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Amazon’s $38 Billion OpenAI Deal — And Why We Were Already Bullish on the Stock
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Podcast Host
Hoping for today in the founders?
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Ed Elson
Scrappy, traction oriented grinders and hustlers who will blow through every brick wall in this building to get to where they need to be.
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Podcast Host
Welcome to the pitch. Season 14 where startup founders raise millions and listeners can invest on this season of the show. 10 VCs, 7 startups with one shot to build the company of their dreams.
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Adobe Express Advertiser
Oh my God, we built the entirely wrong product.
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Podcast Host
Two shots to build the company of.
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Dan Primack
Their dreams with that intro.
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Thumbtack Advertiser
Let's go.
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Podcast Host
Season 14 is available now wherever you listen to podcasts, so subscribe to the Pitch so you don't miss it. This season is presented by Adobe.
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Ed Elson
Today's number 95,000. That's how many Japanese citizens are more than 100 years old. That makes Japan the second oldest region in the world, just behind D.C.
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Dan Primack
Money markets matter. If money is evil, then that building is hell.
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Ryan Peterson
The show goes on.
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Ed Elson
Sell.
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Dan Primack
Sell.
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Ed Elson
Welcome to Property Markets. I'm Ed elson. It is November 4th. Let's check in on yesterday's market vitals. The S and P and the NASDAQ rose to start the month with gains from Amazon boosting the indices. More on that later. The Dow declined as most stocks outside of big tech ended the lower. The yield on 10 year treasuries increased as the government shutdown reached its fourth week. Bitcoin sank amid a broad crypto sell off and finally Palantir stock popped in after hours, trading on better than expected earnings and strong guidance for the current quarter. Okay, what else is happening? The Supreme Court will begin hearing arguments tomorrow on whether Trump can use emergency powers to impose tariffs. Trump's challengers will argue that the trade deficit is not an emergency and the tariff power belongs to Congress, not the White House. Meanwhile, the government will argue that the president does have broad authority to impose these tariffs and that rolling back the tariffs would hurt the US Three lower courts have already ruled against the administration. The Supreme Court will have until June to issue its decision, but most expect a ruling to come by January. While the justices consider whether any of this is actually legal, the tariff announcements continue to roll in. On Thursday, Trump established this framework for a deal with President xi Jinping. Just three weeks after threatening 100% tariffs on Chinese imports, the US agreed to reduce tariffs on Chinese goods by 10%. And in return, Beijing pledged a tougher crackdown on fentanyl. Meanwhile, new tariffs on medium and heavy duty vehicles and buses took effect on Saturday. All told, consumers are still facing an average effective tariff rate of 17.9%, the highest since 1934. Okay, here with on the ground experience navigating these tariffs, we are speaking with Ryan Peterson, founder and CEO of Flexport, a global logistics and supply chain management company. Ryan, thank you very much for joining us.
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Ryan Peterson
It's great to be here. Yeah. Something bad must be happening in tariffs world. When you call me exactly, you're the.
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Ed Elson
Only one who's actually experiencing this and understanding what's really going on here. So obviously there's the Supreme Court, which is having the hearings on whether these tariffs are actually legal. That is ongoing. We will have a decision by June. That is the rule. Perhaps we'll have one earlier, but last time we had you on it was about six months ago. We were talking about tariffs, and the word you used to describe the business environment was paralysis. Where are we now? And is that still the word?
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Ryan Peterson
Yeah, it's, you know, and the reason I said paralysis is it was just very difficult for people to make decisions because it was all changing so fast. In terms of which countries were being hit with what duty rates, I think we have a lot more information than we did. When was that? Four or five months ago. It's. It's a little bit more clear. I mean, this latest deal with China, where they've really lowered China down to the levels even below India and Brazil, it gives you, I guess, a fair amount of clarity. And by the way, it now shows you that being paralyzed before was the right answer, because if you did move your production to India, then all of a sudden your tariffs are higher than if you would have kept it in China. So people are still In a bit of a wait and see mode, maybe more than before. And there's probably some degree of regret of people who acted too quickly who are now going, oh, I've met at least a couple of companies who started shifting manufacturing to Indonesia and Vietnam and are now saying, wait, China is not worth it. China's got lower D rates.
