Long Live the eCom King. AMZ

TLDR:

LBAB!’s Investing Criteria

What Amazon’s Earnings mean for eCom

LBAB Community - Our Investment Criteria

We’re asked all the time what our investment criteria AKA what we’re looking for. What seems like a rubric for how we screen bizs is so much more important than that. It’s essentially a fund’s playbook. 

So instead of repeating myself on calls and DMs I’ve consolidated out Fund’s investment criteria into you guessed it: a Notion doc!

When building something from scratch it’s so easy to skip these exercises and just wing it to get market feedback. Document it later when things are more fleshed out. But I always start here because it provides a useful forcing function. 

Writing out documents like this provide clarity on who you are and who you’re not. This isn’t quite a vision doc, but forced me to spend time deeply thinking about the vision of the fund to work back to what types of deals we are looking at today.

Having this cleanly documented, available to the public and a resource to easily send out will properly set expectations.

Exiting a biz is so high stress and a burden that clearly stating your intentions before the process starts fundamentally changes everything downstream.

Documenting that clarity of mind is an advantage over you competitors that don’t. It gives you the guardrails that when things get tough you don’t need to think about the decision.

Your documented process does it for you. It’s not the bible, you can always adapt to changing markets, but you don’t have to reinvent the wheel for your decision making process.

If you’re interested in checking it out. Have a look. It’s available for everyone on the internet And as always if you know anyone who fits the criteria send them my way.

Let’s Examine This Biz

Note: NOTHING that follows is investing or financial advice, just my own analysis.

Amazon needs no introduction, but it might need a re-introduction. 

Trading at $169.51/share with a $1.7T market cap, +109% the last 5 years, the eCom OG has outgrown the market.

The tentacles are in more things than we can count, from eCom, Grocery, Ads -> 3P Seller Services, Medical insurance, and obviously Cloud Computing.

Amazon’s delta between Rev (3x) & P/E (56x) ratios shows how confused the market is. It’s marked as an incredible brand (56x P/E ratio) but a horrible SaaS biz (3x Rev). 

Not because either are performing poorly. Both are firing on all cylinders. But because investors have no idea how to categorize Amazon. Based on its Free Cash Flows, investors think it could be 2x the share price. We’ll call that discount the Confusion Tax.

This biz has its own orbit so we aren’t going to waste time trying to buy it. Instead we’re going to analyze the Sun’s orbit and spend today figuring out where eCom is going.

Financial Summary

TLDR Analysis: Definition of Operational Efficiency

This is what the best of the best looks like. Across the board. And how an eCom P&L should be formatted.

• Sales +12% outpaced COGS (+6%), Marketing & Selling (+5%), & Fulfillment (+7%)

• All while cutting G&A (-1%)

• They made $30B in Net Income. $30B!!!! After a year with a Net loss.

• FCF turned from a negative -> $36B 🤯🤯🤯

• Burned 10% less cash YoY ($1.9B). 👍

This is the powerhouse’s powerhouse. It’s VERY hard to steer a ship this large. But with the orbit that Amazon has in the space we have to see where it’s all dragging us.

Let’s Learn This Biz!

This biz is far beyond reach. But it sets the tracks for where we’re all heading. Here are my 3 biggest takeaways and where I’m placing my next bets.

1) Amazon is slashing prices further.

Pricing is what matters on Amazon. It always has and it always will. But it’s where the game has changed: Wish, Teemu, TikTok Shop are all placing more downward pricing pressure on Amazon. 

If you’re a Seller on Amazon, you’re squeezing into tighter & tighter margin windows. Or formulating your product at lower costs. This trend is painful and isn’t going anywhere. 

The Ads tax is making matters worse, but this is the game. If you want to sell in the largest mall in the world, you have to play by their rules. 

Amazon knows it has a monopoly, and the US gov’t isn’t going to do anything about it, other than block petty product acquisitions. Amazon doesn’t have the brand to meaningfully raise prices on consumers. So how will they grow?

Extracting more B2B dollars. 

• 3P Selling fees will continue to go up.

• Ads will become more prevalent. 

They’ll have to find more dollars and opportunities to increase their Revenue. All while consumers pay less. That means it’s coming out of your pocket.

Takeaway: Prices ⬇️ = Amazon Tax ⬆️.

2) Amazon’s New Frontier: LaaS (Logistics as a Service)

Mid ‘23, Amazon announced they’re opening up their fulfillment operations to other bizs. This has been the writing on the wall for a while, but now it’s real. And they have a compelling offering to take to market by cloning the AWS playbook:

1. Build the next frontier to solve their own problem ✅

2. Heavily invest to scale it up ✅

3. Charge accessible prices to everyone else and print 💰. 🚀

Major product updates they announced in their earnings:

• Prime Air drone deliveries will expand to Italy, UK, and more U.S. locations in late 2024 

  • AND now Drone integrates with Same-Day

• In 2023, 7B units arrived the same or next day. Same-Day Delivery operates in 110+ U.S. metro areas and operates more than 55 dedicated Same-Day sites across the U.S. 

  • Same-Day has already broken 1B packages delivered.

• Expanded Amazon Fresh grocery delivery and free pickup to customers without a Prime membership in the U.S.

