We’re adding Amazon to the Best Idea Long list. In all our years covering this name, we’ve never been more confident in the setup heading into the upcoming year. The company has rebased revenue and profit numbers two quarters in a row. It’s facing abnormal cost pressures that should subside in the coming quarters as cost pressures moderate, and the company is ramping spend in the face of slowing revenue and rising industry costs. Those sound like negatives, but it means the company likely just set the expectation of trough revenue and profits on the rate of change. Forward outcomes relative to expectations favors the upside. We are about 6 months from easing compares, and the company is investing when it should, which is when the competitors are getting complacent with recent success and the industry is starting to see slowing revenue pressure. Within 6 months or so competitive intensity will ramp as sales are tougher to come by, and Amazon will be positioned to take massive market share having boosted capex to new all-time highs (over 14% of sales at $15.7bn this Q). That share gain makes for an outsized revenue acceleration 3 to 4 quarters down the road. The new CEO is taking the brand further into consumer experiences in sports and gaming while continuing growth in every other business unit driving share of wallet higher. Action on big tech giants by law makers might be a risk, but Amazon is not at the top of the list as it relates to regulatory action. If there is future action, it would likely involve a forced breakup, which might actually be a positive for equity value. Rolling out NTM estimates 1 year, we see 30%-40% upside over 12 months for this uber mega cap name with strong downside support.
Bullish on BIRD: The Allbirds deal prices on Tuesday night and is set to trade on Wednesday. Initial range is $12-$14, for an EV of $1.6bn-$1.9bn, or about 6x sales. This deal is going to be hotter than hot – especially with the ESG crowd given the highly sustainable nature of the product value proposition. Our sense is that it prices above the range and rips on day 1. Allocations will be tight, but we think you definitely want to put in for this deal if given the shot. The question for us is what you do on the rip. Where to be a buyer and where to sell. While apparel companies are a dime a dozen, new footwear deals come around only once every few years. This year has been anomalous in that we have ONON which went public in September and now clocks in at an EV of $10.6bn, or 11.6x sales, and now we have Allbirds this week. Next on the docket are likely to be GOAT and StockX – marketplaces for footwear rather than brands – but still, the space is hit right now. In order to get a real sense as to what BIRD is worth, we need to roll the clock forward a few years and see where the revenue base, margin structure and capital intensity are likely to shake out. From where we sit – 30% annual top line is a slam dunk for this brand – especially given that it has only 11% brand awareness, with huge upside for new customer acquisition. Though it’s currently losing money on roughly $250mm in sales – 100% of which is DTC (i.e. extremely attractive) – the EBIT margin structure is likely to clock in at a 15%-18% level over a TAIL duration on nearly 3x the revenue base. That puts about $0.75 per share in earnings in play. This name should trade 40x-50x that number easily, which suggests a $30-$38 stock price over 2-3 years. With that as a backdrop, we’d be buying the BIRD as high as the low-$20s when it begins trading this week.
