Competitive Strategy – Business Decisions that Strengthened Companies, No Matter the Industry

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I’m launching a new, recurring series called: Competitive Strategy – Spotlight on Decisions that Strengthened Companies, No Matter the Industry. Why am I doing this? Frankly, I am tired of hearing “this is a good business” or “this is a bad business” with some blanket statements behind why. How many times have you heard why a certain company is a “good business”?

  • Consolidated industry
  • Leading national market share
  • Asset light
  • High margins
  • Stable demand
  • Of course, saying a business has a “moat” doesn’t hurt

A company that has some of these features isn’t necessarily great. If you want to learn why (or disagree and would like to hear differing thoughts) stay tuned. I am actually launching the first in the series today – and what better way than to start with a company like Amazon.


A company’s competitive strategy outlines what decisions it will follow every day.

Where it will compete, what segments of the market it will target, where it will choose to scale, how it will use its balance sheet, and what will customers value?

These decisions can result the metrics I mentioned above, but the metrics themselves do not make the business good, or differentiated.

I will go through the competitive strategy of a wide array of companies.  Decisions companies have made / are making to show how those decisions upgraded them from good to great.

I hope to surprise some folks by discussing names that are in “bad” or cyclical industries. Sometimes you can have a bad industry, but a great company within that industry – and sometimes the stars align for a great investment opportunity.

After writing a few of these, knowledge will build and I probably will refer back to previous posts for examples on different company tactics (e.g. hard to not say Amazon Prime is similar to the Costco Membership strategy)


Here is a preliminary timeline of companies and industries I will examine (subject to change). If there are any companies you’d like for me to add, reach out to me in the comments or on twitter and I’ll add it to the queue. Some names may jump to the top if there is enough demand.

Here’s the one’s published so far:

AWS Valuation: Thoughts on the business and whether it should remain part of Amazon

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As cities across the U.S. embarked on huge marketing campaigns to attract “HQ2“, I couldn’t help but ask myself why Amazon was planning a second headquarters. Usually companies like coherence and for the business to act as one under one roof. It is more difficult to do this when you have two “headquarters”. To me, it reminds me of having two CEOs. Two voices. Two cultures. I came to the conclusion that Amazon was preparing for a split up of the company and I would need to think of AWS valuation.

The split would be simple: take the traditional retail business + Whole Foods would go under one umbrella and continue to operate out of Seattle, while the second business would be Amazon Web Services (AWS) and would operate out of its own hub and have its own resources. We should then ask ourselves ahead of time: what is a reasonable AWS valuation.

For those that do not know, AWS is much different than the retail business. It is designed to provide developers quick access to on-demand computing power, storage, applications and development tools at low prices. Thanks to its offering, developers, startups and other companies do not need to focus on infrastructure build out when they are starting a new venture, they can instead focus on their core product and utilize AWS’ resources.

AWS allows faster speed to market in some cases. It also allows this spend to be a variable cost, rather than a high, upfront capex spend.

This led me to ask myself:

  • What do I think AWS is actually worth? Does Amazon’s valuation today reflect its strength?
  • Is AWS actually a good business?
  • Would splitting the company make sense?
  • Is the AWS valuation not factored in to the stock price today?

I think I am going to go through the answers in reverse order. I do think it makes sense to split the company. AWS operates in a competitive environment with the Microsoft Azure, Google Cloud, IBM among others clamoring for a larger piece of the pie. AWS currently has top share of wallet, but it’s a much different business model than the retail business. Here are my three main reasons for splitting the company:

