Motley Fool Money - Amazon Joins the $2 Trillion Club

Episode Date: June 27, 2024

Welcome to the stock market in 2024. When we recorded today’s show, Chewy was up about 60% for the month. By the time we wrote the description, Roaring Kitty had posted a picture of a dog and the stock was briefly up more than 80% on the month. (00:21) Ricky Mulvey and Tim Beyers discuss what’s behind Chewy’s surge, Amazon’s new retail plan and journey to being a multi-trillion-dollar company. Then, William Cohan from Puck (16:13) joins Ricky to discuss his reporting on Paramount and future after it turned down a buyout deal from Skydance Media. Companies discussed: CHWY, AMZN, PARA Check out Puck’s newsletters: https://puck.news/newsletters/ Host: Ricky Mulvey Guests: Tim Beyers, William Cohan Producer: Dylan Lewis Engineers: Dan Boyd, Tim Sparks Public.com disclosure: A High-Yield Cash Account is a secondary brokerage account with Public Investing, member FINRA/SIPC. Funds from this account are automatically deposited into partner banks where they earn a variable interest and are eligible for FDIC insurance. Neither Public Investing nor any of its affiliates is a bank. US only. Learn more at public.com/disclosures/high-yield-account Learn more about your ad choices. Visit megaphone.fm/adchoices

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got 60% more valuable over just the last month. You're listening to Motley Full Money. I'm Ricky Mulvey, joined today by Tim Byers. Tim, how are we doing? Fully caffeinated, ready to go. And we got some stories that you are ready to go on. One of them is a fully caffeinated pet retailer in Chewy. It's up by about two-thirds since literally May.

Tim, I am seeing no news on this. I am holding on to my Chewy stock, and I'm wondering what the heck is going on. I mean, did everyone just get bullish on vet care clinics or the international expansion? What is going on with Chewy right now? Well, it's probably a short squeeze. And that will define what that means. But let's talk about what happened when there was an impressive earnings report in May.

I'm going to make sure I have my facts straight here. I want to give you this to you, Ricky, the exact date. So, it was May 29th, I believe. 29th, yes, May 29th. May 29th, 24. So the average volume of trading in Chewy stock was under 10 million shares on a given day. On May 29th, it was 66.6 million. Ricky, that is outrageous.

And some of that has to do with an extraordinary amount of buying. This is what happens when you see institutions, funds pour a bunch of money into a stock at one time. So a lot of that initial surge was due to just money flooding into the stock on good news from the earnings report. And since then, the short interest in Chewy has drawn down dramatically. But you may want to talk about what a short squeeze means here. Let's do it. Okay. Well, then the idea here is there was a fair amount of short interest.

It was over 5% of the shares outstanding. It's closer to 5.5. Now it's down to 4.5. And so the net effect of what happened here is you'd almost think of it as the tide coming out a little bit. So lots of institutions that said, you know what? I believe that this stock is going to fall. And so they'd taken short positions.

And so they had borrowed stock on the belief that it would go down so that when they want to close their position, they buy it back at a lower price and they take the difference. They take the profit that they've earned. So that's short selling in a nutshell. What ends up happening is Chewy reports an extraordinarily good quarter and a big, fat, planned share buyback, also good for existing shareholders. And that leads institutions to say, oh, oh, hang on, this stock is not going to go down. These were better results than we thought they were going to be.

And so what ends up happening is they close those positions. So remember, they borrowed the shares. If they want to close the position, they got to buy it back. So then you get a flood of buying all at one time. And everybody is racing to exit the position. That is the squeeze. and that's what leads to, on a given day, a stock that trades for much lower volume, suddenly is trading for over six times the volume.

So, yeah, I mean, the prevailing wisdom on where Chewy is has sort of changed. The Windsor are blowing a little friendlier. So what should investors do during a short squeeze? You know, you said there's a lot of forced buying. Sometimes it's if you have someone that has to buy the thing that you own, you can get a pretty good price for it because they have to buy it. Sure. I prefer and I am a shareholder. I prefer to, you know, when everything is going bonkers around you, I prefer to let the bonkers people go bonkers while I can sit and drink my coffee and let those people do their bonkers things while I just sip and enjoy. I think nothing is an underrated move, particularly when everybody is running around screaming about things happening. And any mindset advice, because it's not just going to happen with Chewy.