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Ed Elson
So what does this mean for prices? I mean, I think what you're describing here is a state of paralysis, maybe a little bit of taco. Does that result in people actually not changing prices? Does that mean that, that that tariff costs aren't being passed through because they don't really know what's, what's going to stay and what isn't.
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Ryan Peterson
People, the brands that we work with largely did pass through some degree of price increase. Remember that the tariffs, although high, the wholesale cost and people tend to mark, brands tend to mark their wholesale cost up three to five times by the time a consumer's buying it. So right, a 20% duty, you know, it's really divide that by, by three or by five in terms of what the price increase will be. And you have seen that in the E Comm world in particular. So you, you have seen some, some degree of price increases coming through. Brands are always very reluctant to increase price because they don't know what's going to happen to their demand and, and can't afford to shrink. You're also seeing a real good recession right now. And the economy is not in recession probably because of services, data, AI, data center build outs. There's a lot of incredible amount of stuff happening in the energy sector to meet the demand for that. But if you look at the movement of goods, it's freight, freight movements are way down in the economy. Some of these leading indicators, the volumes at the ports are down quite a bit, especially from China, which is our biggest import partner, from an ocean standpoint, down about 20% year over year. So now ironically, a goods, a recession in goods might actually decrease prices because it gets very competitive and brands, you know, they have to accept less margin and they'll start selling stuff cheaper. So it's always a very complex dynamic. Just to pin down to one metric.
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Ed Elson
Yeah, when we look at just the inflation, which was 3% in September, it's, it's going up. It was at 2.3 and then it's been continually rising after the tariffs. But it is still lower than some expected. Some people were expecting it to be higher than, than 3% and I have heard the argument made that because it is lower than expected tariffs are not that big of a problem or they are not causing the pain that we really thought. I, I'm suspicious of that because my view on it is it seems to be that as you say, there's paralysis. So brands are reluctant to pass the cost through, but they are passing them through and eventually they will pass the full cost. But as someone who's on the supply chain side, what do you think when you hear that argument when people say, well, look at inflation, tariffs aren't as bad as all the naysayers said?
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Ryan Peterson
Yeah, well, you have to remember that the tariffs were paused on rest of world and there was a hiatus and it didn't really come live until the end of August. So this is pretty new. And it does take these brands time to decide their position, their pricing strategies, what to pass through. The other thing is that we've seen just a huge rise in fraud. And our analysis we're going to publish soon, but our analysis is that around 10% of all freight that's coming into the United States from China has shifted terms to where the Chinese companies are importing it into the US Instead of the American companies importing.
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Ed Elson
Wow.
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Ryan Peterson
And it's a subtle distinction, but the United States is the only country in the world where foreign countries can import goods into the country. Every other country on earth, you need to have an entity. Foreign companies, we're the only place that allows foreign companies to import goods. Every other country in the world, you need to have an entity as you could be wholly owned as a foreign company, but you have to have an entity that serves as the importer. In the United States, you don't. So a foreign company can just import goods and if they lie about the valuation and they say, hey, these goods that are worth a hundred thousand, they tell customs are only worth 10,000 if they are caught. We don't have agents in foreign countries like China to go and prosecute trade compliance violations like that. So we're seeing around 10% of US trade has shifted terms in a way that indicates just massive amounts of fraud. It's 60% of all the Amazon sellers are Chinese. What's called a non resident importer, meaning the overseas companies imports the goods. So I think, you know, markets find a way and black markets also tend to pop up when the incentives are there. And so we're just seeing a huge amount of fraud and evasion of these customs duties. And that could also be partially to explain why it hasn't hit inflation is if they're cheating and not paying the duties.
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Ed Elson
When you think about how this is playing out. Who are the winners and the losers in tariffs? Right now it sounds like foreign importers are in a sense a winner because they have a fraudulent network that allows them to evade the tariffs in a way that perhaps American importers can't.
