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LesterTan
2023-07-21

Focus only on the risks, not rewards. Very skewed. WB has amzn shares too.

Amazon: AWS Is Rolling Over

SummaryAWS's moat appears to be coming under pressure with declining margins and market share.Meanwhile, Amazon's e-commerce business is extremely capital-intensive and isn't what Warren Buffett would

Amazon: AWS Is Rolling Over

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Very skewed. WB has amzn shares too.</p></body></html>","htmlText":"<html><head></head><body><p>Focus only on the risks, not rewards. Very skewed. WB has amzn shares too.</p></body></html>","text":"Focus only on the risks, not rewards. Very skewed. WB has amzn shares too.","highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":0,"repostSize":0,"favoriteSize":0,"link":"https://ttm.financial/post/200175514763504","repostId":2352041065,"repostType":4,"repost":{"id":"2352041065","pubTimestamp":1689902700,"share":"https://www.laohu8.com/m/news/2352041065?lang=&edition=full","pubTime":"2023-07-21 09:25","market":"us","language":"en","title":"Amazon: AWS Is Rolling Over","url":"https://stock-news.laohu8.com/highlight/detail?id=2352041065","media":"Seeking Alpha","summary":"SummaryAWS's moat appears to be coming under pressure with declining margins and market share.Meanwhile, Amazon's e-commerce business is extremely capital-intensive and isn't what Warren Buffett would","content":"<html><head></head><body><h2 id=\"id_3857973660\" style=\"text-align: left;\">Summary</h2><ul><li><p>AWS&#39;s moat appears to be coming under pressure with declining margins and market share.</p></li><li><p>Meanwhile, Amazon&#39;s e-commerce business is extremely capital-intensive and isn&#39;t what Warren Buffett would call a &#34;wonderful business.&#34;</p></li><li><p>I&#39;ll explain why growth may disappoint.</p></li><li><p>At a normalized PE ratio of 56x, I think Amazon is about to roll over ~ Sell the rally.</p></li></ul><p class=\"t-img-caption\"><img src=\"https://community-static.tradeup.com/news/63353963b0650d6e0aa3d29abc759cc2\" alt=\"Alex Wong/Getty Images News\" title=\"Alex Wong/Getty Images News\" tg-width=\"750\" tg-height=\"531\"/><span>Alex Wong/Getty Images News</span></p><h2 id=\"id_2428538841\" style=\"text-align: left;\">The Thesis</h2><p style=\"text-align: left;\">I&#39;ve covered Amazon (NASDAQ:AMZN) twice before, first recommending a &#34;Sell&#34; in mid-2022, then upgrading to a &#34;Hold&#34; at the end of last year. Amazon&#39;s since rallied 45%, but I think it&#39;s about to roll over again. Let me explain why.</p><p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/159847e5286f7e5bf36d5a0a4e1fb58f\" alt=\"Author&#39;s AMZN Rating History (Seeking Alpha)\" title=\"Author&#39;s AMZN Rating History (Seeking Alpha)\" tg-width=\"640\" tg-height=\"325\"/><span>Author&#39;s AMZN Rating History (Seeking Alpha)</span></p><h2 id=\"id_2848980801\" style=\"text-align: left;\">Amazon&#39;s Businesses Are Rolling Over</h2><h4 id=\"id_1138416373\" style=\"text-align: left;\">E-Commerce</h4><p style=\"text-align: left;\">Amazon&#39;s flagship E-Commerce business has had its fair share of struggles. Amazon made the mistake of over-investing in e-commerce warehouses and delivery vans during the abnormal lockdowns of 2020 and 2021. Next, Amazon compounded the issue by spending tons of money on depreciating movies and TV shows.</p><p style=\"text-align: left;\">Thus, depreciation expense has outgrown revenues drastically:</p><p class=\"t-img-caption\"><img src=\"https://community-static.tradeup.com/news/948c230f0d785a9393d241e8b22e6463\" alt=\"Data by YCharts\" title=\"Data by YCharts\" tg-width=\"635\" tg-height=\"433\"/><span>Data by YCharts</span></p><p style=\"text-align: left;\">When the lockdowns eased, Amazon was &#34;swimming naked&#34; as it ran into the brick wall of inflation in 2022. Seeing wages skyrocket for its 1.5 million employees, Amazon started losing money on its e-commerce business:</p><p class=\"t-img-caption\"><img src=\"https://community-static.tradeup.com/news/0eb5c7d391595a507da676a712944536\" alt=\"Amazon&#39;s E-Commerce Operating Margins (Author)\" title=\"Amazon&#39;s E-Commerce Operating Margins (Author)\" tg-width=\"640\" tg-height=\"388\"/><span>Amazon&#39;s E-Commerce Operating Margins (Author)</span></p><p style=\"text-align: left;\">Wages tend not to go down and stay down, nor do depreciation costs, which Amazon accounts for on a straight-line basis. So, the argument for huge margin expansion looks somewhat weak.