BNP Paribas Exane Managing Director Stefan Slowinski joins the Live Show to discuss consumer spending trends and the outlook for Amazon as shares spike.
Video Transcript
DAVE BRIGGS: Amazon's best days are ahead, said CEO Andy Jassy in his second annual shareholder letter. Shares spiked on that letter and are up nearly 20% this year after a rough ride in 2022. And while nearly all analysts are bullish on Amazon's prospects, one is decidedly bearish. BNP Paribas managing director Stefan Slowinski has an underperform on the stock and joins us now. Nice to see you, sir. So how does it feel to be a man on an island? You must have conviction. Why are you so on Amazon?
STEFAN SLOWINSKI: Yes, well, good afternoon, and thank you for having me on the show today. Look, we've been an underperform on Amazon for just over a year now. So we initiated with that about 12 months ago. We had concerns that the expectations the market had for the significant margin and cash flow improvements that the market expected to see come through last year would not come through as quickly as expected. And we think that's largely played out.
We are still underperform. We do see some risks this year. Consensus is still expecting free cash flow to go from minus 12 billion to positive 28 billion, so a 40 billion free cash flow turnaround this year. We do think Amazon will demonstrate this year some improvements. There are still some risks to those numbers. I think one other strategic concern we have is potentially the company doubling down in grocery or in food retail and physical stores. So from a strategic standpoint, that also creates a bit of risk around the stock this year.
RACHELLE AKUFFO: So break down some of those concerns that you have in that expansion in grocery that Amazon really honed in on in that letter.
STEFAN SLOWINSKI: Yeah, so you're absolutely right. In the shareholder letter yesterday, I mean, I think there were three key points I would highlight. One is the company making it clear that they are being more disciplined about their investment approach. I think that's welcomed. So I think they've gone through some very significant strategic decisions at the beginning of last year to cut back on areas where they don't see as much of a potential to be highly profitable and highly cash generative. And I think that's a positive.
We've seen them take some steps around that in terms of strategic decisions last year. They haven't really benefited the margins in cash flow yet, but they should start to this year.
The second thing is, we have seen them also say that they are committed to certain things like the international markets, which are still loss making, and to grocery. And so I think that we'll see them continue to invest there. They have taken steps to close down some physical stores in the Amazon Go in the fresh part of the business, the bookstores.
But we think that's probably also in preparation for them to increase investment, whether it be through Whole Foods or whether it be other organic or inorganic acquisitions. I think they feel like omnichannel, omni commerce is the future. It's important to be in grocery. It's important to have that weekly contact. Grocery delivery has not really worked out as well as they would have liked. And so I do think that we'll probably see them go back more forcefully into the physical format in some form or another.
DAVE BRIGGS: Jassy also talked about generative AI projects, which he says are going to be transformative. What would cause you to switch your evaluation to join the herds of bulls on Amazon?
STEFAN SLOWINSKI: Yeah, look, I think Amazon will be successful with AI. If anything, they're one of the creators of that industry, having been using AI for 20 plus years since they were invented. Obviously, Amazon Web Services has the capabilities. Just like Google, they have their own large language models. They have their own semiconductors. They're not necessarily reliant on external technology. And I think that they'll leverage that through AWS to make that available to their enterprise customers.
I think that's what we saw them announced yesterday. We're not yet quite clear as to how Amazon is going to use generative AI in their own Amazon consumer services. So I still think that's to come. So this is an exciting space. I think Microsoft, through their OpenAI relationship, Google, just like Amazon, has their own capabilities, and Amazon will all be successful. But I think near-term, the market's focused on three things. One is, what's the cost? So we may not see revenue just yet, but will we see a tick up in CapEx as this move towards generative AI accelerates? And of course, for Amazon, people are sort of looking more for CapEx cuts and not CapEx increases.
The second one is what is the product opportunity? I think with Microsoft, people see Microsoft 365, GitHub copilot, and some other announcements they've made of real opportunities near-term for them to begin to monetize it. We've seen some other partners like Salesforce with their GPT offering into it now with Mailchimp looking to monetize this through products.
And then the third, of course, is the platform opportunity, like I just mentioned, with AWS, Google Cloud Platform, Microsoft Azure, providing this technology to enterprise customers to bring their data onto their platforms, use these large language models to begin to train their own AI initiatives. So I think all three companies will be beneficiaries of that over time.
RACHELLE AKUFFO: And as you take a closer look at some of the valuations of these big tech companies, then, are there some that you see really as a good deal at the moment, especially versus Amazon?
STEFAN SLOWINSKI: Yeah, it's been an interesting year, as you mentioned, with the NASDAQ up nearly 20%. So we've seen a lot of multiple expansion because we haven't seen earnings upgrades. If anything, we've seen incremental negativity from an operating standpoint this year. In January, for the December results, Microsoft Azure, Amazon Web Services guided down. In February with the January results, we saw Workday and Snowflake take down their full year guidance. And then for the February quarter results, we saw Oracle miss and Accenture bring down their guidance.
So we're still seeing numbers coming down, but stocks have rallied. And of course, that creates a bit of risk here around valuations. We're not yet seeing signs of improving demand outlook. It's hard to say that's going to happen in the second half of the year. It's still possible. So we still think you do need to be picky. That's been our theme this year. We can't really depend on earnings upgrades. We can't really depend still on multiple expansion.
So we do like companies that are more self help oriented. These are companies like Salesforce, Oracle, SAP. They're more special situation, more self help, more enterprise focused where we see the market being more defensive if they can just execute on what they've promised. The shares should perform well.
And then amongst the mega caps, we like Alphabet. So Google is our top pick there. It does offer you a 7% free cash flow yield. We were cautious. We just recently upgraded to outperform. We think consensus numbers near term are more reasonable. We think that they will announce more of their own generative AI-backed products.
A Google I/O conference on May 10th is another catalyst for that. And so we think some of their underperformance is a bit overdone. So that's one with really healthy cash generation. We're likely to get a very large share buyback announced probably as well around the Q1 results later in April. So we would prefer Alphabet would be one, Microsoft, two, and then Amazon would follow.
DAVE BRIGGS: All right, excellent. Got to leave it there. Stefan Slowinski, BNP Paribas. Good to see you, sir. Enjoy the weekend.
