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Amazon is doing too much & needs to re-focus: Analyst

Amazon has investments in everything from health care to grocery stores. But is it becoming too much? In an open letter to Amazon CEO Andy Jassy, Bernstein Internet Research Analyst Mark Shmulik urges to leadership to pare down on some investments and re-focus on others, like its media business.

Video transcript

SEANA SMITH: One Amazon analyst making a big call. Bernstein's Mark Shmulik wants Amazon to simplify because the tech giant is quote, "pursuing too many ideas." He wrote in a new open letter to CEO Andy Jassy and the company's board, quote, "there's a significant amount of self-help Amazon can take to quell investor concerns around the current investment strategy and investor communications, and together could propel the stock into the $180 to $200 share range."

Joining us now is that analyst. We want to bring in Mark Shmulik, Bernstein Internet Research Analyst. Mark, it's good to see you here. So in this note here, you also highlight it's time to refocus capital, time to retake the narrative. How do you think Amazon should go about doing that?


MARK SHMULIK: You know, first off, great to be on the show. You know, and I think this note follows what we've done last week, which was which is we've upgraded Amazon to our best idea in the internet space irregardless of what we've proposed here.

Primarily, because we don't think the narrative matches truly improving fundamentals in the core business. But if we really want to take the next step, I've certainly sat in on many investor conversations that felt more like therapy sessions than they did analyst conversations, You know, effectively hearing investors' question, specific investment decisions, lack of disclosures, and lack of clarity.

And, you know, what I was hoping to do with this note is really perhaps highlight some of perhaps the biggest areas of investment that I certainly have questions around. Wonder if we could at least see separate disclosures of things like Project Kuiper, putting low orbit satellites up there with internet access, you know, things like their health care services. Moving them aside so we could truly see the successful performance of the core business.

And secondly, reevaluate some of those investments, so that Amazon could really, you know, redeploy capital on some initiatives we think only Amazon can do. Those being buy with Prime and their media business.

AKIKO FUJITA: I mean, couldn't you argue that Amazon's already started to slim things down a bit when you think about where they have targeted their most recent layoffs, though.

MARK SHMULIK: Yeah, absolutely they have. And I think just last week, there was the report that they have trimmed down or kind of wound down 37% different projects. You know, so they're clearly in that mindset already of looking to kind of rationalize and optimize. I think that much is clear.

I'd argue that some of the things we've proposed in the letter are perhaps a little bit bigger. If you look at some of those initiatives that they've wound down, it's things like a video device for kids. You know, I don't know if that's really going to move the needle in terms of, you know, finding incremental capital.

What we're talking about is really evaluating entire international markets. Do they need to be in a place like Brazil where they've been losing share for the last three years? And they're not the number one or two player. You know, they should be rethinking what they're doing with their physical grocery rollout, where, you know, they have shared that they haven't yet found that perfect format and yet they've built out about 44 of these Amazon Fresh stores.

So I think the level of ideas that we're proposing here are, you know, certainly large-scale investments that could really move the needle if there were any change in kind of current operations.

SEANA SMITH: Mark, one of the initiatives they are pushing is to focus on Amazon media, like you said, into what you say is the next great media property. There was a story in the "Journal" today that Prime is potentially looking to adding-- add tier as part of their service. What else do you think Amazon could be doing in the space that they're not?

MARK SHMULIK: Yeah, I know. I was very glad to see that report this morning because at least aligned with in area where we thought it was due for incremental investment. And the reason for that is, you know, if you think about the future of media consumption, you know, I think Jim Barksdale famously said, there's two ways to make money, bundling and unbundling.

And I think what we're seeing is a rebundling of kind of video consumption. And they've got the full stack. They've got the TVs. They've got the Fire Sticks. They've got the content. They've got the Prime channel. They've got freebie. They own content rights from live sports, et cetera. And so they've effectively got this full stack to be able to offer consolidated media services, monetize it via subscription and advertising dollars, and expand even off property.

One deal or announcement that we'd highlight, you know, as they recently entered into a partnership with Pinterest, which we think is one of those things that probably only Amazon and a few others could do, you know, bringing their first party data to the table for their advertising base and effectively being able to fill ad inventory off of Amazon. So we're very optimistic on the progress being made on that side of the house.

AKIKO FUJITA: What about the play for health care? I mean, that's one thing that you've highlighted. They haven't had much success before. But you could argue that they are sort of in a position to pursue it given where competitors stand. I mean, what do you think they should be doing?

MARK SHMULIK: Yeah. You know, I think the issue I take or perhaps the confusion is just around even the term health care just feels too broad, right? It's an entire industry to go after. But the reality is that there are probably some very viable businesses Amazon should be in underneath the health care umbrella. It's just unclear at the moment what those necessarily are.

Certainly, we've seen it through the PillPack acquisition and the expansion of Amazon Pharmacy. You know, but they've dabbled a bit in insurance. They've dabbled a bit in telehealth. They've bought One Medical. You know, it feels like there's just a lot going on at the moment.

And it's unclear, you know, really what's going to stick there and what the real true opportunity is. Because in addition to them pursuing this, we've heard kind of a string of announcements of them winding things down or, you know, the dissolvement of Haven or the shutting down of the telehealth services recently.

So, you know, to me that just feels too broad at the moment and unclear where all those resources are going and what the real opportunity is that only Amazon can do.

Well, Mark, despite all of these, I guess, broader concerns that you do have for Amazon and the vision here going forward, you still have an outperform rating on the stock. $140 price target. What do you see as the catalyst here for Amazon then in the near term?

MARK SHMULIK: Yeah. No, it's not only an outperform rating, it's our top pick. You know, this is kind of gravy on top of how do we break out beyond my price target into the $180, $200 range? How do you get to being a $200 stock?

You know, and the reason why we're outperforming have it as our best ideas, we think that the current narrative just doesn't match up with improving fundamentals. you know, we saw this last quarter already, where the retail business, especially domestically, you know, is really making inroads into accelerated, you know, profitability. They're profitable again, you know. And that's not going to stop. They're going to keep growing domestic profitability for retail.

You know, on an AWS, which seems to be driving a lot of the stock movement at the moment, you know, folks are waiting for it to bottom and wondering is Amazon in last place in AI. Look, that's a narrative at the moment. I don't think there's much substance behind that narrative. But in order to quiet down that narrative, you need to see improving fundamentals.

You know, whether it's this quarter or next, we're getting close to that point when AWS growth estimates are going to bottom. Once they bottom and reaccelerate, I fully expect the narrative to catch up, you know, with a really compelling fundamental story that we see before us.

SEANA SMITH: All right, Mark Shmulik. You lay out a compelling case, I'll give you that. Thanks so much for joining us here. We appreciate having you on. Talk to you soon.

MARK SHMULIK: Thanks for having me.