Weekly Brief #36
The first $10 trillion company...OpenAI and Broadcom’s new AI chip, Google in-talks to acquire Wiz, Stellantis recalls 24,000 minivans, LATAM Airlines to list its share on the NYSE, Trump's run. mate.
Good morning investors 👋,
Happy Friday and welcome, or welcome back, to the 36th Weekly Brief.
This week was Trumped by none other: After being shot at 8 times speaking at a rally in Pennsylvania last week, with one bullet hitting and almost taking his ear off, former President Donald Trump was officially nominated as the Republican frontrunner for the US Presidential election this fall. That same night, he also finally picked his running mate.
Let’s get into it.
In this issue:
🛍️ Amazon: A $10 trillion stock?
👾 OpenAI and Broadcom’s new AI chip
🇺🇸 Trump picks his running mate
FEATURED STORY
🛍️ Amazon: A $10 trillion stock?
Oh, so you don’t believe me? You don’t believe Amazon can be a $10 trillion company? Well, great, neither do I… at least not anytime soon.
(In honour of Prime Day officially ending, I thought I’d write a brief analysis of Amazon and why I continue to believe it’s undervalued, even more so after this recent dip. PS: Prime Day 2024 is now in the history books, breaking records by selling over 315 million items.)
Business, growth and moat
Amazon, the company you know that sells you stuff you don’t need and delivers stuff you don’t need right to your front door, all at the cost of paying a monthly fee to buy that stuff you don’t need without paying for the delivery. Of course, the company is much more than that, but that’s what you probably know it for, right? That’s a dumbed-down and grammatically flawed way of putting things, but essentially, that’s Amazon’s main business. And when I say business, I mean revenue. Though, e-commerce sales are only one piece of the pie for Amazon.
Amazon’s revenue is broken down as follows (excluding ‘other’):
E-commerce Sales: 40.33%
(Self-explanatory.)
Third-Party Seller Services: 24.37%
Revenue from independent sellers listing their products on Amazon. Fulfillment by Amazon (FBA), merchant fees, and advertising among a few key revenue makers.
Amazon Web Services (AWS): 15.79%
Cloud computing services.
Amazon Advertising: 8.16%
(Self-explanatory.)
Subscription Services: 7.00%
Amazon Prime, Prime Video, Amazon Music, etc.
Physical Stores: 3.48%
Amazon Fresh and Amazon Go stores, Whole Foods, and all the physical retail stores a majority of my fellow Canadians have never been to.
Amazon has an amazing business(es), and when it comes to competitive advantage or moat, they don’t lack at all:
Holds a dominant market share in the global online retail market (>40% share).
Holds a dominant market share in the cloud computing market as the largest company in cloud with AWS (>33% share).
Third-largest advertising company, behind just Meta and Google.
Second-largest streaming service with Prime Video, just behind the one and only behemoth, Netflix.
Around 80% of Amazon’s revenue comes directly from markets where they control a dominant share (Amazon’s online stores and AWS). If that’s not an amazing moat, nothing is. Plus, Amazon has branded itself incredibly well as ‘the most affordable place to order everything from A-to-Z’ with free, fast delivery via a Prime subscription. Over 200 million people pay for Prime monthly, and because of all the successful branding and value for consumers, Amazon wields immense pricing power on that subscription.
Amazon is an amazing business, as you can (or maybe you can’t) see. It probably won’t reach a $10 trillion valuation in the near term, and no one can predict what valuation it will be at any term, but I can definitely see it becoming the world’s largest public company. Over their history, Amazon has sunk every dollar into reinvesting back into growing out infrastructure and improving the business. Buying more airplanes and delivery trucks, starting an ads business, and pumping money into growing AWS led to lower free cash flow and lower cash returned to shareholders at the time, but these infrastructure improvements and bets have paid off. And as Amazon matures away from their ‘drive all cash into funding future growth’ strategy, Amazon will now become a cash behemoth. (And that cash will fuel stock price growth over the long term.)
Amazon is the most developed company on earth. The supply chains, their delivery infrastructure, the many businesses they own, the many markets they control, and the many products they offer, paired with amazing brand power and brand recognition, I mean they just can’t be beat.
TL;DR: People want to buy things as a general rule, this will be forever, and they want to buy things at a cheap price. Amazon leads in this value perception and Prime adds to this perception greatly. Amazon has high brand recognition, and high pricing power on Prime operating with a wide-moat business that has controlling market share in online retail and cloud computing, with a massively growing ads business. As the e-commerce market grows, so will Amazon, and with their high-margin third-party seller services, and their massivly growing ads business, I can’t not see them being the most valuable company in the world in the near to distant future. I’m going to say by 2030.
