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Forget Amazon (NASDAQ: AMZN) Stock: These Payments Are Guaranteed

Written by Jason Stutman
Posted October 27, 2018

The higher they rise, the further they have to fall.

At least that’s what the pundits would have you believe.

Quartz: “Amazon’s most important businesses are all slowing down.”

Reuters: “Amazon Shares Sink 10% on Growth Worries.”

CNN: “Tech Mess: Nasdaq Plunges as Amazon Reels”

Granted, they have a point.

Amazon shares did fall 9% on Friday, October 26th, following the previous evening's earnings release. Moreover, Amazon’s stock is currently trading hands 20% below its recent late-summer peak of around $2,000 per share.

However, the headlines of “slowing growth” miss something very important... something so key to Amazon’s future profitability that we’re stunned people aren’t talking about it more... something so educational to investing and business itself that it even points the way to how YOU can make big profits in the years ahead.

Amazon Prime Isn’t All That “Prime” for Profits

Pop Quiz: Why is Jeff Bezos the richest (or is it second richest?) man in the world?

Were you to ask this question to a stranger on the street, you’d probably get a reply like, “He started Amazon and they’re putting every retailer out of business,” or, “Amazon is awesome at charging low prices for everything and then shipping it right to your door... it’s their focus on the customer!”

Both these answers are wrong.

Sure, they all explain why Amazon’s retail operations are so big and almost certainly why Amazon and Bezos are both more than household names.

However, they have nothing to do with Bezos’ wealth or Amazon’s profitability.

So, I’ll give you a hint:

What happened on this day was so incredible that it sent Amazon’s stock soaring in the ensuing 3.5 years, thus making Bezos the richest man in the world.

Any guesses? If you said Amazon’s Q1 2015 earnings release, which occurred on April 23, 2015, then congratulations, you’re a winner!

But what was so special about this earnings release?

It was the first time Bezos & Co. broke Amazon Web Service’s (AWS) operation results out of the opaque “Other” category on its income statement. After seeing what this little side project had become, Wall Street went bananas.

It’s easy to see why, too. For the first three months of 2015, AWS sales rose $1.566 billion, up 49% year over year, and operating income came in at $245 million.

Out of nowhere, Amazon had created a business that was throwing off $1 billion in annual cash flow.

Wall Street had been guessing at AWS’s results and that it was a cash cow for some time, but finally it had the proof. That same quarter, Q1 2015, Amazon’s total revenue came in at $22.75 billion (15% year over year growth), and operating income (again, for the entire company) was $255 million.

In other words, AWS was basically responsible for Amazon’s ENTIRE OPERATING PROFIT.

You can see now why Wall Street, which had long chided Amazon for lack of profits while lauding it for its growth, went gaga for Amazon shares starting that very day.

The World Was Never the Same

Giving billions in free cash flow to a man like Jeff Bezos to play with is a recipe for disaster — for Amazon’s competitors, that is. He has used that money to expand Prime offerings, make movies at Amazon Studios, and all kinds of things that we as consumers love.

Amazon’s retail profitability has improved somewhat since then, but the cash flow workhouse remains AWS:

Amazon Q3 Results:

  North American Retail AWS
Revenue $34.35 Billion $6.68 Billion
Operating Income $2.03 Billion $2.08 Billion

Now, to fully take in the importance of what we just laid out for you, consider this: Where do you suppose Amazon and Bezos would be today had they NEVER created AWS?

Once you’ve picked your jaw up off the floor and recovered, we have another shocker for you: We think Jeff Bezos is about to pull off the same incredible magic trick again.

Amazon Is Going After Google

There’s one more thing worth mentioning from Amazon’s Q3 2018 results, something Bezos has once again buried deep within the filing under the “Other” category of his company’s income statement: Advertising Services.

What is Advertising Services, you ask? It’s exactly what you think it is. In case you haven’t noticed, banner ads have slowly crept their way into your Amazon shopping experience. Seriously, go to right now and search for an item you’re interested in. Scroll down, and you’ll most likely be served up an ad along the sides of the results.

It’s so powerfully simple (after all, how many eyeballs do you think Amazon gets every single day?) that it was almost destined to become a profit powerhouse for Amazon. How powerful? Put it this way: We don’t know EXACTLY how much money Advertising Services is bringing in, but we do know that the “Other” category is, by Amazon’s admission, mostly comprised of this division.

As you may have guessed, business is booming over in “Other.” Amazon reported sales for Q3 came in at $2.5 billion, $10 billion annualized, and up a whopping 122% from last year. Growth is also accelerating — that $2.5 billion figure is $300 million more than Q2 2018.

Profits are harder to guess at, but let’s put it this way: Advertising revenue is just about the highest-margin product or service out there. Just ask Google parent Alphabet (NASDAQ: GOOG).

Amazon is becoming so successful in its push to get a piece of the online advertising pie that analytics firm eMarketer projects Amazon will be #3 in the online advertising spend market by 2020, second only to Facebook and Alphabet/Google.

What You Should Take Away

It’s clear to anyone who does a little digging that Jeff Bezos is at it again. And though shares are down, we have a feeling they’ll rocket to new highs once Bezos comes clean about his second cash-cow creation and breaks Advertising Services out of the “Other” column.

So does this mean we recommend Amazon shares? Not exactly.

You see, even after its recent share price drop, Amazon is an $800 billion+ market capitalization gorilla. Making investors 100% on their investment from this point, even over a period of years, seems like a tall order: it would require a total valuation of around $1.6–$1.7 TRILLION.

If anyone can get there, it’s Bezos, but we think for most of us there are better places to invest. 

In fact, my colleague, investment veteran Briton Ryle, has located an investment opportunity that guarantees investors regular payouts stemming from Amazon's success, specifically its low-margin web services business. 

If you're looking to cut your risk and avoid the wild swings happening right now with big tech stocks, I definitely recommend taking look.

Until next time,

  JS Sig

Jason Stutman

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