Investing Club Stock Profile: We like Amazon for the long haul but it's not without risk

Published Mon, Feb 7 20223:59 PM ESTUpdated Mon, Feb 7 20225:34 PM EST

Amazon (AMZN), a Charitable Trust holding since 2018, has been ahead of the pack in e-commerce and cloud computing for years — and thanks to incredible execution on behalf of management has forced the competition to follow or be left in the dust. Our investment in the company is predicated not only on the incredible business that it is today, and the understanding that the company's true profit generating potential is still being masked by an incredibly high level of investments in growth, but also on the many embedded "call options" (potential upside not currently being factored into our core investment thesis) its scale and cash flow has provided. E-commerce On the e-commerce front, Amazon commands an estimated more than 40% of the U.S. market, according to Statista, an incredible figure given the No. 2 online retailer, Walmart , holds roughly 7% market share. While e-commerce sales as a percentage of total U.S. retail sales pulled back since the heights of the Covid pandemic, there remains plenty of runway as online sales are estimated to represent about 13% of total retail sales. Given the delivery infrastructure is becoming more efficient by the day, we fully expect this share of e-commerce as a percentage of total retail to increase over time and for Amazon to be a primary beneficiary thanks to its own significant investments in Amazon Logistics (AMZL). Thanks to the incredible investments Amazon has made in its logistics network, we expect the company to remain a primary beneficiary of this future adoption. Regarding the logistics investments, we also believe Amazon will offer its network to third parties when excess capacity is available. Cloud Jumping over to Amazon Web Services (AWS), the profit and growth engine of the company, Amazon was ahead of the curve and continues to benefit from a seven-year head start on the competition. Like the e-commerce dynamic, AWS commands a roughly 32% share of the cloud computing market, materially ahead of runner up Microsoft's Azure at about 21% market share. Even more impressive, despite operating at a $71 billion revenue run rate as of the end of 2021, the platform is growing at about 40% annually. As data sets continue to grow, organizations invest more aggressively in digital infrastructure and more devices — both consumer and industrial — become "connected," we fully expect AWS to be a primary beneficiary, even if growth moderates given the incredible scale already attained. Advertising & Other Management recently broke out the company's advertising sales, informing investors that on top of dominant e-commerce and cloud positions, there is a roughly $40 billion advertising business growing at 33% annually. Investors should also be mindful that Amazon's cash flow has provided an incredible ability to invest in new areas of growth. For example, the company previously acquired PillPack, allowing it to roll pharmaceutical prescription deliveries into its logistics network. The company is ramping investments in original content, which along with the logistics investments makes an Amazon Prime subscription more valuable and allows the company to periodically increase the subscription fee, which it announced as part of its fourth-quarter earnings . Thinking about the brick-and-mortar opportunity, the technology we have seen implemented at Amazon Go locations, which allows customers to scan their phone on the way in, grab items off of a shelf and walk out with the bill charged to their Amazon account may one day be leveraged by third parties, providing Amazon with a new services revenue stream while reducing checkout friction for customers. Catalysts In addition to a Prime price hike, we will look for a moderation in the growth rate of fulfillment capacity-oriented investments this year, a cost that accounted for just under 30% of capital expenditures. This moderation should provide for enhanced profitability as we work through fiscal year 2022. The upcoming "Lord of the Rings" series represents another potential catalyst that may aid Prime subscription uptake. The easing of supply chain bottlenecks should provide for another catalyst as it will improve product availability. Lastly, the AMZL logistics buildout represents another tailwind for longer-term profitability as it will allow the company to reduce its reliance on third-party networks, a factor that weighed on margins during the fourth quarter. Risks Antitrust is a key risk for Amazon as regulators seek to grapple with mega-cap tech companies that, while not meeting the historic definition of a monopoly, have significant influence in the market and on competition due to their scale. Competition is another risk as Microsoft and Alphabet invest aggressively to gain cloud market share and traditional brick-and-mortar retailers have ramped up investments in their omnichannel e-commerce offerings. Another risk from a shorter-term investment perspective is that management will always sacrifice near-term profits for longer-term growth. While we as long-term investors like this mindset, it can make quarterly results volatile and difficult to forecast ahead of time. Wage inflation is also a risk as Amazon employs roughly 1 million workers in America alone, making it the second largest U.S. employer, behind Walmart. (Jim Cramer's Charitable Trust is long AMZN, WMT and MSFT. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

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