  • Allow focus in areas of strength.
    • Being a company focused on one goal helps keep all employees realize what the goal at the end of the day is: support customers.
    • Today, while a smaller part of the market, there is a conflict of interest with AWS and CPG sectors (e.g. Target announcement to scale back AWS, Kroger announcing post-Whole Foods it would be moving to Azure and Google)
    • Typically in conglomerates, new business in certain sectors can go unnoticed or underappreciated as “approvers” up the chain of command have other things on their priority list. Splitting the company reduces this kink in the chain. This appears to be limited risk today as Amazon is growing AWS and its services, but think about the other segments. Perhaps they are moving slower now in the retail segment or internationally than they otherwise would.
  • Optimize capital allocation
    • AWS is highly profitable from a EBITDA perspective (though is also highly capital intensive today as it grows). On the other hand, Amazon’s retail business is not only low margin, but also is capital intensive and its return metrics are much lower than AWS (especially internationally where the company still has significant operating losses).
    • Even if I think returns for AWS will come down over time (discussed more below), you could view the company as funneling good money after bad (i.e. taking resources from a high return business and pushing it into low return business). If I invest $1 dollar into AWS, I get 28 cents back in year 1 compared to 9 cents for North American retail or losing 11 cents Internationally.
    • You may be optimistic about the LT trends in the retail business and its improving profitability over time, but think about if AWS could funnel more of its cash into higher return projects. It is likely to perform better over time on its own. Freeing up these resources can help AWS invest in its core capabilities and build sustainable competitive advantage.
  • Better align incentives
    • Distinct and clear business with their own performance goals matter when you are paying your employees in company stock
    • Imagine you are a leading employee in the field and asked to work for Amazon. A significant portion of your comp will be in restricted stock that pays out if the entire company does well. But oops, something happens to the grocery business at amazon and the stock falls 20-30%, so now you are well out of the money.
    • Wouldn’t it be better if your performance and the company’s performance were linked?

Note, AWS valuation being underappreciated is not really a core tenant here.


Is AWS a good business?

“I believe AWS is one of those dreamy business offerings that can be serving customers and earning financial returns for many years into the future. Why am I optimistic? For one thing, the size of the opportunity is big, ultimately encompassing global spend on servers, networking, datacenters, infrastructure software, databases, data warehouses, and more. Similar to the way I think about Amazon retail, for all practical purposes, I believe AWS is market-size unconstrained.”

-Jeff Bezos, 2014 Letter to Shareholders

Clearly, AWS has grown like a weed. Amazon has disclosed the results of this segment going back to 2013 and we can see sales and EBITDA have grown at a ~50% CAGR since then and 2018’s pace actually picked up over 2017.

The business started when Amazon brought infrastructure-as-a-service (IaaS) with global scale to startups, corporations, and the public sector. By this, I mean that they provide the infrastructure that allow these companies to outsource computing power, storage, and databases to Amazon. It essentially turned this services into a utility for consumers, with pay-for-what-you-use pricing models. As an aside, what a beautiful competitive decision that was.

As stated earlier, this allows customers to add new services quickly without upfront capex. Businesses now do not have to buy servers and other IT infrastructure months in advance, and instead can spin up hundreds of servers in minutes. This also means you benefit from the economies of scale that Amazon has built up. In other words, because Amazon has such massive scale, it can pass some of those saving on to you. If you bought the servers and other utilized ~70% of the capacity, your per unit costs would be much higher.


AWS has attracted new entrants as well. Microsoft’s Azure and Google’s Cloud have also grown and attracted share. Microsoft provides some color on the business, which I have estimated in the table above, but Google provides basically no disclosure. Other players with smaller market share include Oracle, IBM and Alibaba in Asia.

Despite growth in Azure, Amazon owns more market share than the next 4 competitors combined. And the rest of the market appears to be losing share.


The logical outcome from this, especially when considering how capital intensive the business is, is that the business forms into an oligopoly. Oligopolies traditionally have high barriers to entry, strong consumer loyalty and economies of scale. Given limited competitors, this typically results in higher prices for consumers. Also traditionally, you would expect earnings to be highly visible and would lead to a higher AWS valuation.

However, this is not always the case and it leads me to some concern on the industry. In some cases, oligopolies become unstable because one competitor tries to gain market share over the others and reduces price. Because each firm is so large, it affects market conditions. In order to not cede share, the competitors also reduce price. This usually results in a race to zero until the firms decide that its in the best interest of all players to collude firm-up pricing.

How could this happen with Amazon Web Services? Well, we all now Amazon’s time horizon is very long and it attempts to dominate every space it is in by capturing share with low prices. As said in its 2016 letter to shareholders:

We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions.

Jeff Bezos, 2016 Letter to Shareholders

In addition, other competitors have benefited from movement into the space and have been rewarded in their stock price (see MSFT). Clearly others think Amazon’s stock price rise is largely attributed to investors’ valuation of AWS – and that may be true.