We saw it. We've seen it with a lot of stocks this year where they're just whipping upward or downward. I mean, even in the past few years, what's become what I would describe as a more violent market. Like, how does a rule-breaking investor handle this? It's a great question because you will see these movements. And especially if you're a newer investor and you're not used to this, you might feel like the market is telling you something. This is where, from a mindset perspective,

you have to get used to this idea, Ricky, that violent moves in the market are, telling you something important. What, Ed? So here's the judo throw in your mind. What if this is not even remotely important? Like that is the question you have to start asking if you're gonna get used to this because I will tell you,

there's many times where a violent move in the market is not even remotely important, and it's just, driven by just cash suddenly moving into a stock for reasons that are technical or are driven by something like a short squeeze or an error or a weird news report. It's very often that these violent swings are telling you absolutely zero. So if you can kind of judo throw these violent swings, and say like, you know what, this is probably nothing.

And then 48 hours later, you can come back to it, look and see what's happening, look and see if there's anything actually material happening. And you'll know if it's material if a company has filed what's called an 8K. You know, they've come out with something and said like, hey, you know what, we had to sharply reduce guidance because something in our business. business is compromised. But in lieu of that, it's probably nothing. So yeah. I'm going to channel my inner Stephen Seagal during his martial arts demonstrations. Yes. Let's move to Amazon. There's a couple stories out about Amazon, one of which is that Amazon is planning to launch a service focused on

cheap clothing and household goods. This is reported by the information, essentially selling directly from warehouses in China. This seems to be in direct response to pressure from Timu and Shine. Or Shane, what do you think of this? This feels like sound and fury signifying nothing. It feels like just the sort of thing that it's a checkbox move. Ricky, I call these things a checkbox move. Amazon feels like it has to do this. It feels like it has to offer the option. Is it value generating or? or value accretive for Amazon. So as an investor, that's what I want to know. Is it value accretive such that Amazon is a more valuable company by virtue of this deal? My argument would be probably

not. And if it is, then I'm not going to find out about that probably for at least six months. So I am not buying that this is significant. Well, we'll see. I think there may be some risk, especially if they're, you know, they're showing these mock-up storefronts of facial massaging tools, mugs, phone cases, and the companies that they're trying to compete with have quality issues, often with the things they send. So I think to your point is, you know, there is a case this could be value destructive to the retail business of Amazon. No question. I mean, and so are you importing, here's something. Are you angering existing partners? who are using your platform to sell their goods by you introducing a Chinese competitor who's

selling for like half the price, but with a lower quality product? I mean, that is a potential danger here. But more importantly, what if you are importing product that has safety concerns? Does that have any legal liability attached to it? I think you're right that the odds of this being more value destructive than it is value creating are greater. And to me, it's probably a net even. Like, there's nothing really happening here. Again, sound and fury signifying nothing. But I think the odds of it being more value destroying are greater. So speaking of value of creative, yesterday, Amazon joined the two

trillion dollar club. It's up there with a lot of those big tech giants. You know who they are. Nvidia, Apple, Microsoft. Any reflections on this milestone of now Amazon having a couple trillion dollars under its market cap belt? You know, I'm going to use the David Gardner test here. This is something that he introduced with the Market Cap Game Show, where we would guess the market caps of different companies. And I am notoriously bad at that game, as frequent listeners of the RBI podcast will testify to. But here's the thing. The indicator that David would often use is if the guess was too high for the market

cap, that's a signal. And so I have to tell you, Ricky, I'm surprised that Amazon wasn't already in the $2 trillion club. That's my reflection. I thought it was already there. I'm surprised that it wasn't there. I feel like I should have known that it wasn't there, but I don't pay that much close attention to market caps. So I'm surprised that it wasn't already bigger, which says something about

the market power of Amazon. Well, you probably know the retail side. And I'm not talking to you, Tim. I'm talking to you, the listener. You're very familiar with the retail side. You may be less familiar or have less interaction with Amazon Web Services, the cloud division. How important is this part of the business to Amazon being a multi-trillion dollar company now? Let me give you some numbers. This is over the trailing 12 months, $94.4 billion in revenue for Amazon Web Services. So let's call that under 20% of the business. I think in the latest quarter it was 17% of the business. 28.9 billion over the same period, 28.9 billion in operating profit. That is 61%. Sixty-one percent. Sixty-one percent.

