THINKING OUT LOUD

Searching for the next Amazon

January 31, 2020

by Rob Zdravevski

 

In a most interesting earnings season, Amazon (AMZN) reports earnings today and the stock price rose 11% after the close of regular trading.

The Numbers

2019 fourth-quarter profit was $3.3 billion on record quarterly sales of $87.4 billion (beating revenue estimates by $1 billion)

and this compared to revenue of $72.4 billion & net income of $3.0 billion in Q4 2018

Amazon Web Services cloud-computing segment was responsible for $2.6 billion in 67% of Amazon’s total operating profit, on revenue of $9.95 billion.

North American e-commerce sales produced operating profit of $1.9 billion on sales of $53.67 billion, while international retail operations produced an operating loss of $617 million on revenue of $23.81 billion.

For the full fiscal year, net income increased to $11.6 billion, or $23.01 per diluted share, placing AMZN on a trailing P/E Ratio of 91.

Net sales increased 20 percent to $280.5 billion, compared with $232.9 billion in 2018.

With all these figures of growth and stellar performance (and in the vain of long-term investing), today’s media and pundits have made comment about how Amazon should be a stock you should buy for your grandchildren and own the shares for a long, long time.

What about if we pondered this notion years earlier, perhaps like Jeff Bezos did.

But What If ?

Amazon listed its shares in May 1998 at $18 per share, but let’s drop the idea of being so poignant to have invested back then.

Incidentally, since then, the company has not increased its shares outstanding by any dramatic stretch.

Let’s just assume we just decided to watch this “start-up” for a decade of so before figuring out if they were any good.

Below is a price chart of Amazon since its IPO.

p.s. Those dollar signs at the bottom of the chart signify when they had some stock splits.

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In another chart below, I’ve zoomed in and around the years either side of the 2007-2009 “Global Financial Crisis”.

For a point of reference, I froze the cursor in the chart below at a moment and price in mid-November 2008, near the $35 mark.

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And now, for some historical and basic figures;

In the 2006 financial year, Amazon produced revenue of $10.7 billion while net profit was a measly $190 million.

At least this “start-up” was turning profitable.

By the end of 2010, revenue was $34 billion and they reported a net profit of $1.15 billion.

Fiscal Year 2013 showed revenue of $74 billion and an abnormally dissapointing net profit of $274 million.

$136 billion in revenue was registered at the end of 2016 and this resulted in a net profit of $2.37 billion.

This is a net margin of 1.7%.

And now, at the end of 2019, Amazon is doing $280 billion in sales and net profit of $11.6 billion.

Although the net margin is 4.1%, it’s the sheer volume of revenue which makes them so dominant.

Financial analysis of Amazon is a different to conundrum to write about, which I may, on another day.

Impressively, the 4th quarter $87 billion of sales is the same amount of revenue it did in the whole of 2014

and the 4th quarter profit of $3.3 billion was 10% more than all of 2017’s net income of $3 billion.

The numbers have been extraordinary as has the catch-up and evolution of their profit.

During 2006, Amazon’s market capitalisation wavered between $11 billion and $18 billion.

Not really a smallish business?

Then, its market cap during the (2007 – 2009) GFC declined from $36 billion to $18 billion

Today, its market cap has breached $1 trillion.

Depending which point you select to start from, this stock has risen approximately 56 fold since 2008.

Can you actually imagine that?

In other words, if you invested $500,000 in AMZN shares at that time and held onto them for the last 11 or 12 years, they would be worth $28 million.

The Joy Of Owning Equities

Surely, many people have continued owning their homes for the past 12 years, yet I don’t think anyone’s residential property has provided that sort of return.

I figured that I’d use an example of a similar amount to perhaps investing in a home as being relevant to emphasise the exponential investment returns that operating companies can produce.

Why not use such an example?

I mean, people take a big bet on a single asset, being their home, all of the time.

So, it’s perfect OK to make the same comparison with a single, large bet on a listed stock.

Some may argue that this is not a like for like comparison.

They are probably correct.

After all, that Real Estate asset, which sits in a particular suburb, on a particular side of the street, facing one fixed direction has limited ability to increase its revenue and profit unlike the opportunity which an operating corporation does.

And Real Estate doesn’t have the liquidity and flexibility to change tack or make changes to its business which creates that revenue.

And it doesn’t have the geographical diversity and ability to manage its other risks which may affect its value and earnings capacity.

I can’t wait for a rebuttal citing that “at least you can touch the home”, or something along the lines of feeling secure in knowing you can see it or visit it.

Should it make you feel comfortable, you can go off and visit millions of dollars worth of Amazon’s data centres or dispatch warehouses, if you’re feel the need to “touch” something.

Where’s the next Amazon ?