But Microsoft ceding share to AWS may hurt their results (and stock price) so they may attempt to take more and more share at the expense of future returns.

In a way, what could happen here is more of a slippery slope. They give a bit on pricing because the returns are so good now that a small price give here and there want matter. But then they add up…

Lastly, its no secret that building data centers to support growth is capital intensive, and that will impact the AWS valuation (see financial table above).

They also serve a lot of start-ups and other businesses. This creates a large fixed cost base for the cloud players. If there was a “washing out” of start-ups, such as the aftermath of the tech bubble, AWS and others could see excess capacity, hurting returns. In order to spread the costs, they may attempt a “volume over price” strategy. This will result in retained share, but hurt pricing for the industry as competition responds.


Unfortunately, I DO think returns are going to come down materially over time. And that will hurt the AWS valuation.

The industry reminds me too much of commodity industries. The industry is no doubt growing today, but the high margins we see today I believe are from high operating leverage. This tends to be more transitory in nature and means that returns on incremental capacity invested go down over time.

Take for example commodity chemical companies. AWS reminds me of some of their business models (unfortunately). Some operate in very consolidated companies, but operate at very high fixed costs and have exit barriers. The loss of one customer results in very painful results due to operating leverage. Although higher prices are better in the long run, the company will lower price to keep the volume and keep the fixed cost leverage.

Think about commodity businesses that reports utilization (note, we have limited disclosure on AWS, but that might be a helpful statistic in the future). Higher utilization usually results in good returns on the plant (or in the case of AWS, server). However, when you lower price on the commodity, the competitors, in turn, will also lower price so they don’t lose their existing customers. What results in lower returns for everyone.

As a another case study, P&G used to run its HR, IT and finance functions within each of its business units. It decided to form one, centralized, internal business unit to gain economies of scale. It actually formed a leading provider of these services. But then, P&G looked at its core business and said, “do I need to continue doing these functions or can I outsource it? Or maybe I can sell this whole business unit to another provider, which would give them more scale and lower the cost of the function”. The latter is what ended up happening. Although it wasn’t viewed as a commodity at the time, these functions began to become more commoditized and business process outsource companies (“BPOs”) now have very high competition and lower returns.

Another analogy would be to at the semi-conductor or memory businesses, though perhaps not as commodity as these two.

I personally think that over time, we will see this form with AWS. The fact that pricing has come down so much for the service (one unnamed engineer I interviewed told me that AWS will even let you know if they think pricing is coming down soon to keep your business). According to the Q3’18 earnings call, Amazon had lowered AWS prices 67x since it launched and these are a “normal part of business.” They’ve certainly been able to lower costs as well so far, but how will that change as competitors also gain scale?

How could I be wrong? I could be wrong in many ways, but the one case is that I am underestimating how “entrenched” the business is into everyday use. That could result in very low switching by customers. It could also mean that developers get trained using AWS so default to using its services. The counter to these arguments is that there is a price for everything and clearly Azure has taken share over the past year, so it’s not proving out thus far. If AWS become the winner-take-all, then I am dramatically underestimating the valuation.


So is it a good business? Well, lets look at at it from a Porter’s Five Forces perspective. I think the view on these, in brief, plus the current returns we can see in the previous tables would point to the industry being solid. My one concern comes back to the competitive rivalry. We can have a high barriers to entry business and highly consolidated, but returns are not good.

AWS Valution: Final Thoughts

Based on the market share numbers posted above, AWS is currently attacking a $73BN market. At the rates that the market has been growing, as well as the additional services, I think its reasonable the market expands to $100BN in the near term, especially as adoption increases.

I assume Amazon maintains its market share due to its relentless focus on lowering price and maintaining share. I think the additional share gained by Google and Azure will come at the expense of the other players included in the market share chart above.

For the reasons stated above, I think this results in returns coming down over time. I still model good returns to be clear, but that the return on assets comes down meaningfully.

This may be hard to read, but I end up with an AWS valuation of $164BN. Given the value of AMZN today is over $1 trillion, even though AWS accounts for over half of EBITDA now, I cant help but think this opportunity is more than priced in, unfortunately.