of Amazon's operating profit over that same period. It is vitally, vitally important to this business. So I almost argue that it is the business. So here's a way to think about the value of AWS. Let's say because AWS's earnings before interest in taxes, which is a rough approximation of operating profit, over the last five years on an average basis has grown over 25 percent annualized. So let's say, we apply to 25x multiple to those operating profits. That's roughly a $750 billion company on one unit. That's one unit, just AWS. So another way to think about it is if AWS is responsible for 61% of operating profit, should it be responsible for 61% or over half of the market cap? In other words, should it be valued at at least a trillion or maybe 1.2 trillion?

I would argue, Ricky, that the majority of value in Amazon today is due to AWS. It is the economic driver. And I know this is a retail business, but in terms of what allows Amazon to take things that are its expenses, its infrastructure, that's its expenses to serve that e-commerce business, and turn it into operating profit, that's the business. That's the genius of Amazon. And then looking ahead, you have AWS in the AI plan, which for Amazon is basically having the AI models run on Amazon Web Services. Companies pay for that, creating some business-focused products like they got a chatbot that can do some coding,

copywriting, co-piloting for you. It's called Q. It's also puts billions of dollars in Anthropic, which makes the foundation models for large language models. And also making some AI chips. Hey, it's also a fabulous semiconductor company. Hey, I think Nvidia does that too. You think Amazon's in a good place for the AI gold rush being in that picks and shovels area? What you're telling me is that Amazon is buzzword compliant? Is this what you're saying here? Is it more than buzzword? Is it doing real stuff or is it buzzword compliant?

It is buzzword compliant. It's doing real stuff as well. I think really what's going on here is that Amazon is building out some tools to make itself more efficient. I don't think we're going to look to AWS. as a provider of the world's great AI tools. However, I do think Amazon is going to be a massive and important consumer of AI for improving its underlying operations. I also think that includes silicon that helps it run

AI intensive workloads really fast and really efficiently. It doesn't surprise me that they're going to build their own AI chips, some of their own software. I mean, they've been building their own chips and servers for years. So that isn't really news. I love that they're trying to get a bit of a, you know, AI buzzword boost in their stock price here. But this doesn't feel very new. But you know what? I am going to suspend my disbelief and try to give Q a try. Maybe there's something there. He's caffeinated and level-headed. Tim Byers, thanks for your time and your insight. Appreciate you being here. Thanks, Ricky.

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All right, up next, William Cohen, a financial journalist and a founding partner of Puck, joins me to discuss what's going on at Paramount Global. Now that the most viable offer to buy it out is off the table, Phil's been writing about the saga and his newsletter, Dry Powder. Paramount is in a mess over the past. few months, a trio of executives has replaced its singular CEO, Bob Backish. Four board members have announced that they are leaving the company, and at the same time, its controlling shareholder, Sherry Redstone, has been allegedly trying to sell the company. The deal that

seemed most likely to go through was an offer with Skydance Media, which produced in finance movies like Top Gun Maverick, last year's Transformers movie. It's run by David Ellison, which is Larry Ellison's son. It seemed like the pieces were in place for this deal to go through, and then it was kind of just taken off the table by Redstone. I guess it's a fundamental question, Bill, does Sherry Redstone want to sell Paramount? I mean, I think that she does. I think she, I mean, she's sort of torn, too, because on the one hand, I think she likes going to the Allen and company conference. She likes being able to say that she owns CBS. and owns Paramount Studio and, you know, owns MTV or, you know, Comedy Central.

So I think she likes all of that, but I think she's also clinical about it. She understands that Paramount is a bit player at this point in the whole big media ballgame and that she's also probably understands on some level that she has squandered the family fortune and that if there's any hope to provide for her and her children and the beneficiaries of the family trust, that she's going to have to monetize this 77% voting stake in Paramount Global. So, as I say, I think to some extent she likes being able to say she owns these assets, but on the other hand, she knows that she's not been the greatest steward of them and that she's going to have to sell it to monetize.

