LONDON — Although its shares have achieved five-bagger status in just four years, Jeff Bezos’s wealth generating phenomenon Amazon is still accelerating. In this edition of the Rational Perspective, one of Wall Street’s top rated retail sector analysts explains why he sees the $1,500 stock breaking through the 2,000 level in the near future. He argues that the launch of AmazonFresh will put the group onto an accelerated trajectory. Fascinating insights on a stock that has become the mainstay of both of Biznews’s offshore portfolios – the top performing Global Share portfolio (CAGR 32% since 2014) and the newly launched US Exponential portfolio (20% since launch in November last year). – Alec Hogg
This is a Rational Perspective – I’m Alec Hogg. Well, after decades of focussing on my home market in SA – 4 years ago I began getting my teeth into global stocks. It was sparked by a sponsorship from Standard Bank, which wanted to attracted attention to its ground breaking Webtrader platform that enabled long-isolated, exchange-control-bound South Africans to start investing in stocks abroad. That was a stimulus for the creation of the BizNews Global Share Portfolio, which has delivered a 32% annual compound gross since its launch in December 2014.
___STEADY_PAYWALL___
A big part of that stellar performance is due to Amazon.com, which we bought at $327 a share and as the near five-bagger, in under 4-years, it’s now obviously my favourite stock in the whole world.
But participating in the BizNews Global Share Portfolio has been challenging. Investors need to do a lot of heavy-lifting themselves and calculate the weightings to replicate our holdings. So, in November last year when EasyEquities introduced US stocks onto their platform we jumped at the opportunity to partner with them.
The Easy team combined a fractional share invention with an equally innovative bundle concept, and that makes investing into what we call the BizNews US Exponential Portfolio a pretty simple matter. Clients can get a slice of the whole pie for just R250 a time, that’s a little more than $20.
Well, when structuring this Exponential Portfolio, I went back to the well and decided to put a hefty 25% of the allocation into Amazon.com. We launched the portfolio in November, at which time Amazon was trading at $1k a share.
Bezos’ beauty has once again delivered the goods and in double quick time, this time around. Amazon’s price has risen a touch over 50% in the last 4 months, to over $1 500 a share today. In the process, it’s pulled the Exponential Portfolio’s return to 20% since its launch in November, which was only 4 months ago (as we do this podcast). The reason for buying Amazon back in 2014, and again last November, hasn’t changed. Jeff Bezos has always put consumers at the centre of his company’s universe. If you read his annual letter to shareholders, which I do, and they go back more than 20 years now, you’ll get a very good understanding of what I mean. Everything else at Amazon has flowed from that single driver.
And an obvious beneficiary it is too, of what is termed the ‘Network Effect’ because the bigger Amazon gets the more it flourishes. So, what’s next for this amazing enterprise and indeed, should we still be holding onto the shares? The Bloomberg surveillance team put those kinds of questions to Scott Mushkin. He’s a senior retail analyst at the US-based Wolfe Research. Mushkin is one of the top-rated analyst in his sector in the whole of the USA. He’s received numerous awards and is ranked among the top-5 in America by both the Wall Street Journal and the Institutional Investor.
In a nutshell – Mushkin reckons Amazon’s price is headed for $2k (I like him). Here comes Bloomberg’s Tom Keene.
Amazon may finally bring its full retail business to Brazil https://t.co/x52yXnPDfH
— Engadget (@engadget) March 8, 2018
It is good to have a few miles under the research pavement and that would be Scott Mushkin, out of Boston College, out of the University of Chicago who has made a career, (a really good career) of consumer retail. That means all the usual names and Amazon. He is at Wolfe Research and, Scott, just to get it out of the way, you were beyond enthusiastic about a small cardboard box company named Amazon. How do you get up to $2k, and I know you’re going to extrapolate that forward from there? Why the overt optimism on Amazon?
First of all, thanks for the kind introduction and for having me on, but I think the optimism on Amazon, especially as the stock has climbed, it has to do what they doing in consumables. It’s particular fresh so, we’re seeing the company move aggressively into the $1.5 trillion for consumables. We think the hearts and minds of the consumer will be won in the Fresh area and, of course, they buy Whole Foods and they’re quickly consolidating that under their umbrella. It has a lot to do with trust. When the consumer trusts you for Fresh it has to do with frequency. So, we think the frequency increases a lot with Amazon if they get the consumer to engage them with their Fresh purchases.
Scott, let me just put it to you. Sprouts Farmers Market, as well as Kroger, are they going to go quietly into the night, along with Walmart – are they just going to cede this business to Amazon?
