Stefan Slowinski, Managing Director of Exane at BNP Paribas, joins us for a live show to discuss consumer spending trends and the outlook for Amazon as its stock surges.
video transcript
Dave Briggs: Amazon’s best days are yet to come, CEO Andy Jassy said in the company’s second annual shareholder letter. The stock surged on the letter, and after a tough 2022, he’s up nearly 20% this year. And while nearly all analysts are bullish on Amazon’s outlook, one is clearly bearish. BNP Paribas Managing Director Stefan Slowinski is now joining us as the stock has been underperforming. thank you. So what does it feel like to be an island man? why are you at amazon
Stephen Throwinski: Hello, thank you for being on the show today. See, we’ve been underperforming at Amazon for a little over a year. We were concerned that the market’s expectations of the significant improvement in margins and cash flow that the market expected last year would not materialize as quickly as expected. And I think that has been largely fulfilled.
We are still underperforming. We see some risks this year. Consensus expects free cash flow to be negative 12 billion to positive 28 billion, so this year he will recover free cash flow of 40 billion. I think Amazon will show some improvements this year. There is still some risk in these numbers. Another strategic concern we have is the company’s potential to double in groceries, food retailers and brick-and-mortar stores. So from a strategic point of view, there is also a bit of risk for equities this year.
Rachel Akufo: Now break down some of the concerns you have about the grocery expansion that Amazon really focused on in its letter.
Stephen Throwinski: yeah you are absolutely right. In yesterday’s letter to shareholders, I think he had three key points he wanted to emphasize. One is that the company has made it clear that it is more disciplined about its investment approach. I think it’s welcome. So, I think at the beginning of last year, we made some very important strategic decisions to cut back on areas that we didn’t think were very profitable and likely to generate cash. And I think that’s a positive thing.
We’ve seen them take some steps in terms of strategic decisions over the last year.
Second, I’ve seen them say they’re working on certain things like international markets and groceries that are still losing money. And I think we’ll see them continue to invest there. They have taken steps to close some brick-and-mortar stores on Amazon Go in a new part of the business: bookstores.
But I think it’s also probably a readiness to increase investment, whether through Whole Foods or other organic or inorganic acquisitions. I think that there. Being in the grocery store is important. It’s important to keep in touch every week. Grocery delivery did not go as well as they would have liked. So I think we’re going to see some form of a stronger return to physical formats.
Dave Briggs: Jassy also talked about generative AI projects. What made you switch ratings and join Amazon’s bull herd?
Stephen Throwinski: Well, I think Amazon will succeed with AI. If anything, they are one of the creators of that industry he has been using AI for over 20 years since it was invented. Clearly, Amazon Web Services has the capabilities. Like Google, it has its own large language model. They have their own semiconductors. It doesn’t necessarily rely on external technology. And I think we’ll leverage that through AWS to make it available to our enterprise customers.
I think I saw that they announced it yesterday. It’s not yet clear how Amazon will use generative AI in its own Amazon consumer service. So I think it’s still to come. So this is an exciting space. Through his relationship with OpenAI, Microsoft believes that Google, like Amazon, has unique capabilities, and Amazon will all succeed. But in the short term, I think the market is he’s focused on three things. One, how much does it cost? So we may not see the revenue yet, but as the shift to generative AI accelerates, will CapEx increase? I am looking for
Second, what is the product opportunity? At Microsoft, I think people will see Microsoft 365, GitHub Copilot, and other announcements they’ve made about real opportunities in the near future to start monetizing. We’ve seen other partners like Salesforce offer his GPT and Mailchimp trying to monetize this through their product.
And of course the third is, as I mentioned earlier, the opportunity for platforms like AWS, Google Cloud Platform, and Microsoft Azure. We offer this technology to enterprise customers to bring their data into the platform and use these large-scale language models to train their own AI initiatives. So I think all three companies will eventually benefit from it.
Rachel Akufo: And when you take a closer look at the valuations of these big tech companies, do you think any of them are really good deals right now, especially for Amazon?
Stephen Throwinski: Well, as you mentioned, it was an interesting year with the NASDAQ up nearly 20%. So we’ve seen a lot of expansion where we haven’t seen an increase in revenue. If anything, the negative factors are increasing from an operational perspective this year. In January, Microsoft Azure and Amazon Web Services led to a decline in December results. Workday and Snowflake lowered their full-year guidance in February, along with his January results. And for the February quarter results, we confirmed that Oracle failed and Accenture lowered its guidance.
So while the numbers are still down, the stock is up. And of course that creates a bit of risk here in terms of valuations. There are no signs yet of an improving demand outlook. It’s hard to say that will happen in the second half of this year. It is still possible. So we still think you need to be picky. You can’t really rely on earnings upgrades. You can’t rely on multiple expansion yet.
So we prefer companies that are more self-help oriented. These are companies like Salesforce, Oracle, and SAP. They’re more ad hoc, more self-help, more enterprise-focused, and we see the market as more defensive if they can deliver on what they’ve promised. Stocks should work well.
And among megacaps, I like Alphabet. That’s why Google is our top pick. Offers a free cash flow yield of 7%. we were cautious. I just recently upgraded. We believe the near-term consensus numbers are more reasonable. We believe they will launch more of their own generative AI-assisted products.
The Google I/O conference on May 10th is another catalyst for that. So I think some of the poor performance is a bit overkill. So it’s something with very healthy cash generation. There could also be very large share buyback announcements around the time of the first quarter results in late April. So I hope Alphabet has one, Microsoft has two, and Amazon follows.
Dave Briggs: ok, great. must be left there. Stephane Slowinski of BNP Paribas. I’m honoured to be able to meet you. Enjoy your weekend.
