Amazon Enters AI Race

JD Durkin: All right. All right, folks. Let's do it. A very cool topic on a very timely day for it and well, we're joined by Mark Mahaney, Senior Managing Director at Evercore ISI, the research division to talk all things Amazon and like I said, what a day for it. Amazon entering the generative AI race through AWS with the introduction of bedrock you may have seen in the headlines the last few hours. It's set to allow clients to leverage and customize AI tools to generate text similar to the way the Chat GPT does. And Mark Mahaney is here who else better to talk about it. We'll also talk a little bit of tech preview as well ahead of earnings season. Mark, thanks for being here. Nice to have you.

Mark Mahaney: Good to be here. Thanks for including me.

JD Durkin: Absolutely. I do need to embarrass you just a bit with a plug. For people who don't know, Mark is also the author of a new book – it’s called “Nothing But Net: 10 Timeless Stock-Picking Lessons from One of Wall Street’s Top Tech Analysts,” and we are doing book giveaways here at Public. So, if you want to get your hands on a copy, just send a DM to the Public live handle. Okay, Mark, thank you for being here. First, congrats on the book, I first want to just get your takeaway for the shareholder letter. It's always nice to hear from Andy Jassy. What most stood out to you?

Mark Mahaney: What most stood out is that, like every year, this is kind of a thoughtful review of what's happened to the company over the last year and what their current priorities are for the next year – I know that sounds really basic. I think all CEOs should write shareholders like this. In the book I went through the first 25 first years of the Bezos shareholder letters, and I pulled out key themes from each year. There was a dramatic focus on customer satisfaction and a dramatic focus on innovation – and you kind of still see that here today. But, if there were a couple of new themes that really stuck out, cost – focused on cost efficiencies, and there's a series of items in this letter about how they looked at all of their businesses, whether it was AWS, retail, both international and in the US, their advertising business, the layoffs and just kind of a recognition that demand trends have softened, and they needed to tighten their belts. And so that was one – that was new. I mean, I think you would have seen this in 08-09, you know, back during the great financial crisis, but we haven't had a shareholder letter focus on cost reductions and cost efficiency, so it's a sign of the times. 

And then I think the second area had to do with innovations in each of the segments. So, in retail, they have sped up deliveries and they talked about Prime deliveries should be at their fastest pace this year like if you're ordering Amazon retail products via Prime, you should get the product faster this year to your home, to your apartment, wherever than you did in the past, that's a good investment. They also tease some of these improvements that you also teased on the AWS side. 

And then the third point is just a reminder that Amazon's actually been aggressively investing in machine learning and artificial intelligence, you know, for the better part of a decade, and it's in there in terms of the product announcements, the the product feed, or the recommendations that they've given, and it's been in there in terms of the AWS products, the bedrock announcement is a little different. But you know, it's a different level, it’s different scale, but the investments have been there – and so I think they kind of also wanted to use a shareholder letter, Andy did, just to kind of raise his hand and say, “Hey, I know we didn't talk about the last earnings call, but we actually are a machine learning and AI company and by the way, we have been for a decade.” So I thought those were the three most interesting things in the shareholder letter.

JD Durkin: Yeah, we also heard him on that last earnings call as well, which I think all of us that listen in on those sorts of things, we want to hear from someone in that position. We haven't historically, and we don't always from big companies. So that's worth noting as well. I wonder, before we move on, was there anything with regards to macro concerns to how the company is positioned for high interest rates? I don't know that we would hear much directly with concerns over tightening credit or potential credit crunch like we do a lot of other companies, but anything you think, for people to know, in terms of potential way, big picture headwinds for the company?

Mark Mahaney: I don't think so. The line in here that I'm staring at now is, “While the short term headwinds soften our growth rate, we'd like a lot of funnels now fundamentals that we're seeing at AWS.” So they're acknowledging the short term headwinds, right up front, and they should, because you know, if you step back on AWS, this was a 30% year-over-year revenue grower up until the middle of last year, and now in this March quarter that they're going to print in two to three weeks, the dates not set yet, they're going to print something like 12 13%, like the growth rates have been cut in half in in a year's time, that's always something that's a little bit alarming, and for any company, but I think it's very much a reflection of softening macro environment. And then what Amazon is doing, or AWS is doing to respond to that, which is they're aggressively going after and bringing down pricing in order to help their customers.

JD Durkin: So you mentioned, it seems as if the company was pretty eager to remind people to say, hey, we're still here in the AI conversation, folks who really haven't gotten anywhere, obviously, much of the chatter may sort of be dominated by other names in the space. But talk to me more about what we learned about bedrock specifically, and any other thoughts, Mark that you have, as they look to integrate it into its cloud offering, certainly a big priority for the company at a really important time.

