Amazon Is A Trade Not An Investment

“The best investment decision I have made has been purchasing Amazon during their IPO and the worst decision was selling Amazon.” – Bill Miller on The Investor’s Podcast

I’m currently reading “The Everything Store” on my local library app (not Kindle ironically), so now seems like a good time to talk about a potential investing mistake that I made last year.

In February of 2016 I purchased AMZN at $570/share. I sold it a few months later for $675. Even after today’s mildly disappointing earnings report the stock is around $1,000 today.

Obviously I left A LOT of money on the table. I don’t actually feel bad about it though, because I’m not so sure that Amazon is worth $1,000/share today. Yes the company is aggressively growing, but the company is currently valued as though it will keep growing forever, and while there is surely runway in retail (and possibly cloud), Amazon is probably the most expensive way to play these trends. Amazon is one of the MOST expensive FANG stocks, with a PEG approaching >7x! On a trailing EBITDA basis AMZN trades at 40x, and even with a growth rate of 40% annually this is a very pricey stock, rivaling Netflix in expense.

This isn’t to say that Netflix and Amazon are not going to keep growing, but they may *never* deliver an acceptable cash flow yield to justify an investment. A “your margin is my opportunity” strategy only works when you get buy-in from investors and employees. At some point, when investors realize that they may never see the margin expansion they are currently modeling for Amazon, faith in the company is going to get rocked. And then rocked again when employee options take a hit. Massive growth tends to mask problems, but they are there somewhere inside of Amazon. No business is perfect and this one has been priced for perfection.

In “The Everything Store”, Bezos comes across as incredibly smart and aggressive, but he is no god, and I think investors must be drinking Kool-Aid to imagine that anti-trust concerns are not just over the horizon for a company which has so publicly and single-handedly destroyed the retail sector and is now slavering over groceries.

If you want to position yourself for online retail, Amazon is not a bad bet, but not the cheapest stock, in many cases it no longer offers the cheapest wares. Eventually shoppers will figure that out.

If you want to position yourself for cloud growth (like I am doing), Google and Microsoft are both well positioned to benefit from the high-end customer market. Google is offering class-leading AI and ML tools while Microsoft has a better sales entry point through Office and Windows add-on capabilities.

Both MSFT and GOOGL generate higher internal rates of return. Both have allotted money to buybacks (though Google has yet to act). Over the past 12 months Microsoft has repurchased 3.9% of outstanding shares and currently pays a 2% dividend. Both would benefit significantly from cash repatriation.

The one wildcard is Bezos himself, who still owns a significant amount of Amazon stock and still runs the company. He has certainly surprised the market so far, and perhaps he will continue to do so.

I currently own Facebook, Google, and Microsoft, all solidly in the tech growth complex so I’m not a tech heretic. I could absolutely be wrong about AMZN, and there’s no signs that the stock will come back to earth anytime soon.

For my money though, Amazon is a trade at these levels not an investment.

 

 

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Author: secondhandstocks

The genesis for this blog stems from a Marine buddy and I came back from Afghanistan with more money than knowledge, and heedlessly tossed our hats into the stock market ring. A few months later, I remember discovering the classic book The Intelligent Investor by Graham and Dodd, and ravenously devouring my first introduction to value investing. That framework - with some generous additions by Seth Klarman, and Joel Greenblatt among others - guides my investment philosophy. I spent five years working in the intelligence field, both in the Marine Corps and then for a government agency after that. I speak Arabic and Pashto, have programming and analysis experience, and enjoy investing in technology companies as a hobby. I also spent a year on Wall Street working on a #1 Ranked Institutional Investor team, before deciding that that the Sell-Side was not for me.

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