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Ryan Peterson
I should, we should, we should caveat that say fraudulent foreign importance are benefiting. Yes, there's plenty of, plenty of good ones and plenty of companies that are above board regardless of where they're from. But yeah that, that would be an obvious winner. I think generally companies that are maybe it's you say agile companies come. It doesn't always mean that you make a rapid fire decision. You might be the best thing to do is to stay still and you know paralysis is probably the wrong answer but staying still can be okay if that's your interpretation. But businesses that are able to adapt quickly to change have done the best. By the way customs brokers are doing very well Flexport being one of them people that the reason is we provide advisory services and solutions for companies dealing with customs. So obviously the more regulated and challenging those regulations become, the more demand there is for that kind of advice and consultants and things like this. So I think that that's a category of businesses that's doing well and Latin America is reasonably well off here. Their tariffs have been much lower than those imposed on Asia other than Brazil. But the tariffs throughout Latin America besides Brazil are at lower levels than Asia and so they're, they're gaining a leg up there. We'll see how good they are taking advantage of that. They're, they don't have the same manufacturing scale capability quality as, as a China does. But, but there's a big opportunity for them if they can seize it.
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Ed Elson
And then losers I would say American.
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Ryan Peterson
E commerce companies, the E Commerce brands are really suffering especially people that were using what's called the de minimis. Some people call it a loophole. I think it was just a law. But de minimis exemption which meant that there was no duties on goods under $800. So the Trump administration killed that on goods from China effective May 2 and goods on rest of the world in at the end of August. So those people were paying no duties and had a huge leg up and have now gotten, you know, now they're paying full duty which at high rates and then closely related they were doing that out of fulfillment centers in Mexico and in Canada. You know there's some big Chinese e comm providers seeing Temu TikTok that fly the goods in from China under this exemption or they used to. But actually a huge number of American brands were setting up fulfillment centers in Tijuana and in Canada. And then if you ordered something from them, it would be made in Vietnam but shipped from Mexico direct to consumer. So there was no duty on that. That's gone away. It's really hit hard these fulfillment center jobs in Mexico. And I suspect you'll probably see some bankruptcies from the fulfillment companies themselves that is set up on the border. Lost a huge amount of customers that's getting reshoring reshored. So that there's now because there's no reason to do fulfillment from Mexico, it's going to slow you down. You're better to put that fulfillment center closer to your customer. So that's a loser, probably the consumer. I do think there's more inflation that's being shown there in the stats. I think that if you look at E Commerce products in particular, prices have gone up.
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Ed Elson
Yeah.
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Ryan Peterson
So yeah, probably. Probably more we could list out. But free trade in general. Milton Friedman's rolling his grave.
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Ed Elson
Yes, exactly. Just looking ahead here, we've got the court decision. I'd like to know what you think the court is going to rule. We've had the lower court say that it's illegal. We'll see what the Supreme Court says. And I'd also like to just get your views on how this will play out long term. Like will we see these tariffs a year from now, two years from now? Are these here to stay?
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Ryan Peterson
Yeah, you know, I get a lot of different reads from different lawyers who are experts. And what will the Supreme Court say and do? I'm sort of a market maximalist here. I'm going to go with polymarket. Right now it's got a 35% chance that the Supreme Court rules in favor of Trump. So 65% chance that everybody gets a refund probably seems as good as anything. It'll be very interesting to follow that one real time and see if it leaks at some point. Right. If that market moves very quickly before it's announced. The other indicator there is currently you can sell your right to these refunds and they're investment banks that are brokering these transactions and you're getting about 25 cents on the dollar if you sell your refund now. So that's probably your range that and that you know somebody's trying to make a profit on that. They're not doing that just to like. Yeah, to get there. Not. That's not saying there's a 25% chance. It's must be higher than that that it gets turned over or they wouldn't buy it. Smart money.
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Ed Elson
Yeah. It sounds like you think that a year from now, probably not looking as affected by tariffs as we are today. Or maybe there are no tariffs.
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Ryan Peterson
Yeah, I'm just going off the markets. I don't really have a good insight into the Supreme Court. I think the Supreme Court's a political body than it is a legal one in a lot of ways. So yes, the, the counter argument to that is just, well, he's, you know, there's some Trump appointed a lot of those people and the, the right. It is a, a right wing court at this point. So you would. But who knows. Yeah, I, I do know that the Trump administration will spin it as a win either way. Right. Stock market will boom and they'll go look what we did.
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Ed Elson
So exactly.
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Ryan Peterson
There's always a way to I think Ben Franklin says good thing to be a reasonable person. You can come up with a reason for anything you want to do.
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Ed Elson
I think that's the right prediction there. All right. Ryan Beaton, founder and CEO of Flexport, as always, really appreciate your time.
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Ryan Peterson
Likewise, thanks for having me.
