Amazon faces structural headwinds from slowing retail growth and the threat of AI agents disrupting its ad-driven profitability, making its valuation unattractive.

The number three might be a little surprising, and that's Amazon. Actually, I like what Amazon is doing in the world of artificial intelligence today. Building venture capital is what she excels at, and designing chips that improve their systems—especially on AWS—is also what she excels at.

But the real challenge facing Amazon today is the retail sector. Amazon's retail business is a great business, but its growth has slowed down recently. This sector is no longer large and rapidly growing.

Let's put this data together to show a clearer picture of the company's business size. We have seen growth of 13% over the past twelve months. This is no small feat, but it's not the kind of growth we've come to expect from Amazon.

The other major challenge is the profitability of this sector. As you can see, after the pandemic, remember that they overextended a little, then came back to $39 billion in operating income from the retail sector.

This income includes the company's operations in North America and international operations.

But where does this profit come from? The profit comes from advertising. When you search for a product on Amazon, ads will appear until you reach the third, fourth, or fifth product in the list.

Amazon relies primarily on advertising to generate profit. Note that advertising revenue exceeds its operating profit.

Why is this a challenge? Because it is not in the sellers’ interest, and it does not provide a good experience for buyers, and now, with the addition of agents who may buy more products, they will have to find a way to profit from this activity.

I recently posted a video about this topic, in which I talk about this real challenge. For example, they blocked the Muse program from accessing Amazon, even with credentials entered, because they don't want agents shopping on Amazon, since agents don't see ads.

This is the real challenge: what do you do with this data? Will advertising work continue in the world of agents? Amazon needs you to visit its app or website. This is its strength in the market.

Therefore, if you use these platforms less in the future, revenue growth may slow down a little, and profit margins may decrease.

Amazon needs you to visit its app or website. This is its strength in the market. Therefore, if you use these platforms less in the future, revenue growth may slow down a little, and profit margins may decrease . This is the real challenge for Amazon.

What will you do in this future that may rely more on agents, where you might talk to your phone and say, "This is something I want to order"? If you're doing it via Alexa, that's great.

But even with Alexa, you won't see ads. And if you do it through another proxy, whether it's Muse, Google Proxy, or ChatGPT, it won't be profitable for Amazon.

This will be a real challenge for Amazon, especially when you look at its free cash flow, shown in pink here, which was negative $11.6 billion over the past twelve months, and its debt. Look at this, $129 billion in debt.

Let's take a look. Review the annual figures and look at the forecasts. The market does not expect this negative free cash flow to continue for long, but it expects it to reach $34 billion in 2026.

Don't be surprised if this figure drops significantly in 2027 as well, because this is a real arms race to build AI infrastructure by all these giant companies.

The market does not expect this negative free cash flow to continue for long, but it expects it to reach $34 billion in 2026. Don't be surprised if this figure drops significantly in 2027 as well , because this is a real arms race to build AI infrastructure by all these giant companies.

Amazon stock is not cheap. The figures for the past twelve months, with a price-to-earnings ratio of 20, look very attractive. Remember that they have a large stake in Anthropic, which shows up on the income statement, making the price-to-earnings ratio look lower.

If you look at the projected earnings multiple, you will find it is 26. This is not a very attractive multiple, especially for a company whose compound annual growth rate is only 12% over the past five years.

If the retail sector is less robust in its AI model than it has been in the past 20 years, that will be a real disadvantage for Amazon. Amazon Web Services (AWS) may remain a strong company, but I don't think it's a leader in AI infrastructure today.

If retailing isn't as dominant as it has been over the past 20 years, I think that will put Amazon in a very difficult position. Once again, another company I'd like to profit from because Amazon's future looks more uncertain than it has been in the past.

Among the companies that appear to be overvalued in this context are Oracle, Korwef, Micron, Amazon, and Tesla. I believe all these stocks are