The stock market is a funny place: When big business is sold, most people are not happy. Instead, they panic. This presents an excellent opportunity for long-term investors who keep their minds on them and combine the triangle between price and value.
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As I make my own triangle, I get a lot of tech stocks on sale today, though in this market, as in any market, one has to discriminate against them. Some in the group deserve attention, while others deserve to be crushed. The reason is simple: Like companies in any other industry, many technology companies will fail, or at least be substandard, because of the grim reality of free market capitalism.
Companies with only moats, using Warren Buffett’s famous and accurate metaphor, which can withstand the intense competition they breed.
For this reason, the key to opening a successful technology investment is still the same as what has been done for all generations. We need to identify, buy, and hold competitive companies that will allow them to thrive while others are deteriorating.
Amazon AMZN, + 1.15% one such company. I am down about 34% in 2022 until Monday, believing that the long-term investment is worth a fortune with Monday's closing price of $ 2,216.21.
Here is why:
Even the most skeptical would agree that Amazon has huge and terrifying streams around both of its major businesses. Its first business, e-commerce, controls about 50 percent of all online stores, and no one comes close to comparing its mix of choice, price and luxury with its vast distribution network.
The company's cloud platform, Amazon Web Services, has the same market share for an outsourced computer. And while AWS's core business leases “deaf servers,” it integrates that asset with a list of powerful software and analytics tools that gradually integrate into the day-to-day business processes of customers. This gives AWS a Prime-like adhesive.
So the moats of the Amazon are beyond any reasonable doubt. The most important issue is: Can they make money behind them? How much profit, indeed, can Amazon produce behind its castle walls? This is a tricky question, because its profit history has been fluctuating.
Let's get the simple piece out of the way: Unlike main e-commerce, AWS demonstrates a healthy GAAP that does not change. Last year, AWS made up 30% of its working genes, in line with other high-tech technology companies operating at a high level.
AWS, however, has more growth ahead of it than mature hardware companies like Cisco CSCO, 2.14%. Experts estimate that companies spend only 10% -15% of their computer budget on cloud today. In the next generation, that number may quadruple.
AWS made $ 18.5 billion in operating revenue last year. Even if it reduces its growth rate from 35% to 20% over the next three years, AWS will generate more than $ 25 billion in tax revenue by 2024. Use that 20 times, a reasonable turnover of high-end business even in today’s area of interest rate rise, and it generates an estimated $ 500 billion. Coincidentally, that’s about half the revenue of the current Amazon market, with less money available.
Digging into e-commerce
The question then becomes: What is e-commerce? The answer depends on how much money you can make in e-commerce.
After following the company for 20 years, I am convinced that e-commerce is able to earn 10 times more revenue than it reported in 2021. That should strike any sensible person as a strange statement, so let me explain why this makes more sense than magical thinking.
My first point is that Amazon has shown that it can generate more or less profits at e-commerce. It can reap the growing business behind its tunnel and show off the many profits that can compete with the old economic companies. Amazon has instead decided that as there is more business to take, spending $ 1 today and punishing current profits will generate that repetition on the road.
Amazon IPO'd during the dot.com boom, and from 1997 to 2001 the company spent as crazy building its own e-commerce channel, generating $ 2 billion in combined operating losses. In the next phase, Amazon lost 80% of its market equity value. Punished by major markets, Amazon entered the harvest mode from 2002 to 2007, producing margins of 5% to 6% wide and a profit of nearly $ 2 billion.
E-commerce made 5% performance margins in 2009, and in 2018 and 2019 - but when the epidemic hit, Amazon re-entered the investment mode. It has doubled in 24 months the distribution infrastructure that took 24 years to build. Not surprisingly, earlier this month it reported its first quarterly losses in six years.
Those who are concerned about over-construction should have their heads checked. The Amazon network has doubled in two years, but its sales have grown "only" by 65%, leading to extreme power. If Amazon's e-commerce segment grows by 10% -15% per annum, which is below its historical average, it will only take the company three to four years to regain its maximum capacity. If sales approach the five-year five-year growth rate of 20%, the issue will be resolved within two years, leading Bank of America analyst Justin Post to rightly write, “Growth in existing complementary potential could be one of the easiest Amazon problems to solve in its history. "
However, in view of the recent fall in prices, Amazon may again be forced to force the market to show higher profits as it did after the dot-com explosion.
Internal turmoil may also trigger such a movement. Two years ago, Amazon provided employees with $ 22 billion in stocks during the grant period - but stock prices plummeted at that time, and position and file will remain that long.
My second point is that more than any other technology company, Amazon and its founder, Jeff Bezos, have proven that they can invest. They can be trusted to make a trade between current and future profits.
