Trade Alert

New Idea: Seeing More Upside to Amazon

_{Posted by Club Member JoeDelta1 9.7.23}

June’s labour report was strong. The economy doesn’t appear to be at risk of slipping into a recession, and looks more likely to be slipping into an expansion.

In that case, Amazon’s e-commerce revenue growth could be at an inflection point, and Q2 earnings is likely to surprise to the upside. Amazon has spent the last 18 months optimizing cost (e.g., laid off 27k workers) across its business units, if we see a reacceleration in the topline in its next quarterly report, I think margins will expand and its stock will be re-rated.

Additionally, pre-pandemic Amazon traded at 18 to 19 times EBITDA, today the stock trades at 14 times EBITDA, which makes me think that despite its recent rally, the markets have not fully priced in Amazon’s AI potential.

AI applications and tools are on the rise. These AI engines require a ton of computing power, to store data, to analyse, to train, and run LLMs. I think AWS stand to benefit from the AI driven demand for cloud computing.

For companies to offer generative AI products and services, they need 3 basic things: chips, servers and an AI model. For most, it won’t make financial sense to have their own Nvidia chips, or build and run their data servers on-premise, as the upfront cost will be too large, a cloud solution like AWS will make much better commercial sense.

AWS now has a full stack cloud AI offering, it has its own AI chips (e.g., Inferentia and Trainium), AI models (e.g., Bedrock) allowing customers to “plug-in” to build their own AI applications, as well as other AI services such as CodeWhisperer, which generates and suggests codes for developers. In any case, AI-related compute spending will only increase from here, and AWS, as the current market leader in data centres, will inevitably benefit from this secular trend.

Nvidia has the best AI chips today, and they are the most expensive, much like a Ferrari in the auto market. While Amazon’s AI chips rank below Nvidia’s on both performance and price, I think they will probably behave like a Toyota to Nvidia’s Ferrari in the AI chip marketplace. Its “price-to-performance” ratio will be key to how successful Amazon’s chips will be in taking market share from Nvidia. Similar to the auto industry, there’s certainly room for both Ferrari and Toyota to co-exist, and I don’t think the markets have fully priced in the potential for AWS to be the “Toyota” of the AI Chips market.

I already have a small position in Amazon, thinking of adding more ahead of its July earnings result, does anyone has a view on this trade?

Looking for more trade ideas? Check out the trades our members are discussing at the Daily Market Exchange.

Subscribe to receive more Trade Alerts!