Amazon – E-Commerce Is No Longer The Growth Titan

“And this commandment we have from Him: that he who loves God must love his brother also.”

1 John 4:21

For those familiar with the Old Testament God gave Moses and the Israelites the Ten Commandments as His law for them to live by. In addition to the Ten Commandments, there were many other ordinances and rules that the Israelites had to abide by. First John gives us an emphasis on one of the two commands that Jesus provided to sum up the laws and rules of the Old Testament. If I love God with all my heart, then I will equally love my brother; these two commands are inseparable.

For investing, there are similar structures, mechanisms, and strategies that can fall into a form of structure, just like a law, ordinance, or rule. What is the equivalent sum of the parts as the Gospel relationship to the Old Testament. It’s tough to connect, but I would link the need to recognize market elements that are out of an investor’s control (daily volatility and price moves) with an investor’s need to remain convicted to their investment style and strategies to optimize successful performance.

Amazon, Inc. (AMZN) is the largest e-commerce company in the world.  This is true based on both enterprise value and revenue. For those looking to China, gross merchandise volume, or GMV is where Taobao and Tmall outperform. But like many other Big-Tech peers, AMZN has a challenge as the e-commerce side of the business has now quickly become the slowest growing segment.

As can be seen, gross merchandise sales, or GMS (equivalent to GMV), have been on a tear that arguably was sustained by the pandemic’s inflationary consequences. As the dust has now settled, and inflation has finally subsided somewhat over the past three years, AMZN’s GMS has begun to substantially slow down.

Even during the pandemic, 1P GMS began to slow significantly by 2022, and without the inflation bump, 3P GMS is poised to follow suite. Today, GMS-generated revenue for AMZN (Online Stores, Physical Stores, and Third-Party Seller Services) still account for 66% of total net revenue. During 2016, this portion was at 84% equating to an average annualized 225 basis point decline. The past three years this as dropped towards 200 basis points on average.

The best performing segments aside from GMS-driven revenue streams have been Advertising Services, AWS, and Subscription Services. Combined, the non-AWS segments reflect 93% of AWS revenue. After peaking at over 100% during 2021, AWS has reaccelerated growth, and most recently, witnessed slowing at a lower rate.

Moving forward, AMZN is likely to continue to see GMS-driven revenue streams below 10% and even at the mid- to low single digits level, while non-GMS segments will continue to see double-digit revenue performance over the mid-term but may also show slowing. To date, even AMZN’s other revenue category that includes opportunistic areas like health care and shipping services, growth has fizzled.

Investors will want to heed AMZN’s average daily OCF/Share valuation multiple that has dropped substantially from pandemic peaks (2020-2022; 694 days; 30 times) and pre-pandemic levels (2002-2019; 4,531 days; 24 times) versus 2023 to date (2023-2025; 597 days; 16 times). The past 18 months have yielded all-time high OCF margins for AMZN too, so investors will want to consider the relative OCF/Share multiple based on OCF margin. Bottom line, AMZN’s growth potential irrespective of any future margin contraction isn’t going to be as robust over the mid-term as it has in the past.