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Ed Elson
After the break, the maker of Tylenol gets acquired. If you're enjoying the show, give Profg Markets a follow.
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- [17:54]
Ested Herndon
First, it was one alleged truck boat.
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Ryan Peterson
Back in September, US Military forces conducted a kinetic strike against positively identified trend aragua narco terrorists.
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Ed Elson
11 on board were killed when you.
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Dan Primack
Flood American streets with drugs. You are terrorizing America.
- [18:12]
Ested Herndon
Then a second strike in the Caribbean, then another and another. Almost every week for two months in total, more than a dozen ships have been hit and at least 57 people left dead.
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Ryan Peterson
We're going to kill them.
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Ed Elson
You know, they're going to be, like, dead.
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Ryan Peterson
Okay.
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Ested Herndon
And Trump is still upping the ante. He's sending warships to the coast of Venezuela. But the question is why? And what Stephen Miller got to do with it. Okay, I'm Ested Herndon filling in around here for the next few months. That and more on Today explained from Vox.
- [18:53]
Scott
Scott, we're hitting the road, bringing Pivot live to the people. Seven cities. Toronto, Boston, New York, D.C. chicago, San Francisco, and LA.
- [19:03]
Vanta Advertiser
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- [19:23]
Scott
All right, that's enough, Grandpa. It's going to be so good. And we're bringing our brand of whatever we do to the people. And we're excited to meet our fans. We love our fans. For Tickets, head to PivotTour.com See you there.
- [19:42]
Ed Elson
We're back with property markets. Kimberly Clock announced it is acquiring Kenview in a deal valued at $48 billion. The deal would bring together some of the most recognizable consumer health brands in the world, such as Huggies, Kleenex, Band Aid and Tylenol. And if approved, the combined company would generate an estimated $32 billion in net revenue next year. Canview shares jumped 20%. On the news, Kimberly Clark shares fell 15%, the most in a quarter century. As a reminder, Canview was spun off from Johnson and Johnson just last year. Since the IPO, the stock has fallen 35%. The company has struggled to gain momentum on its own, weighed down by SO after consumer demand, price cuts and inventory reductions. Then came the Tylenol controversy. US Tylenol sales fell 11% last quarter after Trump linked Tylenol use to autism. And shares in Kenview, the tylenol maker, fell 22% in the weeks that followed. Now comes this buyout from Kimberly Clark. The company is paying $21 per share. That is a 46% premium to where the stock closed on Friday. But it is worth noting Kenview traded at roughly that same level just a few months ago, before the Tylenol controversy. So here to help us unpack this Acquisition. We are joined by Dan Primack, business editor at Axios and the author of the Daily Pro Rata newsletter. Dan, thank you very much for joining me on property markets.
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Dan Primack
Thanks for having me.
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Ed Elson
So Ken View, which was spun out of J and J. There are a lot of questions about how this company was going to fare. It is now being acquired or Kimberly Clark has announced it is acquiring it for $48 billion. Let's just start with your top line reactions. Any, any initial thoughts on this deal?
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Dan Primack
Well, I mean, from Kimberly Clark's point of view, even though their investors hated this deal today when it got announced, the, the strategic rationale does make a certain amount of sense. Right. Kimberly Clark is known for selling things like Huggies and toilet paper, and it wants to move into or expand into health and wellness, particularly as older. So that makes sense for them kind of, you know, own the entire life cycle. That makes sense strategically. But there's these massive litigation risks, which is what I think the, the investors were freaking out about not just Tylenol, but also some old talc lawsuits that are tied to JJ as you mentioned, Ken View spun out of it a couple years ago, but it remains on the hook for those as a defendant in lawsuits not just in the US but also in Europe.
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Ed Elson
Yeah. How much are those lawsuits driving the stock right now? I mean, it's down 35% since the spinoff. Is that the real story with Ken View? Is that why the stock has suffered so much?
