Blain’s Morning Porridge – Jan 27th 2022: Amazon is no longer the New New Thing – Doesn’t it look tired?
“The four most dangerous words in politics; doesn’t she look tired?”
This morning: Dismiss FOMO and Speculation! The markets will focus on fundamentals in 2022 – which means taking a long hard look at everything we think we know, and figuring out what ain’t necessarily so. Amazon is a case in point – just how deep is its moat, and what might revelations of an internal toxic culture do to its price?
Oh, these markets…. Desist from fear. The ying of a Hawkish Fed is balanced by yang of Tesla’s record results… (or maybe it’s the other way round!). Worry not about the in, out, whirl-it-all-about sharp spikey vol lines on the index charts. No one can predict the madness of crowds in periods of turmoil, or guess how the stock market voting machine is going to weight the votes each day.
What I can tell you is; a) as the market’s underlying base shifts, the crowds’ mood is changing, b) this is a critical moment to be making long term calls about assets and investments, and c) do so before the market makes these decisions for you……
This is the time to understand exactly how the game has changed from 2021 to 2022: Focused value plays are replacing optimistic FOMO speculative crack-fuelled hype.
While some are still praying ARK will really return 40% per annum, or that Bitcon is real, they should wake up to a slap of reality. Instead of listening to what wildly euphoric prophets of disruption claim has been revealed to them, think about real profits, competition, business niche, management, and dividends. I’m factoring them all into decisions on what assets I should be holding as the market changes and learns to copes with inflation, higher rates, bond market pain and the new, new reality..
It’s time to get brutal on some nonsense we’ve started believing over recent years.
The more I think about, there are aspects of my own personal portfolio – which I can’t possibly comment about here….. unlikely to make as much a contribution to my pension as I once hoped. And to cap it all… this morning I am delighted to note my Coinbase account of crypto-crap is most definitively in the red zone – exactly as predicted.
But, let me start this morning’s lesson in Markets with a story…
45 years ago Oracle was founded by Larry Ellison and chums, developing databases for the CIA among others. It doesn’t matter how successful it was, or how profitable it became. The point is – Oracle was the New New Thing. (Great book by Michael Lewis.) It went public in 1986 about the same time I was getting into Investment banking. It was generally considered a good if somewhat aggressive firm leading the data revolution. It suffered a few hiccups. Yet, by 2000 its stock price had soared over 50,000%, making its’ founders unspeakably wealthy, peaking at £46.31. Then it crashed 80% to $8 – entirely due to guilt through association during the dot.com burst.
It was over 15 years before Oracle hit the mid-40s level again, revisiting it again in 2020 on the March Covid crash. It basically flatlined for 20-years! Then it soared – with everything else on the recovery bubble. It’s now down 22% from its Dec peak of £103 as it experiences what has become the second major second tech reversal – the disruptive-tech crash. Oracle survives, will thrive, and remains a relatively solid mature business. And it will do so no matter what its stock price does.
From Oracle’s low in 2002 to its peak in December 2021, it rose 750%. Not bad. In the same 20 year time frame, successive New, New Things got the market’s attention. Amazon soared 25,000%, while Tesla, a third generation New New Thing, rose 21,000% to its peak in 2021.
Put the Oracle example in context: how a strong tech business can sustain an 80% price correction, and remain a strong tech business, but on a different, realistic and more modest valuation basis…..
And then think about Amazon. Everyone loves Amazon.
It’s the World’s no 1 retailer, top cloud services firm in AWS, and strong contender in the streaming space via Prime….
Will Nutting, a well-respected market maverick, does not love Amazon. He notes 59 out of the 59 Sell Side Market Analysts who cover the stock have a Buy recommendation on the stock – which should be a screaming groupthink indication. The stock is down 25% over the last 6 months. And it’s still a screaming buy? My colleague at Shard, Julian Wheeler is equally sceptical – he thinks the world is shifting fast, and Amazon will be one of the firms ultimately left behind.
And… I just assumed Amazon was a superb company.
From the way recycling bins fill up with Amazon boxes it much be punching above the bell. Its dominance and strength is based upon its unmatched logistics infrastructure around the globe. AWS has pioneered data to make itself the leading provider of data and cloud services. It’s reinvented the art of retail. It’s also plumbed new depths in the dark arts of tax efficiency, and what’s not to like about that when it comes to business efficiency.. (Well.. lots really if you believe in ESG.)
