For the first time in quite a while, we had the Bank of Canada hold rates steady. There is no doubt the economy needs further rate cuts. However, the difficulty is that if policymakers continue to cut rates amidst tariff uncertainty and inflation begins to accelerate due to tariffs, they won’t have this lever to pull in an attempt to slow inflation down.
It will be interesting to see what happens moving forward. One thing I will almost guarantee, however, is that we will see extensive volatility for the next while.
Any purchases you make regarding individual stocks or index funds must be made with the realization we could go lower from here. With long-term time horizons, we should welcome lower equity prices anyway, as it allows us to scoop up more shares at discounted prices.
Speaking of discounted prices, I’m going to discuss one company I feel is particularly attractive in this environment, and one I added to last week and will continue to add to in the coming months.
This week’s newsletter will be my April Value Call, centered around a mega-cap company and US Foundational Stock that still has a lot of runway left in my opinion.
April Value Call – Amazon (AMZN)
Sitting on losses of around 21%~ this year, Amazon’s drawdown is due to a few things. Let’s dive into them.
Retail could be pressured in the event of a recession
The company is, at its heart, a retailer. Despite the tech side of the business growing at an astounding pace (which I’ll get to in a bit), the foundation of Amazon is its retail side, which has an incredible moat.
I’ve attached an image below to illustrate how much of the company’s revenue comes from retail. Keep in mind as well, that this doesn’t include the revenue generated from third-party sellers.
The difficulty with this is the company is exposed to the cyclicality of the economy. Fears of a recession are dragging the stock price down. A recession would no doubt put some pressure on retail sales as unemployment rises and consumers pull back spending.
We can look no further than the 2022 year in the chart above, in which retail sales dipped from $222B to $220B. However, what savvy investors might notice is the other bars, which are its Advertising, Amazon Web Services (AWS), and Subscriptions Services. Every one of those segments has increased revenue at a double-digit pace since before the pandemic. More on that later, though.
Tariff impacts loom large
Amazon is no doubt impacted by tariffs, but likely not in the way you’d think.
Many consumers and investors know that a solid portion of the goods sold on Amazon are produced in China. We’re not talking Temu levels of goods from China, but still a reasonable amount. If we look to actual numbers, which is data I have pulled from the Bank of America, they estimate that around 20% of Amazon’s first-party sales and 25% of their third-party sales are goods imported from China. First party meaning Amazon buys and sells the products directly, while third party is where retailers set up stores, sell products, and Amazon takes a cut of sales.
Amazon’s main threat from a tariff perspective is lower volumes from third-party sellers. If tariffs are applied to Chinese goods sold by these third-party sellers, consumers may choose to stop purchasing them, which ultimately would hit third-party sales, and in the end, this hurts Amazon’s profits from this segment.
If we look to the chart above, we can see that third-party seller revenue is no slouch, with over $156B in revenue in 2024.
What I find a lot of people are focusing on, however, is the company’s core first-party retail sales. In this situation, despite some of its products having tariffs applied, I do not believe the tariffs themselves (the recession caused by tariffs could impact sales) will have much of an impact on sales.
If we think of simple things like staple goods sold on Amazon that might come from China, it will not only be Amazon that is impacted. I’ve heard some investors mention that Amazon is going to lose sales because of the tariffs. But the reality is, these tariffs on Chinese goods will be applied to every retailer that sells the goods.
Yes, Amazon might have to raise its prices on these goods. But so will Walmart, Target, etc.
There are plenty of underlying segments that will support a retail drawdown
At this point in time, if the tariff situation is not avoided, it will likely drive the US into a recession and likely plenty of the globe into a recession. In this situation, we can expect a slowdown in retail activity.
However, Amazon has plenty of underlying business segments that are growing rapidly that should more than offset this, and I do feel with the stock being down 20%~ this year, the market is being overly pessimistic.
If we look to the bottom of the chart below, you will notice one thing, and that is that the Compound Annual Growth Rates on its Advertising, Amazon Web Services, and Subscription Services are substantially higher than its retail segment and have never really faltered at all in terms of growth over the last 5 years.
If the company can keep up its 24%~ compound annual growth rate on its Amazon Web Services segment, which is primarily its cloud computing segment, it will match the retail segment of the business in terms of revenue generation in just five years.
Add in its advertising and subscription segments growing at a double-digit CAGR, and you have a company that is transforming from a pure retailer to a multi-pronged tech giant.