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Dan Primack
I think that's a big part of it. You know, look, it's a big price tag, right. If you include debt, it's nearly $50 billion. So that's, that's a huge swing. And some people reflexively react to that. There's always what they call kind of like a. There's kind of like a short arbitrage that sometimes traders play whenever there's a big deal, which can just drive stock down almost no matter what the deal is. But the multiple is actually pretty reason. It's a high premium to where Can View stock was trading. But the multiple is pretty reasonable compared to other deals in the sectors. Yeah, it's the, to me, I think it's the litigation risk. Right. You know, you've got this weird Tylenol situation here where depending on what RFK and Trump and HHS eventually say about Tylenol, you've already got a lawsuit in Texas from the Texas attorney general. You could have hundreds, thousands of lawsuits. And even if Can View slash, Kimberly Clark could win every single one of them on the merits. And Wins every single one of them on the merits. It's still a massive cost and it's a massive time suck.
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Ed Elson
Yeah. What do you think is the strategy for Kimberly Clark right now? Right now. Why does this make sense? Kimberly Clark?
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Dan Primack
Yeah, as I said, I think it makes sense because they want to move into health and wellness and that's, that's what Can View is right. It's got a, it's got a huge portfolio of products that are focused, that are health and wellness products, some of which might get divested. Ken View and Kimberly Clark kind of talked about that a little bit on the analyst call after this deal was announced, although not with any specifics on what might get divested. But look, Americans are getting older. Americans need more health and wellness products. And so if you're Kimberly Clark, it's kind of a growth area to move into. They, they use the word tailwinds a lot. And also I think this is a CEO who wants to really put a big acquisitive stamp on his company, which, which again, it's, it's a very it. Kimberly Clark is the sort of company that will always survive.
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Ed Elson
Right.
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Dan Primack
Even in the age of AI, people are still going to need toilet paper. That's not going to change. But it's not a huge high growth sort of business. This could really bulk them up on the top line.
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Ed Elson
Final question here. Kimberly Clark and Ken you. They both sell household staples, consumer health. Are there any antitrust concerns here? Is that something that we should be looking at?
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Dan Primack
Traditionally, I would say no, I don't think so. You know, there might be one or two very, very niche areas I'm not aware of, you know, that FTC or DOJ might look at. Although again, Can View did kind of volunteer today this idea of divestitures. So I think clearly there's no major product lines that are overlapped. So, you know, if the US Government came and said, look, we have antitrust concerns, this is how you could remedy them. I think Ken View and Kimberly Clark would be pretty happy to put whatever those assets up for auction. And so far this FTC and DOJ under Trump have favored divestiture remedies. Biden's didn't. Biden's didn't really like negotiating these deals out. Trump's has the wild card in all this, of course is that is the Tylenol situation and namely that Can View is in Trump's crosshairs. And could there be some sort of antitrust action which doesn't seem to really pass the smell test as a regular antitrust action, but is being informed by other things. Yeah, I think that's possible. And each company has basically a billion dollar plus termination agreement written into this deal with the other one. Although, interestingly, there's no litigation carve out in here for Kimberly Clark. In other words, if this deal closes, it assumes all the liabilities or all the litigation risk every now and then. When you've seen mergers like this with a company, and particular the TALC lawsuits, they'll kind of carve those out and say to the company being bought, your shareholders actually continue to assume this risk. You know, we take this pot of money and it stays over here. Kimberly Clark isn't doing that. They're taking the whole kit and caboodle.
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Ed Elson
Yeah, it's very interesting. I mean, do you think it's possible that they looked at what happened with Tylenol and they. And because it's fascinating the extent to which this Tylenol situation has been the main driver of the stock price. Do you think it's possible that they looked at the Tylenol situation and they said, actually the stock's at a discount. We're not so worried about the litigation. We think we're going to be fine and therefore we're going in. In other words, was what happened with Tylenol a big piece, do you think, in the decision process for this acquisition?
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Dan Primack
It's possible. What we need to do is we have to wait a little bit to get kind of the history of the merger which will get filed with the SEC. We haven't seen it yet. The CEO, both CEOs kind of got asked a bit today about the background of the deal and they both hedged on it. So we really don't know. I mean, this could be something that's been worked on for the last 10 months. For all we know. We found out that RFK was going to zero in on Tylenol as a potential autism cause. The CEO of Kimberly Clark did talk about having kind of had his eyes on Ken View, I think he said for years maybe since the spin out got announced by JJ back in 2223, but we don't know. And what will be very interesting to find out when we do get the history of the merger, because these things get fairly granular. Is did it change the price? We don't know. You know. And what were those conversations? Kimberly Clark said that they had medical experts and legal experts advising their board about this issue, but we don't know how it impacted the actual offer price, which is whatever a 50, 60% premium on where Kenvie was trading.