</p><p style=\"text-align: left;\">Also keep in mind that tons of retailers now have a direct-to-consumer business, such as Nike (NKE) and American Eagle (AEO). This is just scratching the surface. So, consumers no longer have to buy everything e-commerce on Amazon.com; they can just go on Nike&#39;s website to buy their next pair of sneakers or branded hoodie.</p><p style=\"text-align: left;\">I think Amazon.com was at the peak of its power back in 2020, and there may be no going back. I recently asked my fiancee what she would do if Amazon raised its Prime membership fee by 50%, and without hesitation, she said she&#39;d cancel it.</p><p class=\"t-img-caption\"><img src=\"https://community-static.tradeup.com/news/ad4d243b5edf29e1fcd5c3f93ff0ada5\" alt=\"Amazon&#39;s Q1 2023 Revenue Breakdown (Statista)\" title=\"Amazon&#39;s Q1 2023 Revenue Breakdown (Statista)\" tg-width=\"640\" tg-height=\"454\"/><span>Amazon&#39;s Q1 2023 Revenue Breakdown (Statista)</span></p><h4 id=\"id_4213318177\" style=\"text-align: left;\">Not A &#34;Wonderful Business&#34;</h4><p style=\"text-align: left;\">All that said, Amazon is trying to push advertising and other income streams, so it&#39;s not that I think Amazon&#39;s North American and International e-commerce segments won&#39;t grow at all. It&#39;s just that I think they are capital-intensive, low margin businesses (Not what Warren Buffett would call a wonderful business). For example, Amazon had $187 billion of property, plant and equipment on its balance sheet at the end of 2022. All of this shareholder capital is sitting there and earning next to no money. Free cash flow is negative, net income is minuscule, and debt is soaring higher:</p><p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/6367a5ce4bfbfced7044ac9b4af53188\" alt=\"Data by YCharts\" title=\"Data by YCharts\" tg-width=\"635\" tg-height=\"450\"/><span>Data by YCharts</span></p><p style=\"text-align: left;\">This isn&#39;t what you like to see. Amazon&#39;s $141 billion long-term debt and capital lease obligation is enormous, especially compared to its falling profitability.</p><h4 id=\"id_1569079754\" style=\"text-align: left;\">Cloud</h4><p style=\"text-align: left;\">Moving on to cloud, operating margins are rolling over. Amazon&#39;s CEO has cited slowing demand. But I&#39;m seeing increasing competition as well.</p><p class=\"t-img-caption\"><img src=\"https://community-static.tradeup.com/news/498b2632f1238ec1b7ac89b438aa5e4d\" alt=\"AWS Cloud Operating Margins (Author)\" title=\"AWS Cloud Operating Margins (Author)\" tg-width=\"640\" tg-height=\"390\"/><span>AWS Cloud Operating Margins (Author)</span></p><p style=\"text-align: left;\">Amazon&#39;s cloud business hasn&#39;t gained an inch of market share over the past five years, meanwhile, Microsoft (MSFT) and Google (GOOG) continue to gain ground:</p><p class=\"t-img-caption\"><img src=\"https://community-static.tradeup.com/news/c29a7eeeb335c462ac2dbd4e13930785\" alt=\"Global Cloud Market Share (Synergy Research Group)\" title=\"Global Cloud Market Share (Synergy Research Group)\" tg-width=\"756\" tg-height=\"490\"/><span>Global Cloud Market Share (Synergy Research Group)</span></p><p style=\"text-align: left;\">Are Amazon&#39;s cloud margins falling because of slowing demand, or is Amazon lowering prices to stop losing market share (Which has been falling for the past three quarters)? I lean towards the latter.