It always sounds impressive when someone says they’ve got a “million dollar bet” on the line, right? That’s the attention-getter from the Motley Fool that I started seeing this morning, with a promise that they’ll reveal to you their biggest single holding… as soon as you sign up for Stock Advisor ($49/year) to get the “free report.”
So, naturally, we want to see what the story is without coughing up the dough — what are they talking about?
The ad is signed by Eric Bleeker, one of the Fool analysts, and it basically says that this is the most impressive stock pick they’ve ever made, they’ve re-recommended it 16 times in various newsletters, and they still think it’s worthy of being the “biggest bet for 2018” as it closes in on becoming a trillion dollar company.
Which means you might well already know what the name of the stock is… but wait for the rest of the class to catch up, please. What are the clues dropped in the ad?
“We have $1,217,212.94 invested in ONE stock… our single biggest bet!
“Some of our members have already banked huge profits thanks to our recommendations of this stock….
“‘We believe XXXX will soemday exceed $1 trillion-dollar in annual revenues.’ — March 2018 Motley Fool Analysis of XXXX”
So what is that “XXXX?” A few more clues:
“In late December of 2017, one of the Motley Fool’s real money portfolio stock holdings topped one million dollars.
“It was (and still is!) our biggest single holding, ever….
“It has been recommended 16 times across 10 different Motley Fool services….
“when he recommended in back in 2002, David Gardner boldly asserted that ‘is a keeper stock for the long term’ ….
“Then in mid-2010, David Gardner made a seemingly “preposterous” prediction: “XXXX, currently valued at $79 billion, will eventually surpass Wal-Mart’s $199 billion market cap.”
“Sure enough, in mid-2015, it soared past a $199 billion market cap…and hasn’t dropped below that since.”
OK, so this one isn’t much of a workout for the Mighty, Mighty Thinkolator… this is, of course, good old Amazon.com (AMZN). Which isn’t a bad bet for hitting that “trillion dollar market cap” level first, given that it’s already toyed with $800 billion in the past few weeks… though a trillion dollars in annual sales would be a whole different matter, that would be a quintupling of the current sales volume. It might get there, sales are still growing fast (and accelerating — 40% last year, the highest sales growth number in five years), but it will at least take a long time.
Amazon is one of the all-time great stock picks from David Gardner, king of the growth side of the room at the Motley Fool Stock Advisor, and one of the huge winners that makes up the foundation for his market-beating returns over the years (his strength is an ability to pick stocks that are “too expensive” but changing the world, and, more importantly, hold on tight through sometimes disastrous periods to get those 5,000-10,000%+ returns from names like Amazon, Marvel (then Disney), Netflix, Priceline, etc…. though there are always plenty of grumpy subscribers along the way if they happened to only invest in the less successful picks that get squashed in the averages by the huge winners).
I’ve been an admirer of Amazon for years, but could never convince myself to buy shares just because it has always been so absurdly expensive if you thought of it, as I did, primarily as a retailer… until early in 2017, when I finally decided that the underlying growth in their high-margin web services business, the huge and almost universal appeal of Amazon Prime, and their “winner take all” status in ecommerce, where they had 30%+ market share in the US and seem to have an easy ride to 50% or more at this point, were worth a small nibble as I waited for bad news to hit and bring the stock down to a more appealing price.
So what happens after that? The stock refuses to dip, and my investment doubles in a year, and it’s still absurdly expensive. And still a great company.
If you look at the financials, you will soon tear your hair out trying to justify an investment in Amazon….
They have only recently started to grow their earnings meaningfully, with their best quarter ever to start 2018, but even now the stock trades at a trailing PE of 200…. roughly the lowest PE it’s had since 2012 (and yes, I screwed up by thinking it was too expensive at 40X earnings in 2005).
