The evