Chit Chat Stocks - Amazon (Ticker: AMZN) with Edward Chang

Episode Date: July 6, 2023

Amazon.com, Inc. (AMZN) is a multinational technology company that revolutionized e-commerce and expanded into various industries, offering a vast selection of products, cloud computing services, and streaming media, while continuously innovating and disrupting traditional business models. Listen as Brett and Ryan ask questions about the company, its business model, and valuation. Enjoy the show! ***************************** Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney  Subscribe to our Substack to receive free show notes and charts that go along with every episode: https://chitchatmoney.substack.com/ Interested to see more of Edward's work? Check out their Twitter here: https://twitter.com/edwardwchang?s=20 Contact us: [e-mail] Timestamps Amazon | (1:58) Profitability | (11:41) AWS Margins | (21:58) Competitive Risks | (44:13) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. Today is our Thursday deep dive episode where we interview an analyst to discuss a single stock or industry. And today we have on the show, Edward Chang. He is the founder of Pledge Capital. And we're talking about Amazon, a business that he's been invested in for a little while. And it's a business a lot of people are familiar with. We've got no advertisement for the show today. So without further ado, here's our interview. Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital,

and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or recommendation. Now, please enjoy this episode. welcome in today we are joined by edward chang he is i guess two-time guest now and founder slash lead investor at pledge capital um last time you were on i think we talked about the joint corp am i missing one or was it was just one time that you've been on right Yeah, yeah, yeah. It was a bit joint last time. Okay, perfect. And today we're talking about a little known company known as Amazon.

It's kind of, we were talking about this beforehand, but there's so many different directions we could go with this discussion. Full disclosure, Brett and I own shares of Amazon in Arch Capital and Ed, I believe you're an investor as well. So there might be some bias in this discussion. Just kind of keep that in mind that we are shareholders as we talk about it. But maybe let's start with kind of your history with Amazon. How long have you been following the business for? And maybe when did you first get interested in investing in Amazon? Yeah, for sure.

And thanks for having me on again. I started following Amazon. gosh my brother got a prime membership when we were in college in 2010 and so I've been a user since I first read the book the everything store I'm sure a lot of investors have read that great book in at least 17 or 18 and I think I really got interested last year as you know they were rolling out next day shipping and same same day shipping and that that's when i really got interested in amazon when it felt like investors were getting very negative on them um you know i thought next day

shipping was a pretty nice uh you know improvement in the value proposition and it made me want to to take in deeper to the overall business. Makes sense. What a, I guess we're trying to think of where to start with this interview. And obviously this is a very, they've got their arms into a lot of different industries. So maybe give us your broad overview. How do you look at the business? What do you think are the most important segments?

maybe what are the first things you look at when they really release earnings or something like that yeah for sure um so i mean i i liked the setup in amazon because i thought that you know the management team was doing a lot of what they've you know they've always said they would do which is to you know focus on the customer and you know like i said with e-commerce they had you know next same day next day um with you know with the ad business i really like what they were doing with um you know the clean rooms and so in terms of like what i like to follow it's it's really just how the business is is strengthening and increasing their competitive advantages right like widening that moat um so that's like what i try to track and i i thought there was a lot

of signs that they were indeed doing that at the end of last year when i took you know took a position in the stock and that's primarily what attracted me i kind of saw across the board ews and even stuff like kyber or you know their own proprietary ai chips it just it seemed like they were working and pushing the company in the right direction on multiple fronts. So that's like what I tend to track is how those things are helping increase the value proposition for the customer on a quarterly or regular basis. Right. And we'll get to some of the details of the individual segments.

We're going to hit AWS specifically later. We're going to hit kind of the retail or how I like to describe it as ex-AWS, but you can kind of, there's a couple of different ways to slice that piece. But first, this was in your write-up, which, or, and there's also a presentation to go along with it at MOI Global. We can maybe link that in the show notes, or if anyone's interested, contact us and we can share that with anyone. But you say at Pledge Capital, you quote, look for companies that are investing to strengthen their position through some sort of fundamental inflection point you just mentioned about strengthening the moat. But at the end of last year, if you just looked at Amazon's

trailing numbers, you would think, hey, look, this company is doing $600 billion in revenue or give or take, and it's still burning cash. So I guess there was the potential for the fundamental inflection point, but why do you think that is going to occur over the next couple of years? Yeah, for sure. So at the end of last year, I really felt that sentiment was really beaten up and you know it it it's not a fast investment to roll out some of these things that they've been working on right like rolling out same day next day requires a significant investment in logistics infrastructure you're raising your fixed costs you're you're hiring you know you're you're working all these delivery service providers and

And so, you know, you basically have to build it before they come to some extent, to a large extent, right? And I think it goes along with a lot of inflection points that you see in other industries where, and I saw this when I was at UBS covering restaurants, is that sometimes these business investments take time and they end up disappointing investors, right? People start thinking it takes too long. And so, you know, there might be an initial hype followed by a, you know, a valley of just despair. And it felt like that was the setup with Amazon. You know, I personally think that next day and same day, it really transforms the value prop, right? I think if you go back 10 years, Amazon was more about saving money. And now it's turned into, well, it's kind of like a personal shopper, right?

The other day, my wife was on, bugging me to go buy these clear tape strips that kind of protect sharp edges. And I didn't want to run over to Home Depot, so I just ended up ordering, and it showed up the next day. And I was able to go to the gym instead and do other things in my life instead of running all the way to the store to get it. And it's just a gigantic time savings. It's so convenient. And you get, in general, a pretty good price. And so that's what we really look for across our portfolios is businesses that are making these investments and really try to take the long-term view. Because I think this next day, same day, it could really help Amazon win long-term, increase share of the wallet.

I mean, the average Amazon member is relatively high income. And they're not spending all their shopping budget at Amazon. They're at least hanging out across. And in this initiative, a lot of stuff they're working on could help them grow their share of the pie. I was going to have one follow-up with expanding the value proposition. I think buy with prime, I relate to that. Is that part of the thesis as well? I know that's a tiny part of the business.

It's not going to be meaningful financially for a long time. But do you think that kind of shows how they're trying to expand the moat and counter position versus Shopify's of the world that have been eating a little bit of the market share, especially in the United States? Yeah, for sure. I mean, it's expanding that prime benefit, not just, you know, the $2,000 you spend on Amazon or whatever it is, range to everything you potentially buy. And I think it actually might be incredible timing to step into this business, try to compete more with other logistics providers. I mean, you have UPS, FedEx, but you have this entire third-party industry that runs all these warehouses and works with these delivery providers. And, you know, right now, you have a lot of talk of the Teamsters going on strike. And that actually might create an opening for Amazon. You know, there's a bunch of parties involved. It's great for all of us Amazon members. But you have to have merchants, shops, different e-commerce sites who want to work with Amazon. And this might actually help Amazon build out this business and fill that spare capacity.

So it's definitely great for the customers. I think it's a win-win-win for essentially everyone involved. And I think there's some near-term catalyst to help them expand this private crime model. I guess one question I have, I agree with everything you've said, and I want to make sure that we're not just patting each other's backs on our investments. but when I think about the last three years, they clearly invested a lot at the onset of COVID and kind of throughout COVID 2021, 2022 in expanding capacity. And they kind of got to the point where I believe they had double hired a number of times because people were taking time off and there was maybe too much fulfillment capacity that there was a lot of excess.

do you think it's just a matter of time until they kind of are able to grow into that or is there something here that like do you think they control their path to profitability on the retail side or is there maybe elements that are kind of out of their control and that question makes sense i would add on to it does that in your mind mean steady margin expansion say on the retail side of things yeah yeah so yeah i mean their their margin got crushed so badly with all these heavy investments i do think at this you know point in time um there's a lot more upside than downside and a lot of it does of course depend on just growth in sales and how fast they can fill that capacity um of course i think there's an opportunity to um rationalize that i mean but

you also don't want to cut too much right that's not the right long-term strategy i think it is relatively there is a path for them to grow um sales maybe at a close to double digit ten percent you know just tmv and in packages and parcels to grow that volume and fill that capacity i do think they're they are well positioned and i mean that's a longer conversation right um i think there's a bunch of different factors like by with prime um how they're growing you know their own volume uh there's the competitive dynamic but you know i think they're their biggest competitors today are most likely target and and uh and costco to a large extent so how much share they can take in you know for physical retail you know walmart while it's a very big e-commerce player uh kind

of competes more on the on the low end but of course they're a competitor as well so you know i also have to talk about timo at some point so you know there's there's a lot of moving pieces But in general, with e-commerce being 20% of retail sales and Amazon controlling around half of that, I do believe there's still a lot of secular growth left. We're not in the later innings. I think we're at most halfway. E-commerce is still an industry that can compound at a secular rate for five to 10 years or more to come. Okay. Okay. And I want to hit T-Mail.

Let's not forget to hit that because we did forget to put that in our notes. But to close out this segment, because we seem to have been hitting on retail a lot at the start. What, from your guys' analysis, and obviously these are just estimates, but what are your estimates for what X AWS margins can hit? This would include advertising, Prime Video, Prime. And what is kind of your big reasoning for what may be your base case? You know, are we thinking 5% margins, 10% margins, 15%? What are you guys' analysis there?

So, yeah, of course, you have to cut it up, like you said, into different pieces. But for, you know, the one, so the really large chunk, like one third of the business is like the one PL business, right? And setting the prime membership aside. When I was doing my analysis, I kind of looked at it as prime, you know, the prime membership revenue is up 50% gross margin business. I think one PL can actually stand on its own and generate a long-term, maybe modest profit, low single-digit EBIT margin. I mean, you're talking about the scale player. And the way I think about unit economics, if they're making 20% gross margins, say the average order is $40 or $50. And so they're pulling in $8 to $10 in gross profit. And looking at the logistics costs, I think that from everything from coming into the DC to going to the sortation center, going to the delivery station, putting it onto the van and delivering to the customer's home, I think that costs about $6.

So you're making a low single-digit contribution margin on that. And so as they scale, I think that should lead to 1% or 2% or 3% potentially even margins for that segment. And then on top of that, you have Prime generating a ton of contribution margin. You have advertising that could be a 20% to 30% plus EBIT margin business. You mentioned AWS. That feels like somewhere in that neighborhood as well. So as a whole, normalized margins for Amazon does feel like it's somewhere between 15% to 20% and potentially heading higher, right? depending on um you know we also forgot to mention the marketplace 3pl business right so if the

average order is 50 or 45 dollars you know something like ricardo libre and latin is like 30 30 something um and so if you're taking a third of that as commission and your take rate for you know fulfillment and logistics um you know you're you're talking you know 10 plus dollars in revenue per order and then six dollars in fulfillment so you know it's it could be a you know it may be marketplace is more like 20 to 25 30 percent now but it could be adding higher as well long term all these businesses ads AWS marketplace they all have much higher margins and so I think overall 15 to 20 is not crazy for the entire business and it could head to 25% or more longer term, right?

As the mix of 1PL keeps declining and everything else, it's already one-third, two-third, but it could head to 75%, 80% or more longer term. So that's kind of how I think about the margins long term. Okay, let's talk AWS. I've got a couple of questions in my mind, but I want to just start general. what are your thoughts on AWS and what do you think of the recent I guess slowdown

there's been a lot of narrative around their competitive positioning versus Azure kind of I guess just overall thoughts yeah it doesn't look as strong to be honest as it did six months ago

or twelve months ago but I also don't think it's as bad as some like this you know as some of the narrative kind of sounds like, which is that Azure has beaten AWS and AWS is just going to be a perpetual shared donor. I think if we step back,

I still believe cloud is still in the relatively early days. I mean, they talk about how 15% of IT spend is on the cloud today and the other 85 is going to shift over. um i think with ai it's still very early days and uh you know a lot of there's there's expert calls where you know and this is what andy jassy and adam um selebski have been saying as well um and i think it's corroborated by you know some experts who who say that you know clients aren't shifting workloads at this point due to generative ai and llm and chat gpt right like it's that's

it's still really early in, you know, building use cases. So I spent some time recently with a friend of mine who does a recommendation engine at a big tech firm. And he, you know, I think there's a sense that with chat GPT, it's getting a lot of attention, you know, kind of a lot of things are kind of over exaggerated at this point. um it's not easy to build a ton of use cases yet for for a lot of companies right like i still think it remains to be seen what exactly this can enable um and so that gives amazon time to make

investments and to offer this or to just help other companies like say a hugging face uh or others offer something in this area so um i don't think things are as dire um you know there certainly has been deceleration but you know i think i would point out that their backlog has been growing a lot faster and it hasn't decelerated to the same extent um you know still growing something like 37 percent in the latest quarter even though it's flat versus the prior quarter um and so you know there's a very big gap between that and what they're you know the 16 and i think the the expectation is like low teens or 10 in this next quarter um but i think all the signs uh seem to suggest that um you know maybe a lot of this is actually just amazon doing a very good job helping

customers um save money right and to cut out unnecessary expenses at least that's what the a bad thought would suggest is that they're doing what they've always done, which is really focused on the long-term customer relationships, much more so than other companies out there. Yeah, that totally makes sense. And I think one big concern investors have today is currently AWS has very strong profit margins, let's say 25% to 30%, but it's been higher over time. Let's just say it's around that range. One big concern is that given the competitive landscape, the margins could start to deteriorate or compress.

Do you believe this narrative? I think you mentioned earlier that you don't. And what's your reasoning for why this margin is sustainable, you know, much higher than, say, the average business out there? Yeah, so, I mean, I think there's definitely more competition now than before. I think that's hard to argue against that. you know oracle is coming in um and uh you know they had a very interesting um report right after you know they issued an interesting report to fdc so i guess the puts and takes right more competition right i still think this is a very sticky business uh you know i've talked to experts

who say that you know they would they wouldn't consider switching unless they can save at least 50%, right? And that's an enormous amount for another cloud company to offer you to get you to switch. It's more likely than not pretty tough. It might be possible in certain situations, but, you know, I don't think that kind of, you know, that kind of discounting and price war is happening on a very big scale, you know, in isolated circumstances, yes. But it's a very, very sticky it takes a lot of effort to move and so there are some you know very strong advantages for aws right so but if you look at all the puts and takes um one thing that oracle mentioned right is the egress fees which i think are something like six or seven and you know other people have

complained about how expensive it is to move data away right part of the lock-in and you know part of you know trying to retain the customers um and so i mean they do offer free um for a lot of the smaller customers free egress up to a certain level so so the the high volume clients are kind of subsidizing that and also there's there's free ingress which is you know moving data there so the egress fees kind of subsidize all these other spend uh but but at the end of the day you know the the egress is by itself a very high margin business right so if if that if there's action on that or they're forced to kind of come back on prices it's you know the six percent like if it drops you know spice some you know could measure that that could actually lower margins

by a few points you know one two three percent you know and maybe they offset some of that by charging you know all customers on egress um or maybe charging a small but you know not crazy amount on ingress and so you know that's another negative um but on you know on the positive side you know this is a business where they have scale um they have the lowest costs um and i think there's other things such as the the marketplace business that could be very beneficial to uh margins long term so something like 800 million 800 billion dollars in enterprise software spends right and if if you think that eventually you know most of i.t is on the cloud and aws has a huge share well you know as a marketplace if they're helping sell a lot of that software and a lot of

that sas right and they're taking a very high margin commission right like you know you throw you know 20 or 30 percent on hundreds of billions of dollars in software sales um at a very high margin you know that that helps um another area that i think helps is um you know in microsoft was making this point in their uh you know the recently leaked board um memo right for presentation and they were talking about how cloud is going from more of a cost center to something that's built into every single you know i guess revenue generating uh you know maybe client facing customer facing um service and so when as as you and i think um ai is still very early uh there's a lot of potential i think long term to build out very powerful services um that help customers

actually generate revenue, that should be higher margin as well. Do you think that AWS or retail, Amazon's retail, has a larger moat? Which do you think has a deeper competitive advantage? I actually think the e-commerce business. And I think that may be one of the reasons they decided to promote Andy Jassy, right, to the CEO position. It was more important to hold on to him and then bring it and selectively back it in to run AWS. I think the e-commerce business is harder to replicate,

much more difficult if you look at how all the pieces integrate from the prime membership to the advertising that is, you know, bringing people in or helping them sell products to just the crazy amount they've spent into that infrastructure right so if they're losing money with you know who else can replicate that infrastructure it's and so you know i've spent a lot of time on walmart target and costco and i mean costco's been talking a lot about this um it's this as they build out e-commerce it just adds a layer of cost right if you're fulfilling e-commerce with products that you hold in your store you know before the model is great everyone

just came in and helped source all that labor now you're actually hiring people to go pick and pack and then send it out you know it's a very low margin business to begin with and now you layer in you know the shrink right all this theft and structurally does that really change unless you you know rewrite laws that say if you if you steal 700 you can get away with it right like how does strength change and so you have retailers who are needing to raise crisis and that just widens the value prop right to to in order and i think they can offer this e-commerce um you know in this current you know way up to a certain level but at some point they kind of run into an innovator's dilemma right so what if like 20 or 30 of yourself shift well now you know

You go from this box, you have to convert it into a hybrid box. And then what happens is it shifts even more. You have to go back and convert it again. And so it's just, it's a very, I think it's a very difficult, it's actually a very difficult process for a lot of physical retailers to handle. Brett and I were talking about it today. We were talking about that shrink factor. I think Target mentioned that they were losing 500 million,

a shrink attributed to like 500 million dollar subtraction of off their profits be a lot harder to steal from amazon uh shelves there is the yeah there is the package theft at the front door but that's an easier problem i think to solve and it's at least someone that you know if that happens to you you can kind of well buckle down that the consumer the the customer solves that one over time. You mentioned the executive team. Like with Amazon in 2022, across the board, there was a narrative of negativity around this new management team. Just for context, Bezos, the founder, retired in 2021. Or yeah, he officially left in the summer of 2021, brought in Andy Jassy from AWS. And since then, they've gone through a bit of a troubling

time period from the the fundamental performance but i'm curious your thoughts on because you've even seen people say like we need to bring bezos back and stuff like that so what are your thoughts on that is this the right team why do you have confidence in this management team or even stuff like annie jess you can just stop talking on conference calls it's just it's all over the place right i think just in general any time to stop and performs like it did for five years right it was flat didn't went nowhere it also it was very down down a lot from all-time high you're just you're gonna get haters um i again part of it was i didn't think it was as bad as you know what a lot of haters and critics were saying look andy was um bezos's shadow right this is

someone that he picked has been with bezos from the really really early beginning right like he has experience not only with AWS, but he helped build out some of the early categories for e-commerce. And he was, I guess, asked to take a step back when they were rolling out this marketplace business, which is keeping customers in mind, bringing in other sellers to lower the prices or provide more assortment. it hurts your internal sales your 1pl business but ultimately that's how you do right by customers and so andy jesse watched his category get decimated but then also saw the so i think

he's been indoctrinated and he's been you know he's absorbed a lot from bezos and of course it means tbd you know how much shareholder value he will create for uh amazon shareholders and that's what he will ultimately be judged on um but i think he there's a lot of uh good um to say about him uh that i just felt wasn't getting enough discussion um i think he you know absolutely has continued to um manage uh amazon in um alignment to its know long-term culture and objectives you know focusing on the long term focusing on you know the customer value prop so i really don't think he's as bad and but to some extent it's tbd to be determined how how good of a executive he is um i i do think you know i i wouldn't be you know

advocating to you know take him um you know off uh take him take the position away from him i I think he's doing a fine job so far. I don't know if you saw, but about a month ago, maybe two months ago, Jeff Bezos bought one share of Amazon, the Form 4. Do you have any speculation? Do you think it was a signal? Do you think he was telling us something? I have no idea.

I feel like you just clicked the wrong button on accidently. what was he doing even doing on on on uh his brokerage account i have no idea yeah it is maybe it was just to get people just to get people to speculate just because he could maybe right when he's bored yeah he's bored on the yacht he's bored on the yacht yeah oh man how do you go about doing valuation work for amazon um i guess not as cheap as it was six months ago obviously the stock's up a little bit um maybe two-part question here how do you value it do value it in parts and then what do you think of the valuation today yeah so today um it's what 600 some billion next year and it's sales it's trading a little bit over two times

sales um i i don't think it's crazy expensive right if you look at it uh you know on normalized uh margins right like what will margins look like in five years when these higher margin businesses are 75 80 percent of the business when one pl is you know 20 percent um and you know what kind of scale have they achieved you know greater scale have they achieved in five years right like if those businesses if a lot of these businesses are 20 percent generally 20 margins today are they at 25 in five years so it it could be trading around 10 times uh normalized ebit right for a business that probably continues to compound and have some um margin expansion opportunities right compound sales at a 10 percent uh rate like i think advertising is an area that i'm very excited

about um i think they have phenomenal data right like everything everyone talks about roku or nielsen right like the fire stick like they know what all of us are watching right across all different streaming platforms not just what's on amazon right they know what you're watching on netflix etc and it's just so much better data than nielsen and then they're combining that with with everything that their prime members are buying, right? Like Roku doesn't have access to that. It's what Meta and TikTok are trying to build out, right? That's another group to talk about potentially.

And so now, you know, they're combining all this and they have your credit card information and they can go out and buy some demographic data. And now they're, you know, selling that, you know, they're enabling ad buyers to access that in a clean room. So I really feel, I really believe that Amazon can grab a lot of CTV, sorry, a lot of linear TV ad dollars. You know, that's a $200 billion global market. There's even the potential that they take share from, say, social, social networks, right?

So, you know, that's a business that I think can grow significantly above 10% for a very long time, right? maybe even 15 20 and so you know there's there's a lot of things to be optimistic about it i think there's just there's a lot of long tail like you know upside um hard to pinpoint exactly what all these things will grow uh but it just it doesn't seem expensive at you know a little bit over two times sales i believe yeah not a lot of people think about the advertising segment and if I'm not mistaken, it's the third largest advertising business in the US. I've heard those estimates before. I guess one question here, how do you think about some of the potentially wasteful spend? Amazon certainly has lots of different initiatives. Some of those have worked

out. Some of those certainly have not. And some of those are kind of in limbo. So I guess, do you think about them today yeah one one area that i think they get unfairly ticked on is actually kyber um the the satellite uh initiative and look it's obviously tbt uh but if you look at the united states i think there's something like 20 million so i think 20 of uh americans are on dsl which in my opinion is absolute crap compared to yeah that's absurd yeah yeah right it's like 10 megabits per second like i'm on 400 and um you know so there's also another i think five to ten percent who don't have access to internet right so if you look at like satellite tv i think direct tv is something like 13 million subscribers dish is somewhere around seven so like you're talking

about you know north america right i've talked to satellite folks who say london is not so dissimilar right like you go an hour outside london and there's a lot of people who don't have good access to internet right i think that is the case in many european countries as well so you know even you know going you know just putting the the huge african or latin opportunity aside right like in developed markets there's a lot of people who don't have access to great internet and you know amazon with you know the fire stick and you know all the devices they make right also the chips right they've been making graviton since like 18 um multiple generations of that um and there's also the tranium and differential chips like they have a lot of

silicon experience which i think helps them with um the satellite business i think there's an inflection point in the satellite uh business you know we've had the physical mechanical satellites right the dish that you actually have to point and we're going towards a more silicon we're going going towards a silicon um antenna like esa right that uh is more like a chip than than a traditional satellite and and that will benefit from economies of scale right and from continued iteration just like like a chip improves uh an esa could directly improve over time especially as they gain scale So if you can offer an ESA antenna for $100 or $150 and also provide 50, 100 megabit per second downloads, and Starlink is selling their service for $75, it's discounted in some areas, in some places it's $100. If you can come to market and get to scale and you can offer that for 50, 60, 70 bucks, I think that could take a lot of market share from DSL users.

And so imagine Amazon is your internet provider, right? And they package that with Prime Video, right? All those TV shows that they have. It's one of the largest libraries, right? And then you package it with the prime membership, right? That's a way for them to incrementally grow share in a lot of these rural or, you know, outer, you know, kind of far away, maybe an hour away from big urban areas that I think is largely dominated by, you know, people driving 30, 40 minutes to go to Walmart.

And the only store you really have is a Dollar General or maybe a CVS. There's not much retail. So, it's an opportunity for them to create or penetrate in those areas of the developed worlds, but also to break into, do a better job in Latin America or other emerging markets. I think it could be, it feels a lot like what they're doing with Prime Video right now, which is to just go to market first with Prime Video and offer the content and then try to deepen those customer relationships longer term. So I think that there is a business case for Kuiper alone as an internet, right?

There's something like two, three billion people around the world who don't have access to internet, right? Like in Africa or LATAM, you probably need to sell internet for $20, $30 a month in order to get that penetration up. there's a massive opportunity right in those markets and even just look at the 20 or so million people in the united states who are probably able to pay 60 70 80 you add that all up together it's a massive i think it's a very large opportunity that people are overly negative on and i think they do have expertise in this area with um semiconductors and basil's just

making this like his passion project it's just all about those rockets and space travel and they also have a huge benefit relative to starlink with prime video and that whole um you know ecosystem that they're building yeah and if they give a nice little discount for prime members i mean that's a pretty darn good value proposition we did i don't think we'll have time to cover it on this episode but there is talk about them being one of the i forget the exact term for it but basically like a virtual provider of wireless services yeah yeah like hopping on either t mobile or whoever right that could be interesting as well um we we saw there's like they were debating on whether to offer it for free for prime members which that would be quite aggressive but

we'll see exactly what they they end up yeah yeah yeah exactly they subsidize so many things right So there is actual ballot criticism from, you know, in one area like Alexa. I don't know what you guys think, but it's more of a head scratcher how much they invest in that area. Two thumbs down. It's harder for me to argue against that one. I think they've lost a lot of money on that. I don't know what they're building towards. It's a little harder for me to see.

Yeah, the biggest risk to Amazon might be that this new AI quote-unquote revolution inspires them to spend $50 billion more on Alexa because it's just around the corner. But I want to talk about maybe some competitive risks and then we'll talk about maybe go through a pre-mortem. But I want to hit, this could be part of your pre-mortem, but you mentioned Timu earlier. It's a very unique situation.

It's coming out of China from Pinduoduo, or I guess they call themselves PDD Holdings now. But I mean, they've been super aggressive on marketing. It's number one in the app store across all their core markets. uh thoughts i guess in general on timu well wish wish was number one at 1.2 right so i think there's there is look timu you can't count them out you don't do all what i've seen in china you know they've done amazingly but there's also i think a lot of valid criticism you kind of get

what you pay for um and that's i think a sense that i get talking to folks who in china buy from kindle versus jd or alibaba it's a lot of lower quality items um and um you know if you go onto timu's app right and you search you know condoms you'll see like just you scroll down it's all like uh dildos it's it doesn't feel like um it feels like they have work to do on that platform um i don't think the search is you know on on timu is that great um even little things like you know you're trying to search a new item instead of highlighting and delete it just that doesn't work so um yes like i think there's there i think they're doing a very good job attacking the low end right now but it's there's kind of like a bifurcated market right like

Like, with consumers, you know, if you shop at Walmart, you may not shop at Target necessarily, right? It's kind of like you're either the Target or the Walmart crowd, right? Like, Costco members might shop at Costco and Target and Whole Foods, but, you know, they might not ever go to a dollar store. and of course there's some overlap but i think that right now um at least in the u.s e-commerce market with the average income of the average amazon shopper it's a lot more targeting costco versus you know uh walmart right and and so timu right now feels like more of a threat to um walmart um and of course that can change right in in china like you know that's kind of the position they have right and jd is on the high end with really great service

that's kind of like where amazon looks like today can they really cross over um right now i'm not so worried but of course things can change it's something to keep your eye on um a lot of the stuff that i find on timu it's you know if you if you want the branded version right on um amazon you're not going to necessarily find that on team like you know i'm not going to find bounty or mrs meyers um a lot of stuff that you know we buy you know charmin there's a lot of stuff that's not on there and um i think there's alternatives but they're like private label versus it sounds like a lot it sounds a lot like wish yeah i'll say i wouldn't trust uh i wouldn't trust buying condoms on team you i'm sorry i wouldn't trust even if you got the right search

results i wouldn't trust that but yeah yeah look i agree with you there i think there's a lot of stuff um you kind of get what you pay for like my wife recently she bought like these um microfiber i think they're made of cellulose it's kind of like a replacement for like bounty you can use it to like wipe your plates down and it has like a cool design the one she got amazon has a cool design right and it's it's cheaper on on timu um but it doesn't look like it's not something she would buy right just it's just one color uh the other one she bought you know has different patterns or or some sort of print so um i think it's they're targeting different you know demographics right now and that's it it's to some extent that's kind of

true in china as well right like if i talk to my in-laws you know they won't want to buy off of um uh right they for example my mother-in-law was telling me the apples that you get off of jingdong are just way better right and if you buy from timu it or sorry it's like it's it's like the the smaller apples that are not as good um and uh so i think that's a perception that Teemu is going to develop for itself in the United States. Just going back to my earlier point, Amazon is 10% of the retail market in the US. There's room for more than one player. Walmart is doing a phenomenal job on the low end with their customer base rolling out e-commerce. I think Teemu is more of a threat for Walmart than it is for Amazon. We just naturally

think of amazon um you know i think amazon customers just automatically go a lot of customers automatically go and they won't even check you know but if you do i think only in minority things you will actually buy and you know for for both companies i think they're just they're taking share from the retail the physical retailers who i think have a innovators dilemma to a large extent so you know it's um but but timu could take away um some of the upside for for amazon right like the whole you know pieces i had kuiper right might not play out exactly that way um if timu becomes a huge force and then they could right as we wrap things up let's talk a little pre-mortem what in your mind are you looking for that would cause