However, AWS would benefit in the long-term from being on its own for the reasons discussed above. In the short-run, it may get a higher multiple than the rest of the Amazon retail business since its growing quickly with such high margins.

How will the ECB Handle Europe’s Gas Crisis?

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We’ve all seen the headlines and charts of European electricity prices and gas prices. Each time the Nordstream pipeline is serviced, we brace ourselves for Russia to not bring it back. And we brace ourselves for Germany, Italy and likely all of Europe to fall into a deep recession with no easy way out.

Front Month Netherlands Nat Gas Contract Price

I don’t have much to add to the energy conversation other than to remember optimists usually make the most money in investing. But the situation is so untenable.

Since I have no idea how Germany’s chemical and industrial sector will deal with the loss of gas (I’ve read reports, but I don’t know the long-term solution), I decided to jot down what is happening with the Euro currency and if that’s something to stifle the blow.

Unfortunately I just don’t see it.

Here’s my scratch on what could happen. Happy to hear others thoughts

In a nutshell, the EUR has already weakened considerably against the US$. That may help tourism.

Theoretically it helps exports on paper, but this is an interesting situation. How? In fact, Europe has quickly become the highest cost producer of many chemicals and other products. Note BASF and Yara have cut fertilizer production because of the gas cost. That is likely true for many other products. Instead, Europe will need to import these fertilizers from the US.

So generically, if Europe can import products cheaper than it can make, it will have to. And that’s a lot of things at this point given the disparity in prices. It doesn’t help that commodities are typically priced in US$ either. Europe has become a high cost island.

So what can the ECB do? Raise rates? Drive the currency higher? I guess, but the magnitude likely kills the economy anyway.

Do they raise rates but provide stimulus? Do the governments try to take the whole burden? I could see the merit as this is the equivalent of war time spending. Maybe that helps the currency as investors see Europe is building a sustainable path out.

Do they do nothing? Hmm.

Should the Euro be disbanded? Maybe the countries that have cheaper power may want this. Maybe they wouldn’t.

Will the U.S. benefit? I could see our chemical and industrial sector get a larger boost as the low cost producer. But it will also drive up our energy costs, as we’ve already seen with natural gas hitting $9 again. The U.S. Fed also probably wants a stronger currency as it helps tame our inflation. But it is a bit easier being the reserve currency to strengthen when Europe is in such a troubling situation. It is also hard to imagine the US being unscathed in a major European recession.

Should the US conduct some sort of defense era production act? Drill baby drill, but in our own country? Some sort of Marshall plan? I see the merit, but do US voters?

We shall see!

More Signs of the Bullwhip Effect (part 2)

Reading Time: 4 minutesI wrote a post at the beginning of the year that the bullwhip effect was what kept me up at night. It actually was one of my most-read posts thanks to a bump from Andrew Walker (thank you sir, if you are reading). To summarize, it was a fear that while everyone else is focused on inflation, I was thinking about the after effects of a bullwhip. That is, on the way up, customers tend to see strong demand, prices are going up, and they realize they don’t want to be caught short and also want to get ahead of price increases, so they pre-buy.

Once demand tops out or reaches a tipping point, prices start to fall, customers say, “eh, I’ll just wait to buy when it is cheaper” and it is a destocking downcycle. It isn’t quite intuitive because sometimes  prices of inputs can really overshoot to the downside yet buyers are still reluctant to step in. But that is the point. The bullwhip overshoots on the way up and down.

With COVID, I think we saw this on steroids. Where customers saw strong demand, cost increases, but also supply chain challenges that made them consider having safety stocks. You can imagine why I have a fear of this upcycle-on-steroids turning into a down-cycle-on-steroids. Anything with steroids isn’t good, except for professional baseball, football…


I won’t rehash Target or Wal-Mart‘s earnings, or Bed, Bad & Beyond, which all seem to be experiencing excessive inventory in some fashion. In the latter case it completely sapped their liquidity. This could be true of Big Lots as well, we shall see but the tea leaves are not good.

