Today's video is about Amazon, stock ticker AMZN. Amazon's latest earnings report was a complete disaster, wasn't it? The stock price plummeted by 16.14% in 2 days. It has fallen 22.54% from its peak in 3 months. Is Amazon finished? Is its massive CAPEX dragging the company down? In today's video, we will take a detailed look at Amazon from multiple aspects including the company's latest financial report, latest fundamentals, competitive environment, and its moat. I have held Amazon for 1331 days. As usual, let's start with my holdings and their performance. This chart shows my personal portfolio performance. My compounded annual return over these years is 10.61%. If I had bought the S&P 500 index fund ETF during the same period, my annualized rate would have been 20.28%. Clearly, my Amazon position has not outperformed the market. Let's look at this chart, which shows the performance of my family trust. The Amazon position in the family trust accounts for nearly 90% of my total Amazon holdings. So you can basically understand that this chart truly reflects my Amazon holdings performance. We see that over the years I've held it, my annualized return on Amazon is -4.97%. A large part of this is due to exchange rates. We see that because the dollar has recently plummeted, this has directly led to significant losses in returns due to exchange rates. During the same period, if I had held the S&P 500 index ETF, my annualized rate would have been 12.60%. Clearly, in this trading account, my Amazon position has not outperformed the market. Did I completely fail in buying Amazon? Does Amazon still have a future in the era of Big AI? To answer these questions, we still need to start by analyzing the company's latest financial report in detail.

This is the Amazon's latest quarterly business structure analysis I've summarized for you. The data here has been disclosed by management in the earnings report, so the data is 100% accurate. We see that Amazon's North America business revenue for this quarter was $127 billion, a year-on-year increase of 10%. Gross profit increased significantly this quarter, with a gross margin of 9.03%. Amazon's North America business seems to be becoming more efficient. And with quarterly revenue of $130 billion, if it can reach double-digit gross margins in the future, it's quite exciting. This business currently accounts for 59.56% of total revenue, approximately 60%. Next is Amazon's international business. The latest revenue for this business was $50.72 billion, a year-on-year increase of 17%. The growth is actually quite fast. The gross margin this quarter was 2.05%*. Frankly, I think this gross margin is very poor, which is a very typical characteristic reflecting the extremely low gross margin of e-commerce. It accounts for 23.77% of total revenue. Next up is Amazon's AWS cloud services business, AWS. The latest quarterly revenue was $35.58 billion, a year-on-year increase of 24%. Honestly, this growth is quite outstanding, with a gross margin of 35.03%. It accounts for 16.67% of total revenue. This business is the best performing business in terms of both growth rate and profit margin. Honestly, just looking at Amazon's financial report performance this quarter, it's quite outstanding. Firstly, AWS is growing rapidly, with a current year-on-year growth of 24%. Secondly, Amazon is also actively deploying power supply. Management mentioned that in the past 12 months, the company has added 3.9 Gigawatts of power capacity and expects to double it again by 2027. Clearly, Amazon has realized that besides computing power, electricity is another bottleneck for AI development. Amazon is now actively deploying power infrastructure.

Management also mentioned that Amazon's self-developed chip, Trainium 2, has begun large-scale deployment and has significantly increased data center energy efficiency. This reflects a general trend: after reading the financial reports of major companies, we can see that AI giants are all focusing on self-developed chips to dilute the indispensability of Nvidia's chips, as Nvidia's chips are quite expensive. What's more noteworthy is that management expects capital expenditure (CAPEX) to reach $130 billion by 2025, and projects it to exceed $200 billion in 2026. This massive amount of capital is primarily for building AI infrastructure. $200 billion in CAPEX is far beyond the comprehension of ordinary people. Imagine, how many companies worldwide can invest $200 billion in capital expenditure in a year? You could probably count them on one hand. This indicates that Amazon is investing in AI infrastructure at an unprecedented scale.

Amazon has numerous businesses, and many of them are leaders in their respective fields. However, for Amazon's scale, the businesses that can truly "Move the Needle" (make a significant impact) are primarily e-commerce and AWS. Amazon is the global leader in e-commerce and also the global leader in cloud computing. These two points are enough to illustrate its importance in the global economy.

Let's first talk about Amazon's e-commerce business, which is its foundation. However, due to the extremely low profit margins in e-commerce and challenges from various competitors in the overall market, Amazon's e-commerce business is facing considerable pressure. For example, Walmart is launching a counter-offensive against Amazon, and with the advantage of its over 4,600 physical stores, it has achieved some success. Amazon also faces challenges from China's Temu and Shein, companies that attract consumers with extremely low product prices. However, after Trump modified the loophole in tariffs, this might be a significant benefit for Amazon. Additionally, Amazon faces challenges from new e-commerce players like Tiktok and Shopify. Although the e-commerce market is fiercely competitive, it seems that no single company can currently shake Amazon's position in e-commerce.