amazon to be an underperforming investment going forward um yeah i think it's all about growth right uh ryan had that i think you guys had both at that point earlier but um building that capacity so i'm not so worried about the next couple years um with how things look now so i guess if you were to fast forward to five years what do things look right so one is if team mood does a lot better job than it is right now and then and they really attack the upper end of the market right they have you know for example maybe a lot of um sd louder or a lot of these cosmetic brands are on there that certainly could be the case something to keep an eye on um like what if i'm wrong about the innovator's dilemma with

physical retail right like costo seems to be stepping back from um e-commerce right like e-commerce sales that you know both costo and target seem to be pretty weak um if if they decide to you know just to compete and and sacrifice profit profits like you know that could hurt you know take away a lot of the upside which i think amazon needs to fill that spirit past um i think there's more concerns with with the cloud potentially you know i think that's a much more competitive market um microsoft you know i think their advantage is of course i think they They've done great with open AI. I think it remains to be seen how big of an advantage that is.

But I think Microsoft absolutely crushes it because they have such a huge sales force. And they have all these relationships with enterprise customers who are, to a large degree, the next wave of customers moving into the cloud. so you know amazon's been trying to compete more effectively by working with you know channel partners by working with sas companies um to sell into that right into that enterprise um segment you know they've been working on um you know improving their relationships or or or you know incentivizing system integrators to help them go after um But, but it's a very complicated cloud industry is a very complicated ecosystem, right? Like, right now, right within the video, like, partnering with, you know, snowflake, right? And, and only in areas where there's actually, you know, cloud provider, right in that region. But I think there's a lot more people competing in the cloud market than in e-commerce.

I think that's a much more complicated ecosystem to monitor. And while they have a lot of advantages, that's perhaps an area where growth could slow down. Maybe growth is not going to return to 20%, 25%. kager long term maybe growth is more like 10 15 percent right and so that's something that we might have to account for and that could hurt the irr here but i also don't think that there's so much downside right like this is still the market leader um i think they're making all the right moves um you know they're investing in custom silicon which is i think something that's it's strategic that there's a strategic reason to do that but like you know the

video is it's also starting to compete with all the cloud providers right like they are offering their own models you know they're starting to build you know surfer like you know servers you know and and you know it's like they're trying to compete with their biggest customers and you know their biggest customers are all moving towards custom silicon and so i think that that's a dynamic that you know we have to watch and remains to be seen how it all plays out right like you know i think from a from the cloud provider perspective they would love to cut out um you know nvidia who you know is trying to make all these ml ai models that they've been working on for decades they're

trying to essentially like arm the rebels or arm startups right like it just doesn't make strategic sense to you know help nvidia who is trying to help all your you know small small startup competitors so there are a lot of things i think monitor in the cloud industry i think e-commerce I'm less worried about ads. I think they have a very strong hand, but I think cloud is absolutely an area to keep our eye on, collective eye on. That could be one area. And that's why I think it's so important for them to retain the leaders who brought them so far, right, with the talent they have. And that's why I think they did go with Andy Jassy as the CEO and to bring, you know, talent back with, with Adam Slepsky.

Yeah. I think that's all the questions we have. I know Amazon is huge and it's hard to get to everything, but I think we touched all the bases or all the important ones, I guess for listeners that want to read more of your work, what are the best resources, best places to follow you? Yeah. I don't put too much out there. It tends to be, you know, my Twitter, which I don't post enough on. I think that's something I want to work on. uh considering putting out like a you know longer thought paper um it's here so i guess you know

you can i'll post on twitter if that's the case but um most of the time that i'm you know kind of more in the public you know uh i guess seen is in talks like this so you guys can check out my prior interview with you guys on on the joint um or uh you know i've shared a lot of the moi interviews that i've done on my website so you know pledge capital our pledge capital website so you can check that out there too but you can you're always uh free everyone's free to just you know drop me a message on twitter or linkedin perfect well we should throw a disclosure on this before we go uh brett and i are not financial advisors anything we say or discuss here on chit chat money is not formal advice or recommendation we are however general

partners at Arch Capital. So clients may, and in this case do have a position in the securities discussed in this podcast. So keep that in mind. Thank you all for listening and we'll see you all next time.