Amazon's core business does not make sense. Despite being so massive, their retail operation makes almost no money. There is little market share left for them to win, the best they can do to grow is shave expenses.
AWS has been their real money maker, but also the explosion of AI and server farms has worked against them in threes ways: there is much more competition on infrastructure, the costs to run infrastructure keep going up, if you're looking for a growth industry there are other more appealing stocks now to park your capital.
It seems like AMZN has significant growth priced-in to the stock, but retail growth will become increasingly challenging as their market share increases.
Amazon's free cash flow rises year over year (apart from the post-COVID period) [0] while Walmart's doesn't [1] and price multiples are largely determined by expected FCF over time not directly revenue/EBITDA. FCF rain or shine maps roughly onto possibility of paying out dividends/buybacks, which determines the value of an equity in capital markets ("discounted present value of a company's future cash flows").
Their business models are increasingly converging with both generative revenue through seller fees, subscriptions, and advertising. Amazon is ahead in most of these areas and also has the higher margin revenue from AWS. Amazon also has a large base of prime subscribers they can sell incremental services to.
>You have to believe that Amazon is poised for much higher growth than they are to justify their current stock price.
How many decades now have we lived in a world where the demand for investment far outstrips sane investment opportunities? In such a world, do stock prices have to be justified as you insinuate? And what happens when the prices are far higher than can be justified? I ask not rhetorically, but rather whether I should be hoarding shotgun shells and canned goods and hiding in the basement.
I'm down to about one Walmart trip per year. It may have been as many as 3 years since I've been inside Target. Kmart is a dusty memory. On my last Walmart trip, it is a shabby caricature of what I remember from the early 2000s (maybe even on up into 2011 or 2012. I can't be sure, but I believe aisles have been made wider so they could fit fewer shelves and keep those looking fuller. What fills them is the cheapest looking junk I have ever seen, and I had no favorable opinion of Walmart's goods to start with. Truly much of it looks like the sort of trinkety crap you would have found at flea markets and gas stations years ago. Target was (3 years ago) still worse, I think they do most of their ordering off of Temu.
If there is something I might prefer to not wait on Amazon for, I will not find it at Walmart even if I remember Walmart once carrying that product. This is without fail. Each new (rare) trip to Walmart reinforces the lesson.
I have never been fond of Walmart's grocery department. I suspect (long ago) that they were able to sell produce 1 cent cheaper than anyone else by buying the least-wanted, unsold inventory from agricultural distributors, and the quality always reflected that theory. I could buy strawberries from Walmart, buy them again from the local grocery chain 10 minutes later, put them in the fridge simultaneously. And the Walmart-bought produce was slimy the next day, the grocery store produce not (unless I stacked the Walmart clamshell on the grocery store one... cross-contamination).
Worse still, they have reduced their personnel to skeleton crews, all shifts. The stores tend to look like they were looted after hurricanes. I do not know how anyone shops at Walmart, and it scares me that if my circumstances were less agreeable I might be forced to shop there too. Walmart might aim for stealing marketshare from Dollar General as a growth strategy, the overlap must be nearly absolute.
> Despite being so massive, their retail operation makes almost no money
You misunderstand the point of retail. It's now a marketplace where they use their name recognition and (alleged) consumer friendliness to collect fees from sellers. It costs to list, it costs to do FBA, and it costs to run ads so that your products appear in search results. Amazon ads is incredibly profitable.
That's also why Prime has such a grab bag of benefits. By keeping Prime membership sticky, the overall value of that marketplace supports the fees charged to sellers.
I am not so sure this is an accurate analysis? Notably, a major thing that kept it so that retail made no money, was the massive expense of expanding the retail operations. That is, expanding retail footprint is a massive cost. And you have to expand if you want to reach more customers.
This is different from AWS where your reach is essentially "all of the internet" for anything that you launch. But this really just meant that reinvesting the revenue from AWS was harder for them to do, compared to revenue from retail. As a result, they didn't. Not nearly as aggressively.
It's not that bad. From a finance and accounting perspective, Amazon’s retail business provides strong synergies with its cloud services. Although the retail segment has a relatively low net profit margin, it generates stable and substantial cash flow for the company. In contrast, cloud services are highly profitable but require significant upfront investment in hardware, and the associated asset depreciation is substantial.
By combining these two businesses, Amazon can achieve a more balanced capital structure. Compared to other cloud service providers such as Oracle, Amazon can maintain a lower debt-to-equity ratio, reduce its debt burden, and sustain stronger overall financial health. At the same time, it can achieve higher overall profit margins compared to traditional retailers like Walmart.
Depends how you define their "core business" I suppose.
You're right, but their retail business does support the bulk of their ad business which is extremely profitable. Arguably it might actually make sense for them to run their retail business as a loss leader to support their high-margin ad business.
Relevant data point on AWS - GCP is giving out a ton of cloud credits to startups. On average $100k in comparison to $10k-20k from AWS.
Before Claude Code, a full cloud migration could easily be a couple months. We migrated our whole stack to GCP in about a week. It's trivial to switch clouds now with K8 stack and Claude Code.
> There is little market share left for them to win, the best they can do to grow is shave expenses.
I think Amazon netted something like $70 billion last year. What's the problem with them just staying the course and earning tens of billions of dollars in profit year-after-year-after-year?
They say one of the reasons supermarkets move isles layout is so people don’t learn to navigate the store and they put milk in the back to make sure people have to walk the isles.
The purpose is to get shoppers to look at more stuff and impulse buy.
I honestly believe search is bad for the same reason.
AWS has been their real money maker, but also the explosion of AI and server farms has worked against them in threes ways: there is much more competition on infrastructure, the costs to run infrastructure keep going up, if you're looking for a growth industry there are other more appealing stocks now to park your capital.