But now, we have chip companies – center of the storm for supply chain challenges – calling out the bullwhip. Nvidia, which is a top 10 S&P500 company, recently came out and said,

Second quarter results are expected to include approximately $1.32 billion of charges, primarily for inventory and related reserves, based on revised expectations of future demand.
“Our gaming product sell-through projections declined significantly as the quarter progressed,” said Jensen Huang, founder and CEO of NVIDIA. “As we expect the macroeconomic conditions affecting sell-through to continue, we took actions with our Gaming partners to adjust channel prices and inventory.

Not only did they get demand completely wrong, they actually are taking an impairment charge on inventory! That is quite a change from 2021.

Here is Micron as well. They don’t just describe the bullwhip, they talk about its financial impact (demand down, but they also need to throttle back production. Doing so leads to bad decremental margins).

But they aren’t the only ones. Check out what Armstrong (a ceilings company) said about what they are seeing. I think they describe the bullwhip effect beautifully! I know it is a lot of text, but at least read the second half.

Low and behold, many other building products companies are reporting similar impacts. Here is Trex, a composite decking company, which typically viewed as a compounder, long reinvestment runway company (but also decking benefitted from the home being a sanctuary).

Their competitor Azek also mentioned similar things.

Here is Ryerson, a metal distributor:

And here is Stanley Black & Decker


So you get the point. There has been a swift change in what companies have seen and we look to have a destocking cycle on our hands. The last time we saw this was around 2015-2016, when there were similar fears of a recession, prices were correcting lower, inventory was fine so it was a perpetual down cycle.

It didn’t last long though. But you can probably guess why I was recommending municipal bonds a month ago when the 10 year treasury got to 3.5%. My bet was we actually have a disinflation problem coming, and that is starting to prove itself.

My advice would be to continue to avoid things with too-good-to-be true “demand.” Especially those that experienced strong bumps during COVID. That seems like it could unravel quite quickly. On the positive side though, I think the Fed will accomplish its goal on tamping down inflation! At least on the goods side.

Veteran Tip: ALWAYS open Friday 8-k’s $BIG

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Alright, I’m no veteran. But in my career I have learned one important tip… ALWAYS open Friday 8-k’s.

Why would a company file a “current report” that represents something “material” at Friday at 5pm? Hmmm. Seems obvious in hindsight, right? They don’t want people to focus on the said material item.

I’ve seen this a few times in my career. 9/10 times it’s benign. But one time it was a company disclosing a large loss on a hedge contract. Another it was an executive departure that gave a hint results would be bad. There’s more I can’t remember.

This time it’s Big Lots with an ominous signal! For future reference. I’m writing this at 5:30pm on a Friday after getting this notification in my inbox. While they are increasing the size of their credit facility by $300mm, to $900mm, they also are suspending the fixed charge covenant for a period of time. Hmmm

Now, Big Lots historically didn’t need a credit facility this large. But they just bought back a bunch of stock and, like other retailers, have bloated inventory now. They actually went from no debt, tons of cash, to $271mm drawn and limited cash.

The working capital is sucking liquidity, which just happened to Bed, Bath and Beyond. And now the latter is questionably solvent.

This could be a nothing burger. Or it could be an obvious sign that BIGs earnings will indeed suck like the rest of the space. That’s why they need to suspend the covenant. Perhaps they’d fail it otherwise.

I still think BIG will make it through this period and the stock will be higher in 5 years. But in the meantime… not a great sign.

Bed, Bath & BeBOND? (part 2)

Reading Time: 3 minutesWe all knew it was going to be bad, but it was worse. Bed, Bath & Beyond’s earnings were terrible, their cash got sucked up, and the CEO is out. The CEO’s credibility was already toast, but I want to pile on: their share buybacks might go down as some of the worst timed in history. Their investor day targets were laughable and I feel sorry for anyone who believed them. They also might be the fastest “great liquidity situation doing ill timed buybacks” to bankruptcy I have seen in awhile.

In my last Bed, Bath and BeyBOND post  I said,

I calculate LTM EBITDA of $190mm as the turnaround plan ran up against snarled supply-chains. Now we have changing consumer trends, which Target called out. So expectations are just $51MM in EBITDA for FY’22 (ended Feb ’23) and then going to $260MM in ’23.

This all sounds pretty bad compared to their investor day goals of $950MM. Management credibility is bad. And with everything else going on, I’m not sure many have appetite to invest in retail right now.