</p><p style=\"text-align: left;\">Moreover, I think AWS&#39;s long-term moat (A.K.A. durable competitive advantage) in cloud be somewhat fickle. I would compare cloud computing to the semiconductor industry where you can have an advantage due to scale, offerings, technology, and brand, but these advantages can fade over the years as we&#39;ve seen with the once great Intel (INTC), which has been displaced by Taiwan Semiconductor Manufacturing Company (TSM) and others. So, I cannot say if AWS will enjoy the same dominant position in 10, 20, or 30 years.</p><h2 id=\"id_3093333052\" style=\"text-align: left;\">Normalized Earnings</h2><p style=\"text-align: left;\">I still believe Amazon is under-earning on a net income and free cash flow basis. If we assume Amazon&#39;s e-commerce business (Segments ~ North America and International) returns to a 2% operating margin and that AWS can maintain its 24% operating margin, then Amazon would likely make $24.8 billion:</p><table style=\"border-collapse:collapse;\"><tbody><tr><td style=\"text-align:left;vertical-align:top;\"><p>E-Commerce Operating Income</p></td><td style=\"text-align:left;vertical-align:top;\"><p>$8.7 Billion</p></td></tr><tr><td style=\"text-align:left;vertical-align:top;\"><p>AWS Operating Income</p></td><td style=\"text-align:left;vertical-align:top;\"><p>$21.1 Billion</p></td></tr><tr><td style=\"text-align:left;vertical-align:top;\"><p><em>Interest Expense (Net)</em></p></td><td style=\"text-align:left;vertical-align:top;\"><p><em>($1.4 Billion)</em></p></td></tr><tr><td style=\"text-align:left;vertical-align:top;\"><p><strong>Earnings Before Income Tax</strong></p></td><td style=\"text-align:left;vertical-align:top;\"><p><strong>$28.4 Billion</strong></p></td></tr><tr><td style=\"text-align:left;vertical-align:top;\"><p><em>Income Tax Expense</em></p></td><td style=\"text-align:left;vertical-align:top;\"><p><em>($3.6 Billion)</em></p></td></tr><tr><td style=\"text-align:left;vertical-align:top;\"><p><strong>Normalized Net Income</strong></p></td><td style=\"text-align:left;vertical-align:top;\"><p><strong>$24.8 Billion</strong></p></td></tr></tbody></table><p style=\"text-align: left;\">Note: This estimate excludes the effects of equity investments and foreign currency gains/losses, giving Amazon a normalized PE ratio of 56x.</p><p style=\"text-align: left;\">Turning over to Amazon&#39;s operating cash flow, readers should understand that Amazon has $21 Billion of stock-based compensation. This makes operating cash flow a poor metric because it doesn&#39;t account for the huge dilutive effects of this figure. Owners of Amazon stock are continually seeing their per-share ownership decline:</p><p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/5168afbb811afb711e75a9613269d81e\" alt=\"Data by YCharts\" title=\"Data by YCharts\" tg-width=\"635\" tg-height=\"417\"/><span>Data by YCharts</span></p><h2 id=\"id_2452094190\" style=\"text-align: left;\">Amazon&#39;s Stock Could Roll Over</h2><h4 id=\"id_39016528\" style=\"text-align: left;\">Growth May Disappoint</h4><p style=\"text-align: left;\">Amazon is a terribly capital-intensive business, trading at 56x normalized earnings. Looking at Amazon&#39;s core businesses, growth may disappoint. For example, Grand View Research has the global cloud computing market growing at 14% per annum through to 2030. AWS&#39;s market share isn&#39;t growing, and the company is concentrated in North America where cloud computing has been widely adopted, and companies are actually trimming back their cloud spend. So, I think AWS will actually grow slower than 14% per annum over the next ten years. Amazon&#39;s also reached North American concentration in e-commerce, so future growth may depend on the company&#39;s ability to increase ad spend on its platforms and raise Prime membership prices. Of course, Amazon is expanding into India and other markets, but its International business actually saw an 8% decline in revenue from 2021 to 2022. Also, I expect Amazon&#39;s effective tax rates to increase over the next ten years alongside other American firms. Combine all of this, and I see Amazon growing normalized earnings at just 13% per annum.