The profit margins have improved since the worst of the dips in 2014 or so, when they were spending so much on expansion that they actually lost money for every dollar of sales, but they’re still pretty tight at 3% even with the higher-margin Amazon Web Services business becoming a meaningful contributor (Wal-Mart has profit margins of about 1.75%, grocery stores are often at 1% or below). Gross margins have finally returned to where they were in the mid-2000s, in the mid-20% range, but we’ll have to wait to see if they get past that long-time ceiling.
And even if you go out into the future, using analyst forecasts, the valuation will make you a little queasy — Amazon today is trading at about 50X 2020 earnings… and Analysts are almost always far too optimistic about Amazon’s far-in-the-future earnings, in recent years those estimates have had to come down dramatically as they got closer to reality and the clarity of Jeff Bezos “spend what you have to to own the world” philosophy is again reiterated, spending more and more money to build the business and make a better customer experience, with little to no priority placed on profitability.
So that’s the problem — Amazon is a company that lives in its own universe, and pays no fealty to analyst expectations or PE ratios… they are trying to dominate retail and cloud services around the world, one country and one business and one Prime subscription at a time, and as long as they think they can grow they’re going to keep growing the revenue line and the customer count even if that comes at the expense of profitability.
But that’s also the amazing thing about owning Amazon shares: No one else can do this, so no one can compete. Analysts keep saying that Amazon can turn the knob whenever they feel like it, and turn this fantastic business into a profit machine, and maybe that’s true — but they don’t have to, and doing so would probably get rid of their one competitive advantage if they do it too soon, before they’ve become a global monopoly.
There’s risk, to be sure, but I guess I’m coming around the the sentiment that “valuation doesn’t matter” — until it does. There will probably come a day that some real chinks appear in Amazon’s armor again, as they have from time to time, whether it’s because of Wal-Mart finally spending more money to take share, or because of antitrust investigations into Amazon’s market dominance, or because Google or Microsoft takes meaningful profit share in cloud services… but it doesn’t look like the speed bump that trips them up will be “the stock is too expensive.” People, including me, have been saying that for more than a decade, and so far it has just made us look silly. I probably said similarly cautious things about Amazon teasers from the Motley Fool in 2011 and 2013, as I see they popped up on our teaser tracking, and the stock has risen by 800% and 500% since those pitches were made, respectively.
It remains absurd, on the face of it, that Amazon’s total profit during the past 20 years is just about half of what Apple made in profit in the first quarter of 2018… but as long as you focus on profit instead of revenue growth, market share, international expansion and the hugely sticky and persistent growth in Prime memberships, you’re going to miss the Amazon story.
It might be worth missing at this point, of course, you don’t have to swing at every pitch, and not having much profit means there’s not an easy “floor” for the stock if sentiment shifts. The math starts to get crazy, too, because even getting to be a billion dollar company would “only” mean a 25% increase in the stock price from here (obviously attainable, since the stock has soared 100% in about a year), but only you can make that call (Apple at $900+ billion could easily make it to a trillion first, though I’d guess that their stock buybacks will shrink the market cap and slow them down before that happens).
There’s only one Amazon, so leave your comparisons at the door and think about whether you want to bet on a belief in Jeff Bezos’ vision. Personally, I’ve “let it ride” with my holdings, mostly because it’s an incredible company and I’d never want to try to bet against them… but I do have a stop loss trigger in place for my Amazon shares in case we see a huge shift in sentiment, as is possible if hard to imagine at this point, so I’ll wait until that hits to think about it some more. (And no, I don’t think President Trump’s hissy fit about Amazon’s USPS deal, presumably fueled by his ire at Bezos’ Washington Post, is going to get us a “buyable dip” — more likely it will further bankrupt the Post Office).
Your mileage may vary, of course, and it’s your dime so it’s your call — would you buy Amazon here? Do you own it? Tempted to hold, buy more, sell? Think Jeff Bezos will be able to remain the titan of global commerce, or see regulatory pressure coming? Let us know with a comment below.
Disclosure: I own shares of Amazon, Disney and Apple among the stocks mentioned above. I will not trade in any covered stock for at least three days, per Stock Gumshoe’s trading rules.