What Gives AMZN "Most Interesting" Stock Set Up of Mag 7 Since All-Time High Plunge

SPEAKER_1 (0:01)

We're back on Morning Trade Live, and we're looking at some mega cap tech names this morning. We've got AMZN and Meta, lower, Apple and Microsoft are higher. So a split picture across some of our Mag 7 cohort this morning. But of course we have had some record highs earlier this week. Thanks very much to what Meta had to say, and some of the rotation back into our large cap tech. So let's go inside out on Amazon. Joining us now is Kai Wu, Founder, Chief Investment Officer at Sparkline Capital. Kai, thanks so much for your time today.

As I mentioned, we've kind of reestablished leadership this week. I was talking to the team over at Charles Schwab about this a little earlier. But I mean, just looking at the leaderboard, you could say Amazon kind of in the middle of the pack as far as the performance, obviously very strong fundamentals. Just walk us through your take on the price action.

Kai Wu (0:53)

Yeah, I think Amazon has among the most interesting setup of the Mag 7 stocks today. As you point out, the fundamentals have been pretty robust. They reported Q2 in July and it was a 20 percent year-in-year increase in revenue, 43 percent in operating income and even higher net income gains if you adjust for the fact that they have a 20 percent stake in Anthropic, which is of course marked up. Yet despite robust performance, we've seen pretty mediocre price action. There was a pop after the earnings announcement, but we've since basically retraced all those gains down, I think, 15 percent or so since that high. I think the concern revolves less around the financials and more around what Amazon is doing with regards to its investment, its CapEx. They increased their guidance on 2026 capital spending from 200 to 220 billion dollars, which has driven their free cash flow negative for the first time in several years. They have even taken on debt to help finance the build out. So that's the big question. Investors are skeptical that in the long run, all the spending will translate into returns for the company. I think it's worth thinking about what they're doing. There's aggressive investment in CapEx. It's very much in line with Amazon's history. It's very much in its DNA. If you go back to the origin of Amazon, the first 20 years, the firm almost never had a positive net income, almost never had even positive free cash flow, because it was investing so aggressively in building out its business.

As someone who deals with intangible assets for a living, in many respects, Amazon was the world's best intangible investor. What I mean by that is, for example, they built out network effects in the form of the world's best logistics network. They spent all this money in R&D to build out what eventually became Amazon Web Services, our most profitable segment, and they focused on keeping prices low, even though they probably left money on the table, in order to delight customers and build goodwill and brand amongst customers. All these investments obviously compounded and led them to where they are now as a $2.6 trillion company. Now, the difference today is that they are continuing to invest aggressively, which is, of course, what you'd expect them to do.

But there's two big differences. First is that the investments today are in physical capex, so not the intangible assets which compounded their time and which were largely missed by analysts, but in very tangible investments, buying GPUs, building data centers. Second is that while they were ahead of their time when it came to e-commerce and when it came to cloud computing, they are just one of many players currently engaged in this AI arms race, Google, Meta, Microsoft, Oracle, even SpaceX. They are all competing over the same pie here. There's a collective action question of, will it be the case that the game theory dynamics push them to overbuild, and thus push down the amount of profits and returns they can generate from this investment? So I think there's rightly concern that's I think been a damper on its price. That being said, Amazon is currently trading at a P ratio of 20, but that's also not counting all this investment in really interesting intangible assets, which, if you account for those, are basically coming in almost for free.

And so they're trading at a nice valuation. They're actually, I think, the largest or second largest position now in the Russell 1000 value index, which is a fund that we see for a tech company like Amazon that is growing so quickly.

So yeah, I think they have a lot of good things going for them, but there are obviously legitimate concerns around how the overall capex build transpires.