So we knew it would be bad, but it was Bed, Bath & BeREALLyBAD. EBITDA was negative $225MM. Woof. Expectations were negative $85MM.

As a result, their liquidity got zapped pretty quickly and they burned almost $500MM of cash. Good thing they were still buying back stock this quarter (what a clown show).

As a result, the bonds have cratered. In my last post, I mentioned I was interested in the 2034s at 50 cents. However, since that post the 2024s cratered from about 75 cents on the dollar at the beginning of June 2022 to 42 cents.

Ok – call me crazy, but I am taking a small flier on the 2024’s. The company is clearly in a distress scenario, but they also still have $900MM of liquidity. We could still see a fire sale of BuyBuyBaby (a big if), but there is value here to someone to loan-to-own, in my view.

BBBY still has $1.1bn of book value of real estate and $258MM of net working capital. I think they will start to sell down their $1.7BN of inventory over this year to generate cash and get over the 2024 maturity wall and they have room for mark downs of inventory to generate cash.

On the flip side, they still have $1.4BN of debt, but about $1.2BN of it is trading for less than 50 cents on the dollar!  So $1.3BN of real estate and NWC vs. $600MM of market value of debt (it is actually less) and $200MM of ABL. That leaves a gap of about $500MM to work with.

My pre-mortem expectation is they try to do a distressed exchange with the 2024s. They may generate enough liquidity to tender a portion of them (it is less than $150mm market value today – theoretically could use the ABL). My guess is liquidity worsens further next Q before they start to see some inflows from working capital.

One thing I know for sure – expect some coupons in the mail soon!

Special Situation Follow up: Bayer Glyphosate Liability $BAYN

Reading Time: 2 minutesI did a previous Bayer post back in 2019, as the the market seemed to be implying a massive liability for glyphosate. I know how tough it is to clink a link, but highly encourage readers to look at what the market was / is pricing in for Bayer’s liabilities. It made / makes little sense in comparison to other liabilities in the past and relative to what glyphosate is – a chemical which the EPA basically goes to the mat on saying it is safe.

Specifically, the EPA states:

  • No risks of concern to human health from current uses of glyphosate.
  • No indication that children are more sensitive to glyphosate
  • No evidence that glyphosate causes cancer in humans. And they add: EPA considered a significantly more extensive and relevant dataset than the International Agency on the Research for Cancer (IARC).
  • No indication that glyphosate is an endocrine disruptor

I mean, think about it. Glyphosate is the most widely used chemical out there and one of the most studied. I don’t think the government is some evil entity that would hide whether it caused cancer or not. Nor do I think they’d allow it to continue if there was any doubt.


It is highly concerning that a jury can say that a chemical causes cancer, when in fact the evidence shows it does not. That is a slippery ethical slope.

Since then, Bayer has won 3 other cases determining that glyphosate did not cause cancer. I guess in the future one state can say it does and another says it won’t? Hm.

Maybe not. The Supreme Court may hear Bayer’s case. Or they may not. But given this situation I discuss above, it seems like they should!

If Bayer’s case is heard, they could help resolve about 31,000 cases against it AND a huge overhang on the stock.

If Bayer’s case is NOT heard, I think we’re basically in the same situation where Bayer will slowly but surely have to prove its case one by one. That seems more priced in (dangerous words of course).


Bayer currently trades for 7.4x ’23 EBITDA – this is for a pharma and consumer health giant (that also owns Monsanto and legacy Bayer crop protection which is just 40% of EBITDA). Merck and Bristol Myers Squibb trade for around 10x ’23. Is the market implying Bayer’s crop protection biz is worth, like 4x? That is crazy. Especially for me who is someone who thinks the glyphosate liabilities are overblown. They actually announced they are selling a piece of the business for 12x. Hm, maybe just keep doing that?

Last, we have also seen creative ways for dealing with liabilities, like the talc liability and asbestos. To be clear, I think glyphosate is nothing like those. Those actually caused issues! But I am sure Bayer is running through the options to mitigate risk…

I could see 25-30% upside on Bayer from some sort of resolution and even then I don’t think it’d look expensive.

Stay tuned!