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Amazon.com Inc. shares are on a tear this year, up 50% so far in 2023 amid a strong rally in Big Tech names and cheers for the e-commerce giant’s work to cut costs — but zoom out and the performance looks less impressive.
Amazon’s
AMZN,
stock, up 50% over a five-year span as well, has “materially underperform[ed] its closest mega-cap peers by ~52%,” wrote Bernstein analyst Mark Shmulik. This is despite a 24% compound annual revenue growth rate over that period and positive developments including the emergence of its advertising business as a financial powerhouse.
“Today we’re clearly optimistic about the road ahead — we have upgraded Amazon to our best investment idea in Internet — but believe that there’s a significant amount of self-help Amazon can take to quell investor concerns around the current
investment strategy and investor communications, and together could propel the stock into the $180-200 range,” Shmulik wrote in a Wednesday research report that he called an “open letter” to Amazon’s management.
Shares closed Tuesday at $126.61.
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Based on recent conversations with investors, “it’s clear we’re not alone in this frustration,” he continued. That investor sentiment is a disconnect from the sell-side view, as Amazon is well loved by analysts, 94% of whom have buy-equivalent ratings on the stock, by his count.
In Shmulik’s view, Amazon is taking on too much and could benefit from refocusing on its best opportunities. He sees the company “simply pursuing too many ideas, with weaker ideas taking away the oxygen, capital, and most importantly focus from the truly disruptive initiatives that ‘only Amazon can do.’”
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Shmulik recommends that Amazon “divest, seek outside funding, or trim spend” in its healthcare initiatives and with its Project Kuiper broadband aims.
“Amazon has been trying for half a decade to build ‘something’ in healthcare, but the goalposts keep moving,” he wrote, whereas “Kuiper has no discernible competitive advantages over operating competitors.”
In addition, Shmulik wants Amazon to get out of international markets like Brazil where it’s “underwater” and seeing market-share declines.
Elsewhere, he sees Amazon doing a number of things well and recommends the company boost its efforts on those. “Double down on Buy With Prime,” he wrote, likening the concept to the company’s AWS cloud-computing service.
“Sitting on excess fulfillment capacity coming out of the pandemic, Buy With Prime leverages Amazon’s unique assets and capabilities, and offering these capabilities as a third-party service offers real parallels to the beginnings of AWS with Merchant.com,” he commented. “Amazon clearly has a competitive advantage, particularly with Shopify throwing in the towel on a competing service, and falls in the category of something only Amazon can do. Allocate more resources here.”
Shmulik urged Amazon to build out its media business more, as the company looks positioned to benefit from the continued shift in advertising dollars over to digital forms of viewing.
He also thinks the company can improve its messaging, suggesting that it break out noncore areas “to show a far healthier and more profitable core business,” the way Alphabet Inc.
GOOG,
GOOGL,
and Meta Platforms Inc.
META,
already do.
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Perhaps Amazon could do better with how it handles earnings calls as well, given “elongated answers, and a limited question queue,” he said. The company could sharpen its prepared remarks to better anticipate key areas of investor interest and be more consistent with how it presents metrics like AWS growth.
“With all due respect, this management’s team hasn’t yet earned investors’ benefit of the doubt,” Shmulik said. “We’re grateful to have Andy Jassy now joining the earnings calls, but after six quarters post CEO appointment there’s still room to tighten the messaging particularly around strategy and progress.”
