Market Insights & Analysis from Kramer Capital Research

Amazon Just Lost Its Secret Weapon and Now the Stock Is Broken

Jeff Bezos had a spectacular decade. Amazon.com Inc. (NASDAQ: AMZN) soared 900 percent while the S&P 500 barely doubled.

But more recently, the juggernaut has faltered. AMZN is only up 13 percent in the past year and is still 7 percent off its all-time peak. The market as a whole, meanwhile, has shifted into racing gear.

It is not hard to understand why Bezos has hit a wall. The e-commerce engine that he built has gotten so big that achieving additional growth at any speed has gotten spectacularly expensive.

And the cloud computing operation that many on Wall Street once considered a secret weapon seems to be hitting competition in the form of some of the world’s top corporate predators. Amazon is going up against Microsoft Corp. (NASDAQ: MSFT) more and more in the cloud computing domain. And Bezos has started losing.

That’s not a great thing for shareholders who were told the miraculous synergy between all of Amazon’s many ventures would feed growth and profits well into the future.

Microsoft Is Making its Move

Goldman Sachs just did a survey of corporate technology managers that should terrify Amazon investors. The poll revealed that Microsoft now has more big enterprises on its Azure cloud platform than Amazon has using its web services.

A full 56 percent of the survey population is already working with Azure and another 10 percent is planning to at least partially embrace Microsoft’s cloud solutions over the next three years.

Huge contract wins like the Pentagon’s $10 billion decision to let Microsoft run its cloud programs tip the market share scales even further. Azure has gone from a niche player to the status quo.

And everyone who knows Microsoft knows that once it gets a dominant position in any market segment, it never lets go. The whole strategy here revolves around cross-selling solutions into the platform, ensuring that competitors starve.

Maybe that’s why Microsoft refuses to go into detail on Azure’s financial performance. We suspect that the cloud is about a $17 billion business for the company now, which is barely 14 percent of the overall revenue footprint.

But with an estimated $1 trillion to capture between now and 2023, this is a big enough prize for even the world’s largest companies to fight over.

Amazon, on the other hand, is already watching its cloud growth slow down. Last quarter, I was expecting 36 percent growth from the unit and reality came in 2 percentage points short of that target.

That’s a significant deceleration from previous quarters. In fact, Amazon’s cloud hasn’t grown this slowly since 2014.

And while most companies would be ecstatic to watch a unit that’s already capturing $9 billion a quarter move at these growth rates, any weakness on the cloud is ominous for Amazon.

Bezos draws 71 percent of his operating income from this business and historically redistributes it across other ventures like Amazon Prime delivery, original video programming, Kindle support and Alexa voice computing. This is where he gets the cash to keep growing.

While merchants around the world hate and fear his online retail platform, Amazon sales are barely profitable. Plus, its margins are compressing fast. A year ago, Bezos booked about a 6 percent profit on everything sold on his site. Now, its net income from North American retail is below 3 percent.

That’s precarious. But with cloud margins declining as well, his cash cow looks a little underfed right now. I’m not convinced it can keep enough profit flowing to support an $1,900 stock.

AMZN is on track to report around $20 per share in earnings when the final 2019 numbers come in. That’s a 90X multiple for a company that is already struggling to raise the bottom line more than 1-2 percent a year.

If and when we see the growth, AMZN might catch back up to the rest of the Big Tech giants. I just don’t see the cloud playing a big role in that recovery.

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CANNABIS CORNER: CALLING THE WINNER 

Last year turned ugly for Big Weed investors as bad news spiraled across the industry in a classic demonstration of contagion out of control. Every headline fed back on all the stocks because Wall Street couldn’t tell the players apart.

But here we are with a clear winner emerging. Investors seem to have figured out that Canopy Growth Corp. (NYSE: CGC) is different enough to stand up to the tides of sentiment.

All you need to do is look at the stocks over the last few months. CGC has rebounded 45 percent off its Nov. 17 low, outperforming runner-up rival CannTrust Holdings Inc. (NYSE: CTST) by 10 percentage points and leaving everything else in the dust.

Quite a few of these stocks never caught the bounce at all. Tilray Inc. (NASDAQ: TLRY) has dropped another 21 percent over that time period and Aurora Cannabis Inc. (NYSE: ACB) is down 25 percent.

The performance gap here is staggering. Over the summer, all of these stocks moved in eerie unison. Now, there suddenly are winners and losers.

That’s all a factor of CGC lining up the right management team to align the business with corporate parent Constellation Brands Inc. (NYSE:STZ), which has a 35 percent stake in the company and a vested interest in its success.

Dropping Constellation’s chief financial officer into the CEO chair ensures that Canopy makes the best moves to protect its parent’s investment. That’s a great thing for shareholders.

After all, Constellation just wrote down another $534 million in the value of its Canopy stock. Management on both sides will do whatever it takes to stop the bleeding.

It has worked so far. But there’s a lot of ground left to recover. The last six months have cut the overall value of CGC in half.

At least it’s bouncing now. TLRY and ACB are still falling knives. I don’t see them hitting the floor until they communicate exactly what sets them apart from the little players in the industry who imploded for very good reasons over the summer.

Size isn’t good enough. Winners here will have compelling products and differentiated business models to drive them. Losers will race to the bottom.

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