Amazon: The King of the Jungle

In June, the WSJ published a piece analyzing Amazon’s decision to takeover Whole Foods. When Bezos made his initial announcement, he didn’t give any reason or backing to his decision. He just announced that he was going to do it.

Amazon doesn’t give out any dividends. They are a company completely focused on internal and external growth. They take the money that they earn and shovel it into RD and other ways to grow. That can be seen as selfish to the investors, as the reason we invest is so we can reap monetary gains (and that’s not happening if it’s all going back into research and development)

So is Amazon doing the right thing? Are all the gambles that it is taking going to pay off?

When looking at these graphs, there are a few keys things to notice.

  1. Out of all the stocks in the SP 500, the tech companies (Facebook, Apple, Alphabet, Microsoft, and Amazon) are not only performing the best, but they are outperforming the benchmark
  2. As we can see by Amazon’s PE ratio in 2015, investors were expecting tremendously high growth
  3. These 5 stocks are where essentially ALL the gains in the SP 500 are concentrated.

Amazon is a behemoth. It doesn’t have a wildly dedicated fan base like Apple, or 1.32 billion users like Facebook does. But it does have an edge in a lot of sectors, and a big edge at that.

With the acquisition of Whole Foods, Amazon now has a huge foothold in the grocery industry. Upon the announcement of the conglomeration, Smucker and Hormel stock dropped 8 and 6% respectively. Kellogg dropped 5.5% and Heinz 8.6%. Finally, Kroger, Costco, and Dollar General all dropped 6%.

Investors know something is coming. The packaged food and grocery industries are preparing for the onslaught they expect to get from Amazon’s entrance into the market.

No one knows exactly what Amazon plans on doing with the retail location of Whole Foods, but there are a lot of options to take advantage of in the $800b grocery industry.

The online market for groceries is expected to grow 15x faster than that of traditional retail. Amazon is already an online delivery service. Why wouldn’t they expand that into groceries?

We are a consumer convenience society, or as James Mackintosh says, the “human sloth” society. Amazon is getting us one step closer to achieving that. We want convenience, and we want it on our doorstep.

And Amazon can do that.

Then comes the question – what won’t they expand into? What is safe from the Amazon reach?

If the FTC won’t balk at this Whole Foods acquistion, what else will they allow?

Will the entire world be based on deliverable goods?

No one knows for sure, of course. But we can look at this PE ratio bar graph to see speculated growth based on investor perception for Amazon over the next two years.

Of course, reaching far out into 2019 (even 2018) is never completely accurate. But the sentiment is there. Consumers think that Amazon might be slowing down, with a lower PE ratio for each subsequent year. So less growth for the company that never seems to stop growing?

Amazon is a tremendous company with a lot of potential. To say that it will simply stop growing, and stop getting into everything that it can isn’t correct. It’s ready to take over the world, quite honestly.

stock chartcharts

This is just a 5-year price growth chart. I personally think there is a lot more room for improvement and growth in the stock.

As the number of public companies dwindles (from 7,000 in 1990 to 4,000 in 2017) with a median net margin of 9.7%, big companies like Amazon are taking their cake and eating it too.

All that being said, nothing lasts forever. Just look at yesterday’s unstoppable winners (General Motors? Time Warner?) to see that. But Amazon has been able to reach into industries and connect them in a way that no other company has been able to. And that warrants some thought.

Disclaimer: These views are not investment advice, and should not be interpreted as such. These views are my own, and do not represent my employer. Trading has risk. Big risk. Make sure that you can balance your risk/reward, and trade small, and trade often.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s