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Ed Elson
Yeah, certainly the elephant in the room that we all need to hear more about. Okay, Dan Primack, business editor at Axios and author of the Daily Pro Rata newsletter. Dan, really appreciate your time.
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Dan Primack
Thank you very much.
- [27:50]
Ed Elson
Amazon struck a seven year, $38 billion deal to supply computing power to none other than OpenAI. OpenAI will run its AI models on Nvidia's GPUs, but in Amazon's data centers. The news sent Amazon stock up 4% to a record close, while Nvidia ended the day 2% higher. So another week, another blockbuster deal involving OpenAI. We've seen OpenAI partner up with Microsoft and Oracle and Nvidia and AMD, practically every big tech company. But now they will partner with Amazon and once again, the market is very, very excited about this. Amazon added nearly $100 billion in market cap on news of this deal. Now, what makes this different from other deals? Well, not much, other than the size of it. Compared to the other deals, this one is relatively small. Yes, it's still $38 billion, and that is a big number. But Compare that to AMD, which was more than 200 billion, or Oracle, which was $300 billion. It is not quite the same. In addition, this is clearly a pivot away from Microsoft, which has historically been OpenAI's largest partner, but also Microsoft is AWS's largest competitor. And as we learned recently, there have been some tensions between OpenAI and Microsoft. They seems to quell those tensions with this new deal they announced last week. But still, this is clearly an attempt by OpenAI to wean itself off of Microsoft for cloud computing. Now, perhaps the more interesting question is, what does this mean for Amazon? On Monday's episode, we talked about Amazon and we briefly suggested why we are bullish on the stock. And since then, since we talked about Amazon, the stock has risen about 5%. So now seems as good a moment as any to unpack exactly why we are bullish on Amazon. And it comes down to a few reasons, and one of them is indeed AI. Despite the fact that Amazon is in fact an AI leader, AWS is the largest compute provider in the world. It's larger than Microsoft Azure, it's larger than Google Cloud, and of course, cloud is essential for AI. Despite that, Amazon has, for whatever reason, been viewed as an AI laggard. When you think about AI, you think of OpenAI, you think of Nvidia, you think of Microsoft. Generally speaking, you don't think of Amazon, but you should think of Amazon, not Just because of their cloud business, but also because of their chips business. Amazon is investing heavily into building its own Trainium chips, sales of which grew, as we discussed on Monday, 150% last quarter. So our view is that the market will soon view Amazon as an AI winner. And of course, this OpenAI news comes out. This is the perfect example of that, which is why the stock is ripping right now. Another reason we're bullish. Efficiency. You might remember Meta's very famous year of efficiency, in which costs were cut dramatically and revenue just continued to grow organically and the stock rose more than 100%. Well, Amazon is headed for something similar. They're already cutting down their corporate workforce dramatically, as we've discussed, and they also have plans to cut down the broader workforce too. This is not great news if you're an Amazon employee, but if history is any guide, it's great news if you are a shareholder. Wall street loves when companies trim the fat and Amazon's plan is to mow it down. Now. The final important reason is mean reversion. Despite everything that's going for Amazon AWS and its role in the AI story, the Trainium chips, even its satellite business project Kuiper. Despite all of that, Amazon is trading at a historically low multiple. Over the past five years, it has traded at 60 times earnings today. It trades at 34 times earnings now. Yes, 60 is very high, probably too high. But there's not a lot of evidence right now to support the notion that Amazon's growth potential is historically low, that it is historically lower than it should have been several years ago. So those are just a few reasons why we are bullish. The stock, of course, immediately ripped right after our episode came out and after we said that we are bullish on Amazon. So there is unfortunately a little less room to run than there was, say, last week or at the beginning of this week, but still at $254. We like the stock in some long Amazon. Okay, that's it for today. This episode was produced by Claire Miller, edited by Joel Patterson and engineered by Benjamin Spencer. Our associate producer is Alison Weiss. Our research team is Dan Shalon, Isabella Kinsel, Kristen o' Donoghue and Mia Silverio. And our technical director is Drew Burrows. Thank you for listening to Profitry Markets from Profetry Media. If you like what you heard, give us a follow. I'm Ed Elson. I will see you tomorrow.