Sprouts – I don’t think so. I think the answer is now, it’s a small, farmer’s market-style company, which leads with Fresh so, it’s not that Amazon wins everybody. But when you talk about the traditional supermarkets – we worry a lot about them. We think Amazon is going to have 20% share of the consumables market. We called it Amazon 2028 and they’re going to suck a lot of share out of traditional supermarkets and we’re concerned. Obviously, Walmart is gearing up for a kind of war and trying to off-set Amazon but as the market leader I consumables at a little over 20% share I guess. There is concerns even on Walmart especially is now moving towards consumables. The thing about consumables – they’re much more egalitarian, i.e., everybody eats so, as Amazon attacks the consumables market – they are attacking the Walmart customer more and more.
So, you think that Walmart is going to struggle competing against Amazon?
The sprawling malls of suburban America are turning into graveyards of the former retail kings. Self-driving cars will accelerate that death spiral. Could the big empty boxes be turned into housing? Data centers? Museums of a time before Amazon? https://t.co/qAq7CHOn5I
— Laura Bliss (@mslaurabliss) March 8, 2018
I think everybody is going to struggle. We did an analysis and it’s an example of one but we were fortunate enough to be in an area where we had Prime and then we had Prime Fresh. Then they withdrew the Fresh offering so, I actually analysed my own Prime account and analysing that Prime account was stunning. We saw the frequency, as we engaged with Fresh, the frequency went up – it went through the roof, and as they withdrew it the frequency dropped quite a bit and the number of purchases, so, as Amazon moves into Fresh and can get the consumer – it’s the same magic, by the way, that Sam Walton understood with the 3-percenter.
Right, but Scott, I’ve got to inform you, I know you’ve got too many children. All analysis of the Muskin Prime, the household, is affected by slime. Slime is bought through Amazon. Children spend hours on their parent’s slime account, getting up to the border of 15 things to buy, including gallons of Elmer’s Glue. That’s completely moved the needle on slime. Slime alone has changed Amazon’s dynamics.
Scott, go ahead – eventually those kids do grow up right, and what else are they going to buy from Amazon?
Precisely.
It looks like Amazon is the ultimate thing and when I quote the book, ‘It’s the Everything Store,’ The ‘Everything Store’ that the ultimate culmination of the ‘everything store’ runs right through consumables, and we’re even think they’re going into pharmacy. Once the consumer engages they kind of own you. They’re going to own about probably 85% of your purchases.
What about the use of Alexa and the artificial intelligence in the home in order to propel Amazon forward?
Yes, I think Alexa – 70% of the artificial intelligence in the homes, assistances, are Alexa. They’re making it very easy to order. In fact, a lot of CPG companies are struggling with this a little bit – how do you advertise when Alexa is controlling the search. Do, Alexa is definitely going to be part of it. It makes it very easy to order stuff. I don’t know if you guys have an Alexa but it’s ‘Alexa – order me some Tide – and she’ll go and do it.’
I’m afraid to put it in the house.
Yes, well that’s not good for Tom because you never know what he’ll show up at the door. Just quickly, I know we coming back, Scott. Can you ask Alexa how long investors are going to let a company that does $177bn in sales and revenue – how long will investors wait to move the profit needle on the company?
Profits are an absolutely great discussion. We actually, think profitability of Amazon is going to move a lot higher over time, and again, our analysis is Amazon 2028 – they have enormous advantages. The one advantage we were talking about is just the payments they get from vendors from the likes of craft times.
Yes, you know what’s great about this, and we’re going to do this with Scott Mushkin and if it really works, we’re going to come back with Mr Mushkin of Wolfe Research and talk about this. When Scott was at Boston College he had one of the original Alexa. He’d be like, ‘Alexa should I go to Maryann tonight?’ Stuff like that – college kids use the thing every day.
Can your dog order anything? That was Scott Mushkin of Wolfe Research.
The dog ordering on it. Well, what an interesting conversation though, I can tell you, Alexa is a big part of our lives here in the UK and many people that I know rely on Alexa increasingly for doing, not just listing to music and finding out what the weather is going to be and what the scores of your favourite football team is, although in my case I’d rather not hear them. But it makes it so easy to order from grocery stores or anywhere else that you’d like to get your daily products from, and that’s exactly the issue that was being raised there and particular being mentioned by Scott Mushkin, who was talking to the team at Bloomberg Surveillance.
Well, the Amazon affect is becoming one of the great wealth creating vehicles of our time. Its made founder, Jeff Bezos, the richest man on earth and it’s changed the world of millions of fans, (myself among them). Interesting to have heard Warren Buffett and Charlie Munger at the last Berkshire Hathaway AGM, talking about the Amazon effect. No in the sense of wealth creation but how it is changing the whole industry, the whole retail industry. It’s interesting to note that Buffett used to be a big shareholder in Walmart; 5-years ago it was one of his top 10-holdings. Well, today, it doesn’t appear in the portfolio anymore.
This has been the Rational Perspective. I’m Alec Hogg. Cheerio.
