Amazon Is Down $861 Billion Since November... - YouTube

INTRO: Amazon just  

posted their first loss in 7 years of $3.8  billion. This caused Amazon stock to tumble  

14% in a single day which is their  biggest one-day drop since 2006.  

This drop itself paints quite a bleak picture, but  if you zoom out on Amazon stock, you’ll see that  

the stock has been struggling for quite some  time now. It’s not that Amazon has crashed 50  

or 70% like Netflix or PayPal. However, they’ve  just been going sideways for roughly 2 years.  

This doesn’t sound that bad until you consider  that all of their peers were going parabolic till  

the start of this year. For example, since the  start of 2019, Google has outperformed Amazon by  

80%, Microsoft has outperformed Amazon by 120%  and Apple has outperformed Amazon by 230%.  

To make things worse, Amazon just broke down  from it’s sideways channel which has resulted  

in nearly a 40% sell off from their all time  highs. And given the size of Amazon, this sell off  

correlates to a $745 billion loss in market cap.  I don’t think Mr. Bezos is a big fan of this move  

given that he is personally down $50 billion  year to date. So, what happened to Amazon?

LACK OF GROWTH: 

Starting with the most notable concern regarding  Amazon, we have underwhelming growth figures. In  

their last quarterly report, Amazon projected  that second quarter revenue would only grow  

3 to 7% compared to last year. Not only is this a  smaller growth percentage than even the S&P 500,  

but more importantly it’s lower than what analysts  estimated. Analysts were hoping for a $125.5  

billion Q2, but with only 3 to 7% growth, we’re  looking at closer to $116 to $121 billion. This  

marks the slowest growth for Amazon since the  dotcom crash way back in 2001. And at this rate,  

it won’t be long before Amaon ends up posting  a full year of single digit growth figures.  

Aside from nearly non-existent revenue growth,  it seems like Amazon is also struggling with  

prime member growth as well. This is really not  that surprising given that basically everyone who  

wants prime already has it. Also, this isn’t  some new phenomenon either. Prime users have  

been leveling off for many years now, and it  looks like it’s just gonna slow down even more.  

Amazon hasn’t really made this issue much better  given that they’ve been constantly hiking prices.  

For example, you might’ve recently heard that  Prime subscriptions are going up to $140 per year.  

But, for a significant number of Prime members,  this price hike is even more painful. You see,  

that $140 number is for annual subscription  holders, but the thing is, 52% of subscribers  

pay for a monthly subscription. And the monthly  subscription actually costs $15 per month or $180  

per year. Now, personally, I don’t think we can  really blame Amazon for this fee increase given  

the rampant inflation we’ve been experiencing, but  that doesn’t really matter. Whether Amazon’s price  

hikes are justified or not, their membership cost  is simply becoming unaffordable or not worth it  

for many people. And this is extremely bad news  for Amazon given that their a growth company.  

I think a lot of people forgot about this  given all of the hype surrounding Tesla  

stock and it’s sky high PE ratio. But, before  Tesla stock went to the moon, Amazon was by far  

the biggest growth company in the world. After  all, Amazon has regularly had a PE ratio of 100  

or higher for most of their history. It wasn’t  till the last few years that Amazon’s PE ratio  

has consistently come in at less than 100. But,  even now, Amazon’s PE ratio stands in the mid 50s  

which is extremely high for a company as mature  as Amazon. And given their poor growth forecasts,  

it’s very possible that Amazon is even more mature  than we originally thought. Amazon is literally  

posting growth numbers that are worse than Apple,  Google, and Microsoft, yet their PE ratio is more  

than 2 times higher than any of these companies.  By this logic, Amazon stock could drop another 50%  

and it would still be more richly valued than  the other FAANG companies. And unless, Amazon  

is able to get their growth story back on track,  it’s likely that Amazon’s pain has just begun.

RISING COSTS: 

Usually, companies like to substitute for a lack  of revenue growth with strong growth in profits,  

and that’s what Amazon was trying to do as well.  Till the end 2017, Amazon’s net income was a  

laughable amount compared to their revenue given  that their net margin was literally less than 1%.  

This is because, Jeff Bezos preferred to reinvest  all of their excess income back into the business,  

but in late 2017, he had a change of heart. He  finally decided to turn on the profit switch and  

Amazon’s net income went through the roof until  now. Now, the most astute of you point out that  

Amazon wouldn’t have even lost money this quarter  if it wasn’t for their $7.6 billion write off on  

Rivian. And while this is absolutely true, even  if we ignore this, their bottom line isn’t looking  

that great. If we take a look at their quarterly  report, we’ll see that total net sales jumped from  

$108 billion to $116 billion from Q1 of 2021 to  Q1 of 2022. Yet despite this, their operating  

income over halved from $8.8 billion to $3.6  billion. And it’s not like this reduction can  

be attributed to any one factor either. Rather,  we’re seeing Amazon’s operating costs increase  

across the board. Also, it’s not like these  increases are that substantial either. We’re  

looking 10% in one category and 15% in another,  but given Amazon’s single digit net margin,  

these increases add up quickly. And the worst part  is that most of this is not under their control.  

For example, their cost of sales increased from  $62.4 billion to $66.5 billion. If you’re not  

familiar with cost of sales, it’s basically just  the cost to produce a given product or service.  

And given that the prices of raw materials and  semi conductors are increasing substantially,  

this is not that suprising. Similarly, Amazon’s  fulfillment costs rose from $16.5 billion to $20.2  

billion. Likely one of the biggest factors driving  up this category is skyrocketing oil prices.  