</p><h4 id=\"id_3733706909\" style=\"text-align: left;\">Long-Term Returns</h4><p style=\"text-align: left;\">My 2033 price target for Amazon is $155, implying returns of just 1.5% per annum:</p><table style=\"border-collapse:collapse;\"><tbody><tr><td style=\"text-align:left;vertical-align:top;\"><p>Normalized EPS (Diluted)</p></td><td style=\"text-align:left;vertical-align:top;\"><p>$2.40</p></td></tr><tr><td style=\"text-align:left;vertical-align:top;\"><p>Compound Annual Growth Rate</p></td><td style=\"text-align:left;vertical-align:top;\"><p>13%</p></td></tr><tr><td style=\"text-align:left;vertical-align:top;\"><p>Year 10 EPS</p></td><td style=\"text-align:left;vertical-align:top;\"><p>$8.15</p></td></tr><tr><td style=\"text-align:left;vertical-align:top;\"><p>Terminal Multiple</p></td><td style=\"text-align:left;vertical-align:top;\"><p>19x</p></td></tr><tr><td style=\"text-align:left;vertical-align:top;\"><p>Year 10 Share Price</p></td><td style=\"text-align:left;vertical-align:top;\"><p>$155</p></td></tr><tr><td style=\"text-align:left;vertical-align:top;\"><p>Compound Annual Returns</p></td><td style=\"text-align:left;vertical-align:top;\"><p>1.5%</p></td></tr></tbody></table><p style=\"text-align: left;\">Note: This is a base-case estimate. The compound annual growth rate is for dividends and earnings. The terminal multiple assumes an interest rate of 5% in 2033 (A reversion to the 5000 year mean). It also assumes a growth rate of 8% between 2033-2043, and accounts for the small probability that the business fails.</p><p style=\"text-align: left;\">Given that I do not believe investors are being paid here to hold Amazon, with the 2-year treasury yielding 4.75% vs. Amazon&#39;s prospective returns of 1.5% and a potential recession in North America looming, I am downgrading Amazon to a &#34;Strong Sell.&#34; AMZN could be about to roll over.</p><h2 id=\"id_279212440\" style=\"text-align: left;\">Thesis Risk</h2><p style=\"text-align: left;\">There is a wide range of outcomes for Amazon&#39;s stock. My base-case factors in both the chance that Amazon loses substantial cloud computing market share, as well as the chance that Amazon&#39;s margins surprise to the upside in e-commerce and cloud. Also, Amazon&#39;s CEO said the company is working on AI chips but that they are competitive on a combination of price and performance (In other words, performance is lagging competitors). Anyway, there is a chance that some of Amazon&#39;s investments pay off. There&#39;s also a chance others lose big. Perhaps Amazon can increase e-commerce margins further than I expect if they effectively use AI to recommend products and integrate ads. But, this is being hindered by ongoing data privacy changes and regulation. Also, maybe the vast use of AI autonomous vehicles will reduce expenses and make Amazon&#39;s shipping vastly more efficient 5-10 years out. This is the wide range of outcomes factored into my long-term returns estimate.</p><h2 id=\"id_2395647617\" style=\"text-align: left;\">The Bottom Line</h2><p style=\"text-align: left;\">Amazon is doing great things, but it is also engaging in extremely capital-intensive things. At a normalized PE of 56x, I think now is a dangerous time to bet on massive margin expansion.</p><p style=\"text-align: left;\">Amazon&#39;s growth may disappoint. It seems the company has reached e-commerce and cloud concentration in North America. AWS&#39;s cloud market share and margins are falling. Moreover, Amazon&#39;s e-commerce business is not what Warren Buffett would call a &#34;wonderful business,&#34; with negative free cash flow and skyrocketing debt. Competition is heating up in direct-to-consumer and in cloud computing. Looking at my 1.5% prospective returns for Amazon vs. 4.75% on the two-year treasury, I think it&#39;s time to get out. Thus, I&#39;ve downgraded Amazon from a &#34;Hold&#34; to a &#34;Strong Sell.&#34; Whether you agree or disagree, I hope I shed light on the key issues surrounding Amazon.</p><p style=\"text-align: left;\">Until next time, happy investing!