2. Amazon.com, Inc. (NASDAQ: AMZN)
Number of Hedge Fund Holders: 273
Amazon.com, Inc. (NASDAQ: AMZN) is a Washington-based multinational technology firm founded in 1984. It is ranked second on our list of top 10 companies bullish on Ethereum. Amazon, which primarily operates one of the largest ecommerce retail businesses in the world, has backed Ethereum for easy processing of payments. In December, the company announced that Amazon Managed Blockchain, a service that allows users to set up and manage scalable private networks using open-source frameworks, would start supporting Ethereum.
On May 17, news media reported that Amazon.com, Inc. (NASDAQ: AMZN), which already has significant stakes in several big businesses like publishing and food delivery, was considering an entry into medical diagnostics with the launch of a new business.
At the end of the fourth quarter of 2020, 273 hedge funds in the database of Insider Monkey held stakes worth $51 billion in Amazon.com, Inc. (NASDAQ: AMZN), up from 245 in the preceding quarter worth $43 billion.
In its Q1 2021 investor letter, Polen Capital, an investment management firm, highlighted a few stocks and Amazon.com, Inc. (NASDAQ: AMZN) was one of them. Here is what the fund said:
“We purchased Amazon in February 2021, which accounts for 5% of the Portfolio’s weighting. For most of the last decade, Amazon did not meet our guardrails. We also did not have enough visibility into future free cash flow margins to indicate that the company would sustainably meet our guardrails and, relatedly, if valuation supported the double-digit annualized returns we seek. We now believe we have that visibility.
In 2008, almost all of Amazon’s revenue and operating profits came from its e-commerce business. Amazon Prime and Amazon Web Services (AWS) were new and relatively small back then. The company had roughly 5% operating profit margins overall, entirely from the e-commerce business. In 2009, the company began harvesting its retail business profits to accelerate investment in its distribution and logistics infrastructure globally and very heavily build out and scale AWS data centers. The company’s return on equity began to decline at that time and turned negative for three full years from mid-2012 to mid-2015 (margins and free cash flow declined similarly). So, beginning in 2010 and continuing to mid-2018, Amazon’s business was outside our guardrails. We chose to stick to our guardrails and not own Amazon.
Amazon’s profit drivers have changed quite dramatically over the years. Starting in the back half of 2018, Amazon came back above our hurdles. Revenue generation overcame ongoing heavy investments in areas such as delivery infrastructure, data center infrastructure, and shipping.
Our research suggests that today, after considering cost allocation, Amazon’s underlying profit drivers from higher-margin AWS and Advertising could grow much faster than its low-margin e-commerce business (excluding Prime), its historical driver of revenues and operating profits.
Amazon Prime, AWS, and Advertising together account for only about 20% of revenue today, but we believe over 150% of operating profits. Looking forward, growth higher-margin businesses means Amazon’s total margins and profit dollars could rise quite dramatically.
It is important to note that Amazon proved to be an exception to our guardrails. Based on our experience, very few companies that remain outside our guardrails for an extended period operate from a position of competitive strength but rather, from a position of competitive pressure. Today, we feel we have better visibility into the future earnings growth and margins from AWS and Advertising and believe these could drive 30%+ annual earnings growth for the next five years. Even with significant P/E multiple compression, we would still expect double-digit investment returns.”
