With increasing competition and a shifting business focus among other changes, Amazon (AMZN 1.97%) is simply not the stock it once was. In this Motley Fool Live segment from "The Rank," recorded on March 14, Fool.com contributors Jason Hall, Travis Hoium, and Danny Vena consider the headwinds currently facing Amazon and what investors can expect from the stock in the future.
Jason Hall: I think that Amazon is going to have to continue to make a lot of very large capital investments. That's going to weigh on its ability to grow its cash flows at the rates we see it. We all saw it, those of us that said this is way overvalued for years and years and years went from it was way overvalued to wow, obviously in this company's producing billions of dollars of free cash flow year. I don't think it's going to be able to grow that free cash flow at the same rates that we've seen because it's going to have to spend a lot of that and I think it's going to weigh on returns. That's why ranked it eight. What about you guys?
Travis Hoium: I want to take the first.
Jason Hall: Travis, go ahead.
Travis Hoium: Sorry, I'll take the first crack at this here. I fundamentally think that Amazon is not the same company that it was 10 years ago. I forget when I first got Prime, but it was over 10 years ago. There was this amazing new service. In the thesis was always that Amazon are customer-focused. Brian Stoffel did an interesting thread on this, maybe a year ago now, where he talked about how the focus didn't seem to be on customers anymore. It was on Amazon making money. In an interesting book called the Amazon Unbound by Brad Stone, who has now written a couple of books on Amazon came out last year. I listened to a really illuminating interview with him where he was talking about, as Amazon got bigger, this advertising business is really, I think a turning moment for them.
Jason Hall: I'm really glad you mentioned that because that's the big business, that it's bigger than YouTube. It's a big business.
Travis Hoium: But I think it's important to understand how their advertising business works. When you do a search on Amazon, Amazon isn't saying, what is the thing that Jason or Danny wants to buy?
Jason Hall: Who gave me the most money to put their product up on the [inaudible 05:11:51]
Travis Hoium: Who gave me the most money to put an ad on the top? Because the first 2, 3, 4 things you see when you search Amazon, those are sponsored ads. Basically what Amazon is doing is all those third-party merchants, which now is the majority of their revenues, these third-party merchants. Amazon doesn't own the inventory anymore. It's third-parties who are buying and selling, making pricing decisions, all that stuff. Amazon's taking a cut of their sales. They're taking a piece from warehousing and now they're also having to advertise to make it to the top of the list so you choose their products over somebody else. If you're a seller and your choices are, I control my own destiny with Shopify or Amazon controls my destiny. There's a lot of legacy companies that are going to stick with Amazon because Amazon is what they were built on.
Jason Hall: Well, its the same model that works in a supermarket, If you want your product at aisle level, you pay for that shelf space.
Travis Hoium: Correct. But there's more competition on the internet than there is in a supermarket. I think fundamentally that's going to be a headwind for them. Honestly, the reason that I dropped Amazon Prime is the experience just wasn't great. I wasn't finding great products. I know what I'm getting when I go to Target and now I can do pick up a Target. I can drive, drive by, swing in, don't even have to get out of my car. They'll put stuff in my trunk, and it's ready in two hours. That was always the thesis of Amazon, it'll be at your door maybe even today. I found that the wait times we're getting longer and longer, the selection was getting worse and worse. You can't find great brands. If you want like obscure item x, Amazon is absolutely the place to find it [laughs] but if you want like nice new shirt, it's probably not.
I just think there's a lot of headwinds coming in. That's the retail side of the business. AWS is still going to be a great business because there is a ton of companies locked into that, locked into them, they're still growing at a great rate. We'll talk about another company that's growing even faster on the Cloud side. But I just think there's a lot of headwinds facing Amazon's way, given their business model. What do you think, Danny?
Danny Vena: You guys have covered most of it. For me, the main reason I ranked it the way it is because I think the growth in cloud and in e-commerce is inevitably going to slow. I don't think it's going to stop, I don't think it's going to reverse, I don't think it's going to be horrible, but I do think that investors are going to rerate the stock based on the fact that the growth has just not going to be what we saw during the pandemic. It bumped up to 39 percent year-over-year revenue growth, now it's back down to about half that, which is what it was before the pandemic. I think that's a reasonable rate of growth for Amazon, and I don't think people are going to rate the stock as highly. I don't think that the stock price is going to grow as fast.