</p></body></html>","source":"seekingalpha","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Amazon: AWS Is Rolling Over</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; 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}\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nAmazon: AWS Is Rolling Over\n</h2>\n\n<h4 class=\"meta\">\n\n\n2023-07-21 09:25 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4618407-amazon-aws-rolling-over><strong>Seeking Alpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>SummaryAWS's moat appears to be coming under pressure with declining margins and market share.Meanwhile, Amazon's e-commerce business is extremely capital-intensive and isn't what Warren Buffett would...</p>\n\n<a href=\"https://seekingalpha.com/article/4618407-amazon-aws-rolling-over\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{"LU0053666078.USD":"摩根大通基金-美国股票A（离岸）美元","LU0642271901.SGD":"Janus Henderson Horizon Global Technology Leaders A2 SGD-H","LU0082616367.USD":"摩根大通美国科技A（dist）","LU0238689110.USD":"贝莱德环球动力股票基金","BK4548":"巴美列捷福持仓","LU0640476718.USD":"THREADNEEDLE (LUX) US CONTRARIAN CORE EQ \"AU\" (USD) ACC","BK4554":"元宇宙及AR概念","AMZN":"亚马逊","BK4585":"ETF&股票定投概念","LU0234572021.USD":"高盛美国核心股票组合Acc","BK4534":"瑞士信贷持仓","LU0109392836.USD":"富兰克林科技股A","BK4507":"流媒体概念","IE00B19Z9505.USD":"美盛-美国大盘成长股A Acc","BK4533":"AQR资本管理(全球第二大对冲基金)","LU0353189763.USD":"ALLSPRING  US ALL CAP GROWTH FUND \"I\" (USD) ACC","BK4566":"资本集团","LU0011850046.USD":"贝莱德全球长线股票 A2 USD","BK4524":"宅经济概念","IE00BWXC8680.SGD":"PINEBRIDGE US LARGE CAP RESEARCH ENHANCED \"A5\" (SGD) ACC","BK4535":"淡马锡持仓","LU0061474705.USD":"THREADNEEDLE (LUX) GLOBAL DYNAMIC REAL RETURN \"AU\" (USD) ACC","LU0170899867.USD":"EASTSPRING INVESTMENTS WORLD VALUE EQUITY  \"A\" (USD) ACC","LU0130102774.USD":"Natixis Harris Associates US Equity RA USD","LU0097036916.USD":"贝莱德美国增长A2 USD","BK4220":"综合零售","LU0320765059.SGD":"FTIF - Franklin US Opportunities A Acc SGD","BK4559":"巴菲特持仓","BK4538":"云计算","LU0234570918.USD":"高盛全球核心股票组合Acc Close","LU0198837287.USD":"UBS (LUX) EQUITY SICAV - USA GROWTH \"P\" (USD) ACC","BK4588":"碎股","BK4550":"红杉资本持仓","BK4579":"人工智能","LU0061475181.USD":"THREADNEEDLE (LUX) AMERICAN \"AU\" (USD) ACC","LU0276348264.USD":"THREADNEEDLE (LUX) GLOBAL DYNAMIC REAL RETURN\"AUP\" (USD) INC","LU0316494557.USD":"FRANKLIN GLOBAL FUNDAMENTAL STRATEGIES \"A\" ACC","BK4503":"景林资产持仓","BK4122":"互联网与直销零售","LU0149725797.USD":"汇丰美国股市经济规模基金","BK4551":"寇图资本持仓","LU0127658192.USD":"EASTSPRING INVESTMENTS GLOBAL TECHNOLOGY \"A\" (USD) ACC","BK4561":"索罗斯持仓","LU0289941410.SGD":"AB FCP I Dynamic Diversified AX SGD","LU0348723411.USD":"ALLIANZ GLOBAL HI-TECH GROWTH \"A\" (USD) INC","LU0211328371.USD":"TEMPLETON GLOBAL EQUITY INCOME \"A\" (MDIS) (USD)   INC","LU0456855351.SGD":"JPMorgan Funds - Global Equity A (acc) SGD","IE00B775SV38.USD":"NEUBERGER BERMAN US MULTICAP OPPORTUNITIES \"A\" (USD) ACC","LU0109391861.USD":"富兰克林美国机遇基金A Acc","LU0417517546.SGD":"Allianz US Equity Cl AT Acc SGD"},"source_url":"https://seekingalpha.com/article/4618407-amazon-aws-rolling-over","is_english":true,"share_image_url":"https://static.laohu8.com/5a36db9d73b4222bc376d24ccc48c8a4","article_id":"2352041065","content_text":"SummaryAWS's moat appears to be coming under pressure with declining margins and market share.Meanwhile, Amazon's e-commerce business is extremely capital-intensive and isn't what Warren Buffett would call a \"wonderful business.\"I'll explain why growth may disappoint.At a normalized PE ratio of 56x, I think Amazon is about to roll over ~ Sell the rally.Alex Wong/Getty Images NewsThe ThesisI've covered Amazon (NASDAQ:AMZN) twice before, first recommending a \"Sell\" in mid-2022, then upgrading to a \"Hold\" at the end of last year. Amazon's since rallied 45%, but I think it's about to roll over again. Let me explain why.Author's AMZN Rating History (Seeking Alpha)Amazon's Businesses Are Rolling OverE-CommerceAmazon's flagship E-Commerce business has had its fair share of struggles. Amazon made the mistake of over-investing in e-commerce warehouses and delivery vans during the abnormal lockdowns of 2020 and 2021. Next, Amazon compounded the issue by spending tons of money on depreciating movies and TV shows.Thus, depreciation expense has outgrown revenues drastically:Data by YChartsWhen the lockdowns