8 to 80 Spotlight: Amazon

By Charlie Bilello

12 Nov 2020


A new series covering companies in the 8 to 80 Portfolio

1) Why is Amazon an 8 to 80 Brand?

Launched as a bookseller in 1995, Amazon has grown to become one of the most influential companies in the world, used by people of all ages in all walks of life.

“I’ll just buy it on Amazon” has become a transformational phrase in retail, representing the inexorable shift in consumer purchases from brick-and-mortar to online.

Key the Amazon ecosystem is their “prime” membership, boasting an estimated 150 members worldwide and 126 million in the US alone.

Source

Being a prime member denotes a loyalty that few companies can claim, and Amazon ranks consistently high in terms of customer satisfaction.

“We’ve had three big ideas at Amazon that we’ve stuck with for 18 years, and they’re the reason we’re successful: Put the customer first. Invent. And be patient.” – Jeff Bezos

2) What are its growth and financial trends?

Amazon last reported earnings on October 29, 2020.

Revenues were up 37% over the past year, its 76th consecutive quarter of double-digit YoY revenue growth. $AMZN

Data via YCharts

Amazon is on pace for a record $373 billion in revenue this year, a more than 10x increase from 10 years ago ($34 billion).

While Amazon has consistently reported increasing revenues and market share, a surge in profitability has only come in recent years.

In its first 12 years as a public company (1997 – 2008), Amazon reported a cumulative net loss of $716 million. They were playing a longer game than everyone else, slowly taking market share over time and ignoring Wall Street’s obsessive focus on short-term earnings. This required much faith and patience on the part of investors, who would eventually be rewarded.

This year Amazon is projected to earn $18.5 billion, a 59% increase over 2019.

A key driver to this profitability has been the phenomenal growth in its high margin cloud business: Amazon Web Services (AWS).

Source: Statista

In the 3rd quarter of 2020, AWS accounted for 22% of Amazon’s revenues and 57% of its operating income (source).

Amazon’s tremendous growth during the covid-19 pandemic has necessitated a commensurate increase in its workforce. While most companies were laying off workers or on a hiring freeze, Amazon was on a hiring spree. The company now has over 1.1 million employees, a 50% increase from a year ago. Only Walmart is a larger employer in the US…

Data via YCharts

3) The Climb

While Amazon’s rise may seem easy in hindsight, it has had many doubters over the years.

Back in 1997, the year it went public, fortune published an article with the following headline: “Why Barnes & Noble May Crush Amazon.”

The author argues… “Anything Amazon.com can do on the Internet, so, too, can Barnes & Noble. Once you look beyond the Website you begin to see why, in this battle at least, the odds favor the $3-billion-a-year Goliath [Barnes & Noble].”

The rest, of course is history, but not before the dot-com crash and a 94% drawdown for Amazon shareholders.

It would take nearly 10 years (December 1999 to November 2009) for Amazon’s stock to hit a new high.

Created in YCharts

From there, Amazon would go on an incredible run, growing into one of the largest companies in the world.

Data as of 11/11/20

4) What are major risks to future growth?

With revenues of over $348 billion in the past year, Amazon has become a behemoth. Maintaining its growth rates of the past will be nearly impossible given its current size.

Its high profit margin cloud business (30%) make it a target for the many competitors in the space (Microsoft Azure, Google Cloud, IBM Cloud, Oracle Cloud, VMware Cloud, Alibaba cloud, and more).

In e-commerce, competition is stiffening as well, with many retailers improving their online capabilities and companies improving their direct-to-consumer offerings. Walmart, Amazon’s largest competitor in the space, recently launched Walmart+, which will likely be formidable rival to Amazon prime.

From a stock perspective, valuation is the primary concern, as is the case with many tech companies today. Trading at over 69x next year’s earnings, expectations are high, making Amazon vulnerable to multiple compression should it fail to meet or beat these lofty expectations.

Created in YCharts

5) Howard’s Take

“Amazon has been one of my 8 to 80 stocks from the beginning.  Amazon has the brand and the products that people live with from the crib to their final homes. It is my proxy for the cloud, ecommerce and the digital economy.

At their size, Amazon is a planet, not just a company and a country. It moves where it likes. The government can’t stop it, but Jeff Bezos could, if he wanted, spin off AWS if he thought it would help the overall valuation of the combined businesses.

Amazon will never, ever, ever be cheap. As a planet, they will always get the benefit of the doubt from investors. There will be times when the mood of the market changes and Amazon does drop 20-50 percent. When it does, remember how they think about turning their costs into sources of revenue (see chart below) and you should be able to keep your cool and add into panics, not sell.” – Howard Lindzon

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Source

To learn more about the 8 to 80 portfolio managed by Compound, click here.

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Disclaimer: All information provided is for educational purposes only and does not constitute investment, legal or tax advice, or an offer to buy or sell any security. For our full disclosures, click here.

About the author

Charlie Bilello

Charlie is the founder and CEO of Compound Capital Advisors.

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