Amazon has transformed the world of e-commerce and cloud-computing over the past decade, and its investors have been amply rewarded, with shares up 1,329% over the same period.
The $1.4trn company is now the fifth-largest company in the world by market capitalisation and forms 2.44% of the entire stock market – as represented by the MSCI World Index.
Trustnet asked fund managers whether they think this retail and cloud computing giant can continue its growth trajectory, or whether the good times have come to an end.
Reasons to be bearish
Stephen Yiu, manager of the LF Blue Whale Growth fund, was a former investor in Amazon but recently dumped his stake in the company as he said there are better growth options out there.
“Whilst we never liked the retail side of the business, it now has the additional weight of inflation to contend with, further eroding its tenuous invest-ability,” he said.
“Looking at the cloud-computing arm, whilst it is still the more attractive side of the business, its competitive advantage is being eroded by Microsoft and Alphabet’s cloud products, both of which we believe offer greater growth potential.
“Our investment in Amazon was always purely due to our interest in AWS and in spite of the retail business. The problem we now have is that both sides of Amazon are looking increasingly less attractive.”
Alec Cutler, a portfolio manager at Orbis Investment Management, also thinks that Amazon Web Services is facing the heat from its competitors.
He described the concept of ‘capital seeking the highest rents’ – where if a business finds something that people think produces infinite returns (as seemed to be the case with AWS), the capitalist world will put an infinite amount of money into it trying to capture it, until there is a balance of supply and demand.
He said: “Amazon Web Services was the only one that did cloud computing in the beginning, and then Microsoft showed up with Azure, and then Google showed up with Google Web Services. Now IBM and Oracle are in there.
“Everybody is throwing money at what Amazon Web Services found, which was providing computing services through the cloud, which is not rocket science by the way – distributed computing has been around for a long time – Amazon just made it cool and made money at it. Now everyone's ploughing money into that and eventually the rents will go away.”
Cutler conceded that it may take a few decades for the ‘rents’ to fully disappear for AWS, but even if they do continue to benefit from cloud computing in the years ahead, he said the sheer size of Amazon’s business will prove to be a hurdle.
He said: “Eventually, the amount of growth that it needs in terms of just raw dollars is just such a massive amount of money to grow.
“For Amazon to keep growing revenues at 20 to 30%, I think we worked out that within 20 years, Amazon will be something like 30% of the global economy if it keeps growing at the at the rate at which investors have priced in.
“It already employs one in 145 Americans, and is trying to hire another half a million Americans this year. It just can’t grow forever.”
Reasons to be bullish
Not everyone has given up on the growth prospects of the e-commerce giant though. JP Morgan Growth and Income manager, Timothy Woodhouse, said that he expects the both the retail side of the company and its overall share price to climb even higher in the coming years, a bullish stance on a company that is already the fifth biggest in the world.
On its retail element, which is how many consumers interact with Amazon, Woodhouse said it expects to grow “north of 20% in the next few years” as the company expands its products and establishes its market dominance in new territories.
Amazon has already established itself as a ‘go-to’ option for consumers in Western countries, offering a combination of convenience, low pricing and speed, but until now it has not been able to establish the same market dominance in broader geographies.
Woodhouse said that it has focused on expanding into Eastern Europe over the past couple of years, an area that will provide “a meaningful opportunity for Amazon’s retail business”.
Yet the business is already exceptionally large, with its market capitalisation of around $1.6trn, suggesting moves into smaller regions will make little difference.
Recently the market capitalisations of certain growth stocks have been climbing to historic levels but there has been criticism in recent weeks about inflated valuations. At the start of this year Apple broke the $3trn market cap record, just three years after it broke the $1trn mark.
When investors discuss these goliath-sized companies, Woodhouse said it is easy to get fixated on just those numbers. But this is a mistake. Instead he said it was important to focus on a company’s cash flow regeneration and whether or not it is actually a strong business, two characteristics he said Amazon still offered alongside the growth.
The company is the biggest allocation in the JP Morgan Growth and Income, ahead of Microsoft and Alphabet, at 5.8%. It is classified as a ‘premium business’ by the JP Morgan managers, a label they said was “reserved for the very best companies around the world”.
“You might say to me, ‘well Tim, surely everybody knows the Amazon story? What's going to be different about this going forwards? What's unexpected about this going forwards?’ Well, don't underestimate the power of a really fantastic business,” Woodhouse said.
Woodhouse was not the only manager betting on Amazon’s run continuing as renowned fund manager Terry Smith announced he had bought into the company for the first time late last year, saying it was “better late than never”.
In his annual letter to shareholders Smith defended his change of heart on Amazon having criticised the company just a few months ago at the annual shareholders meeting just eight months prior.
Back then he had told shareholders at the annual meeting that if Amazon’s founder Jeff Bezos, floated the Amazon Web Services (AWS) business as a standalone company then he would be interested in the company. “But we don’t particularly like the idea of owning one business that is cross-subsidising a barely profitable business,” he said at the time.
Now Smith has 180-ed on the stock, simply stating: “When the facts change I change my mind”.