Yet for all Jeff Bezos (now out the company) does in space… his legacy isn’t a firm generating much in the way of profits after paying for its massive workforce, its equity-based compensation, and its business finance leases. Irrelevant.. It’s generated growth.. lots of it. Not making a profit in a negative yield environment might be smart – why make profits when rates are so low and money so plentiful? Much better to plough revenues into the business, improving its unassailable position, building competitive defences and widening its business moat….. Surely? (Right up to the point money becomes scarce again..)
No prizes for guessing what I’m going to suggest next.
Maybe its defences aint so strong, or its moat particularly deep. Its big, but big wasn’t a great metric when it came to dinosaurs, or building castles in the age before artillery. Amazon is not the only firm that can deliver stuff. It has no monopoly on the sale of tat. Other countries have spawned lookey-likeys that do it just as well or better. The cloud is a cut-throat space – and although Amazon leads today, it’s in competition not just with some of the largest most aggressive firms but is in a space where innovation leaves few barriers to new firms entry. As for streaming – the competition is widening and evolving – Prime could well become an also-ran.
Maybe.. maybe.. Amazon is not the New New Thing any more.. Maybe.. it’s in a vulnerable space where its multiple business niches are under threat? Maybe nimbler young firms will hunt it down as global tech services evolves.. (Or maybe Cloud services are already mature?)
The current hype around Amazon reminds me of Marks & Spencer’s 30 years ago when it dominated the high street. Today M&S struggles like everyone else and is a shadow of its former status. As the rot set in, the analysts defended their on-going buy valuations with talk of which divisions it could sell, or where it could raise prices, or sell more of its own goods, or the value of a clothing retailer becoming a supermarket with less than average designs.
I won’t go into the detailed accounting and business based analysis Will Nutting has done to inform his negative view on Amazon – if you want to see his logic, I’ll be happy to put you in touch with him. Just ask.
I could cite the alternative view from Morgan Stanley where the analyst reckons its going higher based on boosting sales and improving margins in grocery, accessories, and furniture, increasing the number of own-brand (Fulfilled by Amazon) products (which are basically cheap China knock-offs), or hiking fees on its premium streaming service. Yet, none of these “reasons” for the stock to go higher are innovation-led.
Instead, my increasing doubts on Amazon continue with the evolutionary theme. The problem with Amazon isn’t so much its competitive edge, but why its competitive edge is blunting. A firm’s management is the critical ingredient.
And then my colleague Julian sent me this article: Burnt Out Amazon Employees Are Embracing the Great Resignation.
It struck a chord after I’d met a very senior Amazon exec at a Christmas event. She was an unhappy lady – she may already have resigned. The culture was breaking her. She called Amazon toxic, dogmatic and impossible to change, with a rot ingrained in every aspect and level of the firm’s management. While it boasts about wanting to hire the best and most experienced people, it brings them on board but rather than listen to them, forces them to do it the Amazon way. She summed up Amazon’s problem: it’s a company led by data, but data can’t inform it how to use its’ people the best way. It lacks sympatico with its workforce. It’s become too big.
It’s a firm where God sits by the right hand of the senior-most executives – who are worshipped accordingly. If you read some recent HR press releases about internal promotions to the most senior ranks – they are full of stories of Amazon lifers who’ve climbed the pole, got wealthy and now race cars as much as they develop the firm. Turnover is immense – apparently if you have been at Amazon for 2 years, you’ve been there longer than 78% of your colleagues.
(If these stories strike a chord, its probably because exactly the same things happened in investment banking years ago…)
The problem is a firm like Amazon is the proverbial supertanker – very difficult to turn around. It suffers from inertia. They can still hire at junior levels – who would not want AWS on their CV, but it will take years to resolve its senior staffing problems – which won’t be helped as its stock-based reward culture sours in line with the stock price. Ingrained intransigence won’t help the firm focus on the competition or to avoid its moat being filled-over. For techies and data wizards, I’m told AWS is still exciting because it still leads.. buts its increasingly slow to innovate.
At the end of the day… all companies run the risk of becoming bureaucracies for good or bad reasons. What then matters is their culture and ability to dig their way out.
The increasing noise about the toxic internal culture at Amazon should raise 2 immediate fears about:
- Reducing its ability to constantly reinvent itself, and compromising its ability to face down the competition across its businesses,
- Raiseing increasing Social and Governance questions from investors – or at least it should as every large investor on the planet now claims to be fully ESG aware and compliant.
At the end of the day companies succeed when they are well managed. Richard Branson once said something like: “if you want customers to experience great service, treat your staff well.”
I suspect there is a triple whammy of competition, corporate intransigence, and investor disengagement headed Amazon’s way. Watch that space. And wonder what the next New New Thing might be…
Five Things to Read This Morning
Out of time and back to the day job…
Strategist – Shard Capital