Moving onto their next category, we see a very  similar story. Technology and content rose from  

$12.48 billion to $14.8 billion. This can also  likely be attributed to rising chip costs which  

have resulted in more expensive databases and  servers. In the end, Amazon is basically getting  

screwed by inflation like all of us, but just on a  much bigger scale. As a business, their long term  

goal would be to pass on these costs to customers,  and that’s likely what they’re trying to do, but  

it’s a pretty fragile balance between maintaining  customers while increasing costs. Fortunately,  

Jerome Powell continues to insist that we’re  gonna have a soft landing and that the worst of  

inflation is behind us. The market doesn’t quite  believe him, but Jerome being right would not  

only be great for Amazon but for all of us. So,  hopefully, he’s right, but even if he is right,  

it would take a few quarters for stabilizing  inflation to reflect in Amazon’s bottom line.  

So, Amazon will likely have to deal with  rising costs till atleast the end of this year.

PHYSICAL RETAILERS: 

Aside from all these internal problems Amazon has  been facing, they’re also facing a major external  

problem which is physical retailers. For decades,  physical retailers weren’t much of a threat for  

Amazon. In fact, it was usually the other way  around. Physical retailers were scared of losing  

market share to Amazon as they navigated the  retail apocalypse. And this was just made worse  

by the pandemic and stay at home orders. However,  as things return to normal, it seems like the  

innovative physical retailers are rising stronger  than ever before. In fact, online retailers lost  

ground to physical retailers in 2021 and I  have a full video about this phenomenon if  

you’re interested. But, the main explanation  for this shift is that physical retailers  

have learned to offer the best of both worlds.  Historically, physical retailers were trying to  

compete head on with Amazon by simply creating  their own websites and home delivery services  

which were usually subpar to Amazon’s. However,  the innovative retailers have since learned to  

leverage their locations to offer something that  Amazon can’t. This includes convenient returns,  

curb side pickup, no delivery fees, knowledgeable  customer service, and a much more interactive  

shopping experience. Aside from all of these  factors, many customers have also become quite  

weary of Amazon’s quality. The truth is that the  vast majority of the products on Amazon are just  

highly marked up items from AliExpress/Alibaba.  And usually the quality is just not that great  

especially compared to items that you can  find at physical retailers. Personally,  

I’ve found this issue to be most prevalent amongst  cheap electronics and specifically dongles. Since  

the start of 2021, I’ve gone through 3 USB C  dongles and 3 Display Port to HDMI convertors  

all from Amazon. They simply stop working within  3 to 6 months. Considering all this, it no longer  

seems like online retailers are just going to  completely wipe out physical retailers. Rather,  

it seems like they’ve reached some sort of balance  and that things are going to be relatively stable  

moving forward. And while this is great news for  physical retailers, this is terrible for Amazon.

AMAZON’S DARK HORSE: 

Up until now, we’ve mainly discussed Amazon’s  retail business, but the truth is, a significant  

portion of their business has nothing to do  with retail. While 84% of Amazon’s revenue does  

come from their retail business, virtually all of  their profits come from their cloud business, AWS.  

In fact, last quarter AWS accounted for 100% of  Amazon’s operating income given that Amazon.com  

was a net loss both in North America and  internationally. This is really nothing  

new given AWS has been holding up Amazon since it  was created in 2006. But, over the past few years,  

it did seem like Amazon was finally starting  to become independent of AWS as they posted  

their first profitable quarters. However, all of  that progress was wiped out with rising costs.  

And this leaves us with a serious question, how  long can AWS just keep propping up Amazon? Using  

AWS to fund Amazon’s growth was a genius strategy  in the early 2010s. But, it’s starting to get  

old now that we’re 16 years in. Fortunately, it  doesn’t seem like AWS revenue is slowing down yet,  

but it’s only a matter of time until  any business starts to stagnate.  

And Amazon’s continuing dependence on AWS  isn’t the most assuring of characteristics.

FUTURE OUTLOOK: 

Despite all these concerns, I’m personally still  optimistic about Amazon’s future. Here’s the  

thing, Amazon has decisively won ecomerce and  yes they’re a monopoly. 56.7% of all e-commerce  

sales happened on Amazon in 2021, and while  online retailing is starting to stabilize,  

I don’t think Amazon will be losing their  dominance within this sector anytime soon. 

Something else to note is that Amazon just  announced a 20 to 1 stock split and this would  

be their first stock split since 1999. At current  prices, Amazon’s post split price would be just  

over $100. And though, stock splits don’t actually  change anything fundamentally about the company,  

I think a stock split could attract a lot more  retail investors. I know some of you will argue  

that the introduction of fractional shares  has made stock splits completely useless.  

And technically this is true if we just focus on  stock returns, but I mean who actually wants to  

own a quarter or a third of a share. Also, trading  derivatives on Amazon is currently unreasonably  

expensive for most retail investors. A stock split  will substantially help with derivatives pricing.  

Combine this new retail interest with a  fundamental recovery from Amazon and I think  

it’s just a matter of time until Amazon recovers  to its all time high and makes new all time highs.  

I liked Amazon stock when it was $2900 per share,  so I really like it now, but that’s just what I  

think and it’s definitely not financial advice.  Would you guys invest in Amazon right now? Comment  

that down below. Also, drop a like if you’re  hoping that this stock market pain ends soon.  

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