It seems a common theme of the Paramount story is the company not selling assets when there have been deals on the table, which now previously seem like good deals. And the one from Skydance was a little bit complicated, but it got to a place where essentially Redstone would sell the controlling company national amusements for a couple billion in cash. And the non-voting shares, which was one of the big arguments, would, be bought at a premium. Skydance was also going to inject a billion and a half into Paramount's balance sheet, which has a lot of debt on it, kind of bleeding the company, if you will. So it seems

like there was negotiation on both sides. It got to a place that seemed viable. What killed the deal? Yeah, I mean, I think I agree with you completely. I mean, it was a creative but complicated deal. I thought it was clever. They were going to bring in new management. They had sort of a new business plan. They were going to, you know, sort of inject some excitement and enthusiasm into the company, which has sort of been badly needing something like that. You know, so what killed it? First of all, that, the killing of it happened literally at the, you know, 11th hour. In fact, the special committee of the board thought they were meeting to approve the deal. And then the call came from Sherry saying that she was killing it, which she can do,

of course, in unilaterally without explanation. So I don't think she necessarily has explained it. What I've been able to sort of glean from my reporting is that, you know, there were a number of things. I think as we were talking about before, you know, she and David Ellison has stopped talking, you know, in the last few weeks before this, which is never a good sign. I think she was a little peeved that, you know, through the course of, the transaction, the special committee, which was formed to represent the interests of the non-voting

shareholders, to sweeten the deal for them, which basically had nothing in it to begin with. The consideration was coming out of Sherry's hide, and I don't think she liked that, because obviously, to begin with, she probably feels like she's not getting what she hoped she would get for her stake. And certainly, it's a lot less than the family's fortune used to be. So she didn't like that. I think she was also concerned and rightly so about shareholder lawsuits and wanted there to be some sort of vote, even a non-binding vote, to sort of hopefully ratify the deal with David Ellison. And, you know, Ellison and Redbird Capital didn't want to do that, which I also understand. And they also,

She also wanted them to provide some sort of indemnity to her for these lawsuits that were going to be inevitable because she was going to get so much more consideration than the rest of the shareholders. So that was more than likely to lead to shareholder lawsuits. And I can understand they wouldn't want to do that either. So I think it just sort of seemed surprisingly doomed by that point in the transaction. So what had started out, fairly promising, although complicated, and the special committee did a lot of negotiating to get more out of David Ellison and Redbird than they thought they would. They had offered originally. It just sort of, there was sort of a separate negotiation going on with Sherry at NAA that the special committee wasn't really privy to, you know, involving the NIA acquisition. and so it kind of blindsided everybody at that last moment there when the special committee

thought they were about to approve the deal. Let's talk about, I mean, Skydance and Paramount, they work on producing movies together. Top Gun Maverick mentioned earlier. I would imagine that there's some tension now between David Ellison and Sherry Redstone. You know, what does this mean for Paramount's movie business moving forward if these two may not be working together on this deal? Do they go back to business as usual? Look, I think that there's definitely a difference, generally speaking, between sort of deal heat and deal dynamics and just sort of day-to-day business dealings.

So, you know, it's probably too early to tell if this is going to damage the relationship between Skydance and Paramount. You know, I suspect it won't. I think everybody's smart enough to, you know, figure that out. And I doubt Sherry is involved as green lighting movies at Paramount. I think there has been some fallout already, you know, from Paramount's predicament generally, you know, as you mentioned at the top, you know, the firing of Bob Back is the bringing on of the three co-CEOs, the board members leaving. There's been, you know, the fact that the company was for sale for six months and then nothing happens and the company is sort of struggling financially as well and has a lot

of debt. I think a lot of talent has left. I think this failed. MNA process or this part of the failed M&A process. I'm not, I don't think it's quite over yet. I mean, there's still other potential parties who might be able to pull something off. But I think this has really hurt morale throughout the companies. On Tuesday, there was a, you know, town hall. And from what I'm told, you know, where the three co-CEOs announced that they'd hired bankers to sell assets. There were going to be more cuts. My sense from talking to people who attended employees was that morale is not great and people are kind of scared and still wondering what the heck is going to happen here. So, you know, the failed M&A process is definitely