eased, Amazon was \"swimming naked\" as it ran into the brick wall of inflation in 2022. Seeing wages skyrocket for its 1.5 million employees, Amazon started losing money on its e-commerce business:Amazon's E-Commerce Operating Margins (Author)Wages tend not to go down and stay down, nor do depreciation costs, which Amazon accounts for on a straight-line basis. So, the argument for huge margin expansion looks somewhat weak.Also keep in mind that tons of retailers now have a direct-to-consumer business, such as Nike (NKE) and American Eagle (AEO). This is just scratching the surface. So, consumers no longer have to buy everything e-commerce on Amazon.com; they can just go on Nike's website to buy their next pair of sneakers or branded hoodie.I think Amazon.com was at the peak of its power back in 2020, and there may be no going back. I recently asked my fiancee what she would do if Amazon raised its Prime membership fee by 50%, and without hesitation, she said she'd cancel it.Amazon's Q1 2023 Revenue Breakdown (Statista)Not A \"Wonderful Business\"All that said, Amazon is trying to push advertising and other income streams, so it's not that I think Amazon's North American and International e-commerce segments won't grow at all. It's just that I think they are capital-intensive, low margin businesses (Not what Warren Buffett would call a wonderful business). For example, Amazon had $187 billion of property, plant and equipment on its balance sheet at the end of 2022. All of this shareholder capital is sitting there and earning next to no money. Free cash flow is negative, net income is minuscule, and debt is soaring higher:Data by YChartsThis isn't what you like to see. Amazon's $141 billion long-term debt and capital lease obligation is enormous, especially compared to its falling profitability.CloudMoving on to cloud, operating margins are rolling over. Amazon's CEO has cited slowing demand. But I'm seeing increasing competition as well.AWS Cloud Operating Margins (Author)Amazon's cloud business hasn't gained an inch of market share over the past five years, meanwhile, Microsoft (MSFT) and Google (GOOG) continue to gain ground:Global Cloud Market Share (Synergy Research Group)Are Amazon's cloud margins falling because of slowing demand, or is Amazon lowering prices to stop losing market share (Which has been falling for the past three quarters)? I lean towards the latter.Moreover, I think AWS's long-term moat (A.K.A. durable competitive advantage) in cloud be somewhat fickle. I would compare cloud computing to the semiconductor industry where you can have an advantage due to scale, offerings, technology, and brand, but these advantages can fade over the years as we've seen with the once great Intel (INTC), which has been displaced by Taiwan Semiconductor Manufacturing Company (TSM) and others. So, I cannot say if AWS will enjoy the same dominant position in 10, 20, or 30 years.Normalized EarningsI still believe Amazon is under-earning on a net income and free cash flow basis. If we assume Amazon's e-commerce business (Segments ~ North America and International) returns to a 2% operating margin and that AWS can maintain its 24% operating margin, then Amazon would likely make $24.8 billion:E-Commerce Operating Income$8.7 BillionAWS Operating Income$21.1 BillionInterest Expense (Net)($1.4 Billion)Earnings Before Income Tax$28.4 BillionIncome Tax Expense($3.6 Billion)Normalized Net Income$24.8 BillionNote: This estimate excludes the effects of equity investments and foreign currency gains/losses, giving Amazon a normalized PE ratio of 56x.Turning over to Amazon's operating cash flow, readers should understand that Amazon has $21 Billion of stock-based compensation. This makes operating cash flow a poor metric because it doesn't account for the huge dilutive effects of this figure. Owners of Amazon stock are continually seeing their per-share ownership decline:Data by YChartsAmazon's Stock Could Roll OverGrowth May DisappointAmazon is a terribly capital-intensive business, trading at 56x normalized earnings. Looking at Amazon's core businesses, growth may