Pristine fundamentals & valuation
Key metrics over the past 5 years:
Revenue growth: 19.80%
Earnings growth: 24.74% (23.49% per share)
Operating cash flow (OCF) growth (because free cash flow (FCF) isn’t reliable for a company that historically spent all its cash on R&D): 10-15% (couldn’t find exact number)
Key metrics projected for the next 5 years:
Revenue growth: 9.9%
Earnings growth: 21.7% (20.3% per share)
FCF (will be more reliable in 5 years): 15%
Using historical metrics, (based on OCF, because again, OCF is much more reliable today since Amazon has historically burned its cash on R&D) Amazon has historically traded at a OCF multiple of 27.17. It’s currently trading at a OCF multiple of 19.57. Based on historical metrics, Amazon is ~28% undervalued as of current metrics at the time of writing. Using a DCF analysis, with a 20% growth rate, 15% discount rate and a 45 terminal (P/FCF) multiple, I got to a fair value of $1.7 trillion, or a ~30% premium compared to the current market price at the time of writing. I’m more inclined to go for the historical metrics in this one, and I believe Amazon’s fair value is $210 per share.
FINANCE
👾 OpenAI and Broadcom’s new AI chip
OpenAI is in discussions with chip manufactures, mostly Broadcom, about developing a new AI chip, according to The Information. The company is exploring making its own AI chips to address the shortage of expensive GPUs (from Nvidia) used to develop models like ChatGPT, GPT-4, and DALL-E3.
OpenAI, who is backed by Microsoft, is even hiring former Google employees who developed Google’s AI chip, to help with this project. Bloomberg reported that CEO of OpenAI Sam Altman, plans to raise billions of dollars to set up semiconductor manufacturing with potential partners like Intel, TSMC, and Samsung, but most likely Broadcom.
✈️ LATAM Airlines to list its share on the NYSE
LATAM Airlines is preparing to list its shares on the New York Stock Exchange, with aims for a valuation of over $8 billion. (LATAM has the potential to raise over $533 million if these NYSE shares sell near their last close on the Chilean stock exchanges.) Goldman Sachs, Barclays, and J.P. Morgan are the global coordinators for the listing.
LATAM, which has a massive presence in South America, went bankrupt in 2020 due to the COVID-19 pandemic but came back from bankruptcy just two years later in 2022. Shareholders plan to sell 19 million American Depositary Shares (ADSs) under the symbol “LTM.”
BUSINESS
🤝 Google in-talks to acquire Wiz
This week, According to The Wall Street Journal, Google (or I guess Alphabet) started ‘advanced talks’ to acquire cybersecurity startup Wiz for about $23 billion, the largest aquistition in Google’s history if completed.
Wiz is headquartered in New York and founded in Israel, and provides cloud-based cybersecurity solutions to companies and generated $350 million in revenue in 2023. Wiz works with major cloud providers and numerous Fortune 100 companies. Neither Google or Wiz have commented on the potential deal.
🚙 Stellantis recalls 24,000 minivans
Stellantis is recalling about 24,000 Chrysler Pacifica plug-in hybrid minivans worldwide due to fire risks. The recall affects 2017-2021 models, including around 19,500 in the U.S. Stellantis is developing a software update to detect the problem and will replace the battery if necessary. The recall includes 3,000 vehicles in Canada and 1,700 elsewhere.
The J. Nicholas Vroomsday Counter is now at 7.244 million.
What is the vroomsday counter? Vroomsday is doomsday but for car recalls. The vroomsday counter is the total of all cars mentioned in recalls since the inception of the J. Nicholas newsletter.
🇺🇸 Trump picks his running mate
Meet JD Vance, a 39-year-old Ohio senator and political newcomer; Donald Trump’s running mate announced at the Republican National Convention this week. Vance grew up in poor household in Kentucky and Ohio, with a drug-addicted mother and absent father. His was first in the military before politics.
Vance aims to connect with Rust Belt voters (voters in the very northern part of the Southern United States), with a major focus on ‘the impact of jobs moving overseas and children being sent to war.’ He has transformed from a Trump critic to a blood and sweat supporter, and if things go well, he’ll be the next Vice President of the United States.
(Not many more interesting political stories I could find. This is about it.)
📚 Book of the Week
Note: I don’t recommend books that I haven’t read or that I would never read. The books I recommend are books I have already read or that I will eventually read.
Think Faster, Talk Smarter — Matt Abrahams
Book Description:
Many of us dread having to convey our ideas to others, often feeling ill-equipped, anxious, and awkward. Public speaking experts help by focusing on planned communication experiences such as slide presentations, pitches, or formal talks. Yet, most of our professional and personal communication occurs in spontaneous situations that creep up on us and all too often leave us flustered and stumbling for words. How can we rise to the occasion and shine when we’re put on the spot
In Think Faster, Talk Smarter, Stanford lecturer, podcast host, and communication expert Matt Abrahams provides tangible, actionable skills to help even the most anxious of speakers succeed when speaking spontaneously. Abrahams provides science-based strategies for managing anxiety, responding to the mood of the room, and making content concise, relevant, compelling, and memorable. Drawing on stories from his clients and students, he offers best practices for navigating Q&A sessions, shining in job interviews, providing effective feedback, making small talk, fixing faux pas, persuading others, and handling other impromptu speaking tasks.
Whether it’s a prospective client asking you an unexpected question during a meeting or all eyes turning to you at a dinner party, you’ll know how to navigate the situation like a pro and bring out your very best. Think Faster, Talk Smarter is an accessible guide to communication that will help you master new techniques in no time.
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— Jacob