said before we got on, we were talking about, you read something bearish and it makes you feel bearish. You read something bullish and it makes you feel bullish. I think if there’s a criticism of JT and I, is we’re always a little bit bearish. This is not necessarily your prediction of what’s going to happen. This is just I’m explicitly asking you, what are the bullish arguments for the market?

Matthew: That’s a really good question. I think my nature, my tendency is to be bearish anyway. My wife would say I’m a pessimist.

Jake: Welcome.

Matthew: Just waiting for my sports team, and they go down by a touchdown early in the game, like- [crosstalk]

Tobias: You knew it.

Jake: They’re never coming back. It’s over.

Matthew: -“Oh, they’re done. They’re playing horrible,” whatever. My wife will yell at me for being a pessimist and things like that. So, I think my tendency is to naturally be maybe a little pessimistic. All right, but that being said, I don’t know if I can do it for the whole economy, but I think there’s a lot of names– [crosstalk]

Tobias: For the market.

Matthew: A lot of companies, maybe big companies that dominate some of the indices, they’re going through a spell where they’re underearning. Let’s just take Amazon for an example. One of the big parts of the index for an individual company. AWS is earning less. AWS is taking– supposed to growth is slowing down there, at least for the next few quarters. I expect that. As an Amazon investor, I think that’s very much expected. I would be shocked actually if that didn’t happen. However, I think part of never sell is you look at things and say, “Is this a short-term problem or a really long-term thesis breaker?” And so, I think with Amazon, you go, “I don’t think the cloud is going away.” They have admitted like, “We overbuilt our logistics and delivery fulfillment centers. We overbuilt during COVID because e-commerce just spiked so much and we thought that was a permanent spike.” Then, it came back to the long-term growth line that e-commerce is on after that spike. It’s come back down to the long-term growth trendline. They said, “Hey, we overbuilt.” Here’s more information about it just browse around this web-site.

I think there’s so many companies, when I said COVID just muddied the pictures, you see almost company after company just messed up during COVID, either giving projections, guidance that didn’t turn out to be accurate, or overbuilding because they expected this e-commerce demand to stay. A lot of companies just messed up. They had the inventory wrong. Target ordered TVs. The TV sales spiked through the roof at the beginning of COVID So, Target ordered a lot more TVs and electronics. By that time, people were trying to buy clothes, because they’re going out again and things like that. Everybody had bought a TV. You bought a TV last year, I don’t think you buy a TV this year.

That being said, I just think a lot of people messed up during COVID or a lot of companies. But you look at Amazon, they overbuilt their fulfillment centers. Okay, they built too many– I live down in South Florida. So, they built too many in the Miami area. Well, I think they’re going to grow into them. It’s not like those go to waste. It wasn’t the most efficient use of capital at the time, but I think their lead in e-commerce is just substantial. When you look at the square footage Amazon has dedicated to e-commerce and fulfillment and logistics and delivery, it just dwarfs anybody. There’s a caveat to that because somebody like Walmart or Target, you could say, the back of their stores could be– that’s not counted. There’s a little bit of a caveat. But it’s still dwarfs exponentially higher than anyone else. The back of the Walmart stores and Target stores, they’re not built for e-commerce. They’re built for buying in store.

So, Amazon just has that advantage. In some ways, I think you could say, they even increase their long-term advantage even while overspending and spending all that money on Capex. For a bullish case for Amazon, I think they actually increased their long-term advantage with e-commerce, even though they spent all that money on Capex, making their cash flow look like crap for a good solid year or two.

Tobias: Let me ask you a question that– I don’t know if this is answerable question or not, but I’m interested to know. How does Amazon get beaten? Because I think that every other example– Buffett famously talked about department stores being very good businesses for a period of time, but various things have happened. They needed to be situated near where public transport got off in 40s. And then later, it became less relevant because most people drove, and then you needed a big floor space because people wanted to shop in bulk. Hasn’t Amazon got to that point where the convenience is it’s right on your computer, so that’s taken away the need to travel. And then, they’ve got all of the space, which is going to be hard to compete with, just hard to build anything like it. So, is Amazon now insurmountable?

Matthew: It’s one of my two largest positions. So, obviously, I’m very bullish on Amazon. But if you told me to write a bear case, I would say Shopify, I think, is positioned interestingly and they can partner with the Googles of the world, like with Google Shop. Google’s been spending a lot of money and bolstering up their Shop tab at the top of their search if they can bolster up their logistics. I think Shopify would say– because Shopify wants to get the two-day delivery everywhere in the US, and they say, “That’s going to be good enough for most people.” If that’s right, I think Shopify is positioned pretty interestingly. I don’t know if it is.

I think with most things I buy now– If you told me it’s here in two days, I’m not going to freak out, that’s fine. But what’s interesting is, my 16-year-old son ordered something the other day. We ordered it after he was home from school. He’s like, “Dad, will you order this on Amazon? I’ll give you the money.” We ordered it. He comes home the next day. He gets home from school and he goes, “Where is it? How come it’s not here yet?”

Tobias: [laughs]

Matthew: I’m like, “It’s not coming here till tomorrow,” or whatever. He’s like, “What?” I just wonder if two days really is this magic number where people are going to be happy with it or that’s just consumer expectations and where they were for so long. I don’t know the answer to that question. But the government could come in and break up, say, “Amazon, you’re too big and we’re separating AWS from e-commerce.”

Capital allocation is still a thing in Amazon. They spent a lot of money. I was just saying like, “Okay, I don’t think a lot of it goes to waste, but man, they have these projects.” They spent how much on Alexa? They spent how much on this satellite internet thing? Why are they spending that money? As a shareholder, I wish they would cut that back. I think the Jeff Bezos Day One mantra, it might be hurting them more now than it helps them, because sometimes, Jeff Bezos would say–

I think Jeff Bezos was the greatest businessman, entrepreneur of our time. You could categorize me as a Jeff Bezos fanboy. But I do wonder, if that Day One mantra there and them spending so much on these bets, and he would use to say, “Well, the bigger we get, the bigger bets we have to make, because that’s the only thing that’s going to move the needle.” And that is right but when you see how much they spend, I would just say they’re wasting it. They’re not a perfect company by any means, but I do think their long-term advantage in e-commerce is, I don’t see how people catch them. That’s almost insurmountable.

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