disappoint. For example, Grand View Research has the global cloud computing market growing at 14% per annum through to 2030. AWS's market share isn't growing, and the company is concentrated in North America where cloud computing has been widely adopted, and companies are actually trimming back their cloud spend. So, I think AWS will actually grow slower than 14% per annum over the next ten years. Amazon's also reached North American concentration in e-commerce, so future growth may depend on the company's ability to increase ad spend on its platforms and raise Prime membership prices. Of course, Amazon is expanding into India and other markets, but its International business actually saw an 8% decline in revenue from 2021 to 2022. Also, I expect Amazon's effective tax rates to increase over the next ten years alongside other American firms. Combine all of this, and I see Amazon growing normalized earnings at just 13% per annum.Long-Term ReturnsMy 2033 price target for Amazon is $155, implying returns of just 1.5% per annum:Normalized EPS (Diluted)$2.40Compound Annual Growth Rate13%Year 10 EPS$8.15Terminal Multiple19xYear 10 Share Price$155Compound Annual Returns1.5%Note: This is a base-case estimate. The compound annual growth rate is for dividends and earnings. The terminal multiple assumes an interest rate of 5% in 2033 (A reversion to the 5000 year mean). It also assumes a growth rate of 8% between 2033-2043, and accounts for the small probability that the business fails.Given that I do not believe investors are being paid here to hold Amazon, with the 2-year treasury yielding 4.75% vs. Amazon's prospective returns of 1.5% and a potential recession in North America looming, I am downgrading Amazon to a \"Strong Sell.\" AMZN could be about to roll over.Thesis RiskThere is a wide range of outcomes for Amazon's stock. My base-case factors in both the chance that Amazon loses substantial cloud computing market share, as well as the chance that Amazon's margins surprise to the upside in e-commerce and cloud. Also, Amazon's CEO said the company is working on AI chips but that they are competitive on a combination of price and performance (In other words, performance is lagging competitors). Anyway, there is a chance that some of Amazon's investments pay off. There's also a chance others lose big. Perhaps Amazon can increase e-commerce margins further than I expect if they effectively use AI to recommend products and integrate ads. But, this is being hindered by ongoing data privacy changes and regulation. Also, maybe the vast use of AI autonomous vehicles will reduce expenses and make Amazon's shipping vastly more efficient 5-10 years out. This is the wide range of outcomes factored into my long-term returns estimate.The Bottom LineAmazon is doing great things, but it is also engaging in extremely capital-intensive things. At a normalized PE of 56x, I think now is a dangerous time to bet on massive margin expansion.Amazon's growth may disappoint. It seems the company has reached e-commerce and cloud concentration in North America. AWS's cloud market share and margins are falling. Moreover, Amazon's e-commerce business is not what Warren Buffett would call a \"wonderful business,\" with negative free cash flow and skyrocketing debt. Competition is heating up in direct-to-consumer and in cloud computing. Looking at my 1.5% prospective returns for Amazon vs. 4.75% on the two-year treasury, I think it's time to get out. Thus, I've downgraded Amazon from a \"Hold\" to a \"Strong Sell.\" Whether you agree or disagree, I hope I shed light on the key issues surrounding Amazon.Until next time, happy investing!","news_type":1},"isVote":1,"tweetType":1,"viewCount":108,"commentLimit":10,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"symbols":[],"verified":2,"subType":0,"readableState":1,"langContent":"EN","currentLanguage":"EN","warmUpFlag":false,"orderFlag":false,"shareable":true,"causeOfNotShareable":"","featuresForAnalytics":[],"commentAndTweetFlag":false,"upFlag":false,"length":61,"xxTargetLangEnum":"ORIG"},"commentList":[],"hasMoreComment":false,"orderType":2}