Buying Amazon on turnaround in Retail Business

Given our concerns about AWS following the $SNOW commentary on cloud demand, we posted about selling our $AMZN long position which was a significant 5% of the portfolio & shorting it on May 25th to hedge our $META long position. $META was already up strongly for the year & we wanted a comparable large cap technology name to hedge the position. Since then (5/25-7/12), $AMZN is +14% vs META +22%. While our short position in $AMZN did underperform $META, Amazon’s stock was still better than the Nasdaq which was up 10% over this time.

We run a hedge fund which means we have longs and shorts so relative performance & sizing of the positions determines profits. However, I would put the $AMZN short in the mistake category. In hindsight we would have been better off keeping the long position that we bought post their Q1 earnings when Amazon’s stock declined on the further AWS slowdown in Q1 results. We bought it given our optimism on their retail business, their biggest segment, potentially having turned the corner, especially on profitability. Clearly Prime Day results would indicate that this turn around in retail is picking up momentum.

When long standing trends turn at large companies, they have a tendency of continuing. Total revenues at $AMZN were up 44% y/y during the peak of the pandemic in Q4 of 2021 & Q1 of 2022. It grew just 9% y/y in their most recent quarter. Their online stores revenue grew nearly 50% during its peak and was down slightly in their most recent quarter and has been down in 5 of the last 6 quarters. However, $AMZN sold more than 375M items (expectations of 325-350M) during its just completed Prime Day event versus just selling more than 300M last year. This implies an increase of around 25% y/y. Leveraging the infrastructure put in place to handle the surge in e-commerce demand during Covid should enable the expansion in retail profits to be the next big driver for the stock. As a result, we bought the stock today.

Amazon in their retail business has only 1% global market share and 85% of retail sales is still done in the physical world. We continue to see more sales moving online and Amazon continuing to be the biggest beneficiary.