not good for the rank and file at a company and the morale of the company and people's spirits. So I don't know whether these three guys who on Wall Street are referred to as the pep boys, Manny Moe and Jack, can pull this off and make people feel better about being at Paramount Global, but that's a big part of the job they have in front of them, especially if the company doesn't get sold. It's tough to make people feel better when you're also explaining how you're going to cut a lot of jobs in the meantime. Where can Paramount go from here? There's a potential deal from Sony and Apollo. it seems to be unable over the next few years to continue with just business as usual,

is it's losing a lot of money. Yes, I mean, the streaming Paramount Plus is losing a lot of money about a billion seven last year. You know, the linear TV business is still making a lot of money, but it's, you know, less revenue, less profit than it used to be. They're, you know, parts of the company that have been for sale and probably are struggling as well, whether that's BET or Showtime. So, you know, it's, this is an unfortunate situation for a company and its employees, and it's a very, you know, company with a very proud and long history, too. I mean, CBS used to be known as the Tiffany Network. I mean, so this is a company with a very proud and important journalistic history. And now we're kind of down to 60 minutes, Face the Nation and CBS Sunday morning, as far as that's concerned. And, you know, that's just not a problem. place you want to be. And furthermore, as we also alluded to, you know, it's really kind of a minnow

in this world of huge white sharks at the moment that are much bigger, much better capitalized, have many more resources than Paramount Global. And I think it's inevitable that Sherry's going to have to sell this thing. I mean, she has to. I mean, I don't know any other way for her to get out of it and get liquidity for her and her family. So, I mean, I thought that that was what was going to happen here. It looked like that's what was going to happen. At the 11th hour, she pulls the football away. So that's kind of a big bummer. And, you know, there's sort of been leaks about Edgar Bronfman. Obviously, Sony and Apollo is around, you know, this is exactly the kind of deal dynamic that Sony, that Apollo loves and is put on this earth to exploit. So I would not

count Sony and Apollo out, although there are major league regulatory issues, I think, regarding their potentially owning these assets. And, you know, obviously, Sherry's not going to make nearly as much money by selling to Sony and Apollo because they're not even going to buy any I. They're going to buy, you know, their offer would be for Paramount Global itself. So she would yet the same as everybody else, which is good news on the shareholder lawsuit front, but it's going to mean a lot less money for her. And so she must have known that. I don't understand why. I mean, unless she thinks that Edgar Bronfman Jr. and Bain Capital are somehow going to pay her $2.5 billion for N.A.I., which I absolutely don't get because I don't see how somebody

just steps into her shoes without having a plan. At least David Ellison and Jerry Cardinale at Redbird Capital had a plan. and it was clever and it was creative and it was interesting. It was kind of exciting. You know, Edgar Bronfman Jr. and bank capital, just buying N.A.I. and becoming the new Sherry Redstone and keeping the Mani Moe and Jack in place and not doing, I don't get it. I don't understand how you can get a return if you're bank capital putting up all that money. So I don't really see that, frankly. I think that's just a way to try to keep to let Sony and Apollo know that there might be other bidders. I think that's a big head fake, but we'll have to wait and see. The deal dynamics are very

good for Apollo. I'd expect them to take advantage of this at some point soon, and I think the special committee is still impaneled and can still act on behalf of shareholders, but it's going to be up to Sherry. And once again, she and her unilateral right can just nix it if she wants to, or green lighted if she wants to. So maybe we'll have to wait until after the Allen and Company conference when she's made the rounds and everybody can see her hobnobbing with the rest of the big shots from Hollywood. Maybe she'll feel a little bit better about things.

Maybe something will come out of there because occasionally things do spring out of the Allen and Company conference, not lately, but in the past. So maybe she'll be feeling better about herself and her status in Hollywood. And we'll go forward with the deal that she... should have done long ago, to be honest. Seems like a tough story for investors to play arbitrage games with. Anyway, Bill, I'm a big fan. The arbitrage got burned when she pulled the plug on the Ellison deal.

Bill, I really appreciate the work that you and Matt Bellany have done on this story in particular. And thanks for joining us again on Motley Full Money. Sure. Thank you, Ricky. Appreciate it. I'll throw a link to Puck's newsletters in the show notes. They are excellent. I subscribe to several of them.

As always, people on the program, may have interests in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.