• Launched Sequoia-robotics system to identify and store inventory up to 75% faster. Will reduce order process time by up to 25%. 

All those features will make Amazon more efficient and improve its stock performance, but really, this is a sales 1-pager for anyone looking for Logistics help.

Everyone hates their 3PL. Amazon has built the best one in the world. Now, you can leverage it to scale your biz. For Context, UPS has a $126B market cap and the USPS made $78.2B in Rev last year.

1. If you’re a Shopify + Amazon seller, you’ve been considering sending all your inventory to Amazon for years. I remember debating whether to do this back in 2018. 

2. If you’re a Ent Brand (80-90% of eCom sales = Amazon), why even take on the hassle of managing a 3PL or G-d forbid your own logistics?

The flywheel here is unstoppable, and Amazon has the greatest competitive advantage of all. Amazon is the largest customer and is moving their UPS shipments in-house—UPS is now in free-fall because of it.

Amazon will own the market, creating a service any brand can use while being the largest customer of said service.

Replaying the AWS story in another Trillion dollar market.

Takeaway: Logistics is Amazon’s next conquest.

3) Next Wave eCommerce Innovation’s

Amazon’s making 2 major investments that’ll have immediate impact on eCom (and it’ll be no time before they become Shopify Apps too).

1) AI-powered Personalized size recommendations. (The Holy Grail is here!)

Fit Review Highlights: Takes personalized feedback from customers who wear the same size, and improves size charts. Think Netflix for sizing.

Amazon is going to pool customers who buy similar products in similar sizes and figure out common sizing so customers can understand if that Medium is a Medium (or actually a small).

They’re going to pass this feedback along to retailers as well so they can improve their product offering.

This is the holy grail we’ve all been praying for. 

Not only will a feature like this change the Returns landscape, it will also change Conversion Rate forever. The more confident customers are in buying a product that actually fits, the more they will purchase.

I love these double wins: growing Rev through cutting major costs.

2) AI-powered conversational shopping experience.

Amazon is going to ChatGPT themselves. This is the migration from a search -> an answer-based shopping experience, to:

• Address shoppers’ needs, products, and comparisons

• Make recommendations based on context of the query

• Facilitate product discovery 

Customers can simply start typing or speaking their questions into the Shopping app search bar or choose from a set of pre-populated questions, and Amazon will provide answers via a chat dialog box to help them make more informed purchase decisions. 

This 1 is obvious, and plenty of Shopify apps are already working on it, but Amazon has SOOO much data they’ll set the gold standard for these interactions. 

What’s most interesting to me is how this will change the Ads Amazon landscape. Search + Product are still the backbone of the $45B Amazon Ads profit puppy. If Amazon moves to an answer-based model, they’ll destroy their search biz.

But maybe the answer is a question: is that ad space 10x more valuable to an advertiser?

Of all the AI for eCom I’ve seen in the past 3 years, these 2 moves make the most sense. 

But let’s be honest: they aren’t novel, or really new. Pandora pioneered the cohort matching algorithms in 2005 (feature #1), and Tech has been working on making AI chatbots mainstream for at least 7 years (Feature #2).

The major shift: Consumers are finally ready for it.

Takeaway: Old AI is going mainstream. Killer features inbound.

Final Thought

When does Amazon change the definition of its customer?

Amazon’s B2B Rev is about to eclipse the B2C biz for the 1st in its history. At a certain point, when B2B is the lion’s share of Rev, does it make sense to still prioritize the Consumer as Amazon’s customer obsess over?

Today, ~52% of Amazon’s Rev comes from the B2C side of the biz. 

• Online Sales: 41%

• Subscriptions: 7%

• Physical Stores: 4%

Meanwhile, B2B is rapidly catching up at ~48%:

• 3P Sellers: 23%

• AWS: 16%

• Ads: 8%

AWS + Ads are 2 of the fastest-growing (+ most profitable) units. In 2 years, when they account for 35%+ of Sales and 80% of Profits, aren’t B2B customers more important?

Really, I believe Amazon should divest AWS and make it a standalone biz.

In my new reality:

Retail (w/ Subscriptions) + Ads + Merchant Services (3P Sales + Fulfillment) is still be a $1T+ biz.

• Ads will take AWS’s spot as high growth + pure margin.

• Prime will explode as they add new categories like Healthcare.

• Fulfillment is a $500B biz.

• Retail sales are still plugging away. Amazon is early in Internationalization.

Now that’s just my crazy idea, but when Fulfillment is a full-blown offering, and Amazon is eats UPS market share… 

3P + Ads (Today 31% of Amazon’s Rev) + Fulfillment ≥ Consumer Sales (Today 41%).

At that point, you have to follow the money and reprioritize who you obsess over.

🧠 The Takeaways

Amazon is really two separate $1T bizs. They’re leveraging monopoly power to dominate many markets, but consumers won’t be the center of the universe for much longer.

1. Amazon tax will squeeze more Sellers as prices go down & Amazon needs to grow.

2. LaaS is the new thing and it’ll be another irresistible offer.

3. Old AI is finally ready for mainstream as Amazon ChatGPTs their search and introduces AI for sizing.