Next, let's talk about Amazon's best business currently – AWS. As of now, AWS is undoubtedly the leader in the cloud computing market. However, it also faces challenges from Microsoft and Google. Currently, the cloud computing market can be described as a three-way standoff, an oligopoly. The main players include Amazon's AWS, Microsoft's Azure, and Google's Google Cloud. These three companies essentially divide up most of the global market share. Currently, the main focus for these three is on developing their own chips, attempting to break Nvidia's monopoly on chips and achieve vertical integration, thereby offering better cost-effectiveness than competitors.

I believe Amazon's moat ranks in the top tier globally. Amazon, with its number one global scale effect and the network effect of its e-commerce supported by its logistics system, has already formed a so-called ecosystem loop. AWS, in the cloud computing market, has established a technological barrier through its own self-developed chips.

It's worth mentioning that every time I make a video about Amazon, I also consider its corporate culture, as it's one of the few companies where I factor corporate culture into its moat. Its culture of daring to innovate, prioritizing users, and not pandering to shareholders and Wall Street is something I personally greatly admire. It is precisely this corporate culture, combined with its "scattergun" approach, that has led to today's AWS.

In the latest quarter, management officially renamed the previously mentioned Project Kuiper business to Project Leo. Essentially, it's still the same satellite network business directly competing with Starlink. Amazon expects commercial operations to begin in 2026. I am quite looking forward to this venture.

Next, let's look at an overview of the company's latest financial report. Amazon's financial situation is acceptable: Cash plus one-year forward Free Cash Flow (FCF) is 0.85 times its borrowings. Although the leverage is not low, it's not excessively high. The latest Return on Invested Capital (ROIC) is 10.79%. Frankly, the ROIC performance is average. Revenue and operating income have both hit new highs, with an operating profit margin of 11.16%. This double-digit operating profit margin is mainly due to AWS significantly boosting the profit margin. The latest Price to Earnings (POI) is 28.22, and the Price to FCF is 293.30. The reason Amazon appears expensive is primarily due to its massive CAPEX, which leaves very little free cash flow after undertaking huge capital expenditures.

Let's look at the latest Operating Cash Flow (OCF) yield, which is 6.18%. From the chart, we can see that after this stock price plunge, its cash yield has continued to climb, currently reaching its highest level in five years. The company is adept at generating cash; OCF is 1.74 times OI. Furthermore, the company's Research and Development (R&D) expenditure accounts for 77.79% of OCF, which is an extremely exaggerated R&D spending ratio.

This chart shows the company's cash analysis over one year. 94.48% of the cash is directly invested in CAPEX. The company has issued $9.6 billion in debt, and the volume of Stock-Based Compensation (SBC) has reached 13.95% of OCF.

Finally, we can note that Amazon continues to adhere to its consistent strategy: it neither repurchases shares nor pays dividends. All cash is directly reinvested into the company's development. Frankly, this is one of the aspects of Amazon's management that I appreciate. It is precisely because of their strategy that they seem more efficient than other giants. Other giants, to please Wall Street, allocate a portion of their funds for share buybacks, while Amazon completely ignores Wall Street. If they believe the current stock price is not worth buying back, they will not spend a penny on buybacks.

This chart shows the company's operating cash flow in recent years, which can be seen to be growing faster and faster. However, due to the management's massive CAPEX, the company's free cash flow is currently decreasing. It is highly likely that in the near future, Amazon will usher in another cycle of negative free cash flow growth.

Finally, let's look at the company's quality scoring. Under my scoring system, Amazon scores 64.50 points. I give high subjective scores: I rated its moat as top-tier with 14 points, and return predictability and pricing power at 8.5 and 8 points respectively. Looking at the objective scores, Amazon might appear to perform poorly at first glance.

If you've watched my previous videos, I've mentioned that Amazon might be one of the few companies undervalued in my scoring system. This is because, in many aspects, it goes against my definition of an ideal "Compounding Machine" (a company that can continuously generate high returns and reinvest them to accelerate growth). It completely disregards short-term shareholder interests because it never repurchases shares or pays dividends. Furthermore, it invests heavily in R&D and CAPEX, showing little concern for free cash flow. In these categories, the company receives zero points.

Overall, Amazon is currently one of my core holdings, and I am very optimistic about its future. It is the only company that, despite not receiving a "Compounding Machine" score, I am willing to call a compounding machine. Moreover, I believe Amazon is likely to be a significant beneficiary of the next AI cycle. AI is very likely to greatly improve Amazon's efficiency and help reduce its costs significantly.

Thank you for watching this episode of Tang Shijun's Wealth Experience. If you've made it this far, it means you find my videos valuable. I am an accountant, and since entering the market in 2015, I have been fortunate enough to outperform the S&P 500 index. I believe you can feel that on my channel, I neither give buy/sell calls nor provide entry prices. I believe that rather than providing emotional value, I prefer to use fundamental accounting logic to dissect the company's business model and fundamentals. What I share is the underlying cognition that can help you achieve financial freedom.

Alright, that's all for this episode. If you are interested in US stock ASML, don't miss this video. Thank you for watching, and I wish you successful investments. See you next time.