Mark Mahaney: Well, unlike Microsoft, and Google, Amazon's not going to have a generative AI LLM – “Large Language Model” out there. But what they are doing is AWS’ bread and butter has always been selling to devs. What I mean by that is developers, the people who create the large language models, and so they're just that that's kind of what they're doing with bedrock, which is saying that they're rolling out more tools to help LLM developers GAI, that's Generative AI developers, build their models build their tools, that just reminding people that, you know, they, there are tools provider, that's where they're playing in this, this AI race, in addition to doing normal things like storage and compute for their customers. 

So I don't know if that's helpful or not, you're going to see them kind of in the weeds on generative AI and in the weeds on LLMS, allowing developers, creators to create and develop those models, rather than, you know, running the flashy front-end consumer service. So that's also why they'll probably be somewhat under-appreciated in terms of their AI competencies. I just think the broad point is, Amazon's fully involved in AI. They've been using it to improve their processes, they've been using artificial intelligence for everything from book selections to you to where in a warehouse where they actually put products so that they can most quickly have people or robots pick up those products and put them in packages and ship them off to you. And then they use it for advertising and they use that in AWS. So that's just a reminder, because I think maybe the market needed one.

JD Durkin: Yeah, well, to that point, do you think the company almost deserves more credit or deserves to be more a part of the active chat GPT AI adjacent conversation?

Mark Mahaney: Yes, they do. But you need to think about them as a company that’s already been investing in machine learning and AI for their core operations. And then when it comes to large language models, which is what Chat GPT is, they're the company – that’s who open AI will use. Actually, I don't know if they use AWS, but the other open AIs because there's a lot of other large language models and applications being built, they'll be built or a substantial percentage of them will be built on AWS. So AWS is kind of the tools vendor, the picks and shovels vendor, to the AI community, to the generative AI community. That's something that I think the market had kind of forgotten.

JD Durkin: Sure. Andy Jassy said this morning on Squawk he doesn't focus too closely on the company's stock price. What did data say – it's currently up 4.4%, with under two hours left in training here, you have an outperform rating, if I'm not mistaken, you recently lowered your own price target to 155 from 160. Again, with a bump today, it's trading right around 102. Talk to me about your decision to bid more, Mark, to drop that target and are you still finding yourself being positive for a long term case?

Mark Mahaney: Well, I can be near term cautious. I do think what he's saying in the shareholder letter, and he's warning people, is that trends are softening even at AWS. And, you know, the facts of the facts, we've had a dramatic deceleration and growth rate, you know, you go from 30% to 10% revenue growth in a year, year and a half. That's not healthy, that's not bullish. And I think that things are likely to get worse at AWS before they get better, but they will get better. And, and for long term investors, which is what I really pitch people to be on Amazon, I pitched that you'd think about Amazon in 2023, is what I would call a DHQ stock, that's the concept that's in my book a “Dislocated High Quality” stock. Another way to think about it is it's a trough multiple stock on trough earnings. And you know, it's cyclical. And as these companies get bigger and bigger, of course, they're more cyclical, you can't escape the economy if you become a bigger, bigger contributor to it. 

So what I think is so interesting about the setup on Amazon is, there may be a little disappointment about AWS results in the March quarter, or the June quarter guide, but we're going to get revenue growth acceleration as we go into ‘24, for their advertising, business, retail business, and for AWS, and you're going to get margin expansion and improvement and free cash flow. And I'm telling you all that when the stock is sitting here at a multi-year, multiple or trough multiple, a low multiple, and so that's, you know, that's the time when you step in, and you can make money, you may even be dealing with volatility over the next quarter. I don't know that there's a ton of downside volatility, but there'll be some. And I think if you're willing to look out a year, I think this is a great time to buy Amazon shares.

JD Durkin: I don't want to pull the conversation away from Amazon, but I'm hoping quickly, can you talk to us more about DHQs and any other household names people may be familiar with and why they fit that mold? 

Mark Mahaney: Google is another one I think that fits that DHQ category. The old saying in the market says buy low, sell high, and I'm kind of saying buy high low. So you know, find a high quality company measured, you know, the book goes through it, but measured on the how good the management team is, how good the level of product innovation is at the company, how large the market opportunities, find those high quality companies and just wait for them to get dislocated, because they all get dislocated because there are market rollovers. That's obviously what we faced in Texas last year. There are mis-executions, because no company is perfect and they’ll make mis-executions. And then when you get those pull backs in the stock, that's when you step in, but first find a high quality company and I'll just take my reputation as I have historically that Amazon is one of those I think Google is to and it seems to me like the fears, you know, the near term and long term fears are well overstated on both of these names. I think they're both very good franchises so those would be two. You know, you can buy at a multiple, you can buy Google and Amazon at about the cheapest multiples you've had a chance to buy at in the last five years. I don't think you're going to regret buying both of those stocks here as DHQ opportunities.