The main question here will be whether Amazon can continue to drive 20%+ growth from its AWS segment. It does have the largest market share out of all the major technology companies, including Microsoft Azure, Google Cloud, and Oracle Cloud. So, it is likely to grow at a slower pace than these platforms. However, I’m still fairly confident it can continue to grow at a double-digit pace moving forward.
In terms of its advertising segment, I would expect this to slow down in the event we do hit a recession. However, despite ad spending collapsing from companies in 2022, Amazon still provided double-digit growth in this regard, and I have confidence that although we could see a slowdown, it will still drive strong growth.
Let’s get to valuations
Amazon is a relatively unique company to value. Prior to recent years, the company was often valued as a retail company, one with thin margins. However, this is changing.
Operating margins are expanding and are now double what they were pre-pandemic. This is because a larger portion of the company’s revenue is coming from non-retail segments with much higher margins (AWS, Advertising, etc).
There is also the added difficulty in the fact that the company often lays out large amounts of capital expenditures in an effort to expand its market share and grow the business. This makes valuing the company on a price-to-free cash flow basis hard as well. At 57x trailing free cash flows, the company looks “expensive.”
I have covered Amazon for quite some time here at Stocktrades Premium, and long-standing members will know I have reiterated numerous times that Amazon’s capital expenditures are variable and can be pulled back relatively easily. Take for instance in 2020-2022 when the company laid out a substantial amount of cash to expand its network. Many criticized Amazon at this time for its extensive spending and lack of profitability.
Fast forward to 2025, and this spending has worked out brilliantly, with same-day delivery being offered across several cities across North America.
Now the company is spending an extensive amount of capital on a much higher margin segment of the market, that being artificial intelligence. Although this large amount of spending is risky, I am more than comfortable giving a company like Amazon the benefit of the doubt that it will be spent wisely.
For this reason, I tend to value the company on a price-to-operating cash flow basis. Operating cash flow is effectively the cash profits the company generates from its business operations before any capital expenditures are spent.
Why is this my preferred metric for a company like Amazon? Because when capital spending into growth initiatives is scaled back, free cash flow will improve materially. This is because free cash flow is simply the company’s operating cash flows minus its capital expenditures.
If a company has $1B in operating cash flows and capital expenditures of $500M, it has ($1B-$500M = $500M) $500M of free cash flow.
And when we look to the company on a price-to-operating cash flow basis, Amazon hasn’t been this cheap in over a decade.
It is difficult to say why this discount is so large, but there are a few possibilities
Large amounts of cash outlay during a potential upcoming recession are likely not something that is going to be well received by the markets. With plans to roll out over $100B+ in spending, largely related to artificial intelligence, the market is likely going to get a bit spooked over the short term.
I believe this is what is dragging valuations down at this point in time, along with the potential recession that could hit the retail end of the business.
However, Amazon has been an extremely efficient capital allocator over the years. Its returns on invested capital are nearly double what they were pre-pandemic.
For this reason, I’m not overly concerned with the high amount of capital expenditures being laid out. I believe it will be capital well spent. Amazon’s expansion of data centers and the development of custom AI chips are things that may face some pressure if a recession were to cause a cyclical downtrend in terms of artificial intelligence spending, but something that should be rewarded substantially in the future.
Let’s look to a chart of NVIDIA’s data center revenue to give you an idea as to the demand for data centers:
Overall, I think the company provides attractive risk-reward levels at this point, and I am going to be upping my allocation throughout 2025
As I’ve mentioned throughout the last few newsletters, I’m not necessarily in a rush to go out and dump a bunch of money into equities. However, I will be reserving a larger amount of my weekly contributions towards Amazon through 2025 in an effort to get my allocation size from 3.6% currently to anywhere from 5%-6%.
I believe that times when valuations are attractive due to higher levels of pessimism are the best times to add industry leaders like this. Let’s not forget the last time the company went through a large drawdown due to a slowdown in retail sales. It went on to return nearly 200% from late 2022 to early 2025.
I remember in 2022, Amazon was a failing retail company with an inferior cloud platform. It is interesting how quickly sentiment can change to the downside. When it does, investors who understand the fundamentals of a business can reap the rewards.
Let traders focus on short-term (and likely underwhelming) returns. For long-term investors, ignoring the noise and understanding the underlying fundamentals of a business will allow them to make worry-free decisions during what is often the best time to accumulate equities: when prices are getting hammered.