JD Durkin: I have all potential opportunities for Amazon, whether it's logistics, groceries, health care, talk to me about what you personally are most excited about. What do you think makes the most impact? Or is it something that maybe we haven't even yet discussed, Mark?

Mark Mahaney: Well, let me check off some items or count them out. People talking about what Amazon is doing in healthcare - that's always been a head scratcher for me. I'm just not convinced that – I think that's a huge market, but doesn't mean that Amazon should be going into it, so I'm skeptical about that. So I just want to start off with what I'm skeptical about. 

What I'm positive about is I think they can be a lot bigger and advertising now that they've just got a lot more content. All of their advertising, most of their advertising revenue so far has come from sponsored ads within their shopping results. But if they start putting advertisements against all of that premium content, video content that they have, I think that's a segment of the business that can double in the next five years, their advertising business. And then I want to get a little bit more blue sky, I talked about this, that logistics business, that buy with Prime. I mean, that's the FedEx competitor, that's the UPS competitor, and I'm pretty damn sure that Amazon's going after that, and it's tiny, tiny, tiny for them now, but I think that its low margin business, but Amazon knows how to handle its low margin businesses, I think that's going to be one. 

And then the last one I'd point to is business and industrial supplies. And I think what Amazon's vision here is to, is to connect the world's factories with the world's consumers, and, the world's factories with the world's businesses and people under-appreciate that latter one. And so it's industrial supplies, business supplies, look, Amazon's got the fulfillment network out there. They've got vans and people who deliver products to consumers, it's just a different stop. Now, there's a lot of other things that go into getting into procurement cycles for businesses. But I think that that's a big opportunity. I'm actually surprised they're not figuring that now. So that to me, is kind of one of the sleepers. So, the big sleepers for me are that, advertising and then that logistics business.

JD Durkin: Real quick, not the most important question I'm going to ask you, but what's your favorite show on Amazon Prime since you mentioned content? I ask the important stuff, Mark. I'm a very serious journalist, you know me.

Mark Mahaney: I think you've got me. I can tell you what my favorite books that I've been reading on Amazon Kindle. I'm not much of a movie person. You asked the wrong guy. I apologize. 

JD Durkin: No, no – fair enough. I didn't mean to put you on the spot. Lots of good book options as well. Let me ask you about earnings season, of course, right around the corner. In your last note or a recent note, rather, you say you are tactically constructive. Talk to us more about that line of thinking, what you would want people to know, and some of the key factors that are driving that particularly out there?

Mark Mahaney: Yeah, so we're making four points. One is that multiples have been de-risked. estimates have been de-risked. What we've had are all these job cuts, you know, cost actions, as painful as they are, over the last year, over the last six months really, these intense rounds of layoffs and, and cuts that's created what I call these EPS slingshot opportunities. This is the third reason why we're more tactically constructive – because when eventually revenue growth really accelerates it is going to do it on a lower cost base. So that means you're going to get a real launch, or slingshot when it comes to earnings. And then the fourth reason why we're tactically constructive, or really constructive is AI. I think there's a lot of opportunities for digitally savvy companies and I think there's a fair number of them in the internet space, to take advantage of AI models and really create something interesting. So I think there are these reasons and so then I'll just end up with what stocks do we like? Well, our number one pick here is meta. Number two pick is Uber. And number three pick is Netflix. Those are 2023 stock picks. If I'm willing to look longer than that, I'm definitely throwing Amazon and Google into the mix. 

JD Durkin: Nice. Sounds good. That's a great perspective from the great Mark Mahaney, senior Managing Director at Evercore ISI research division. Mark, I encourage you to check out at least a few shows on Amazon Prime. Good stuff there, my man. Thanks for taking the time. Great to get your perspective,Mark. Thanks. 

Mark Mahaney Thank you.

JD Durkin And a reminder to those of you listening at home, Mark of course is the author of the new book titled “Nothing But Net: 10 Timeless Stock-Picking Lessons from One of Wall Street’s Top Tech Analysts,” and is he ever. And as a reminder, we're doing book giveaways of Mark’s new book, so if you want to get your hands on a copy, send a DM to the Public live handle. Thanks for taking the time. Thanks to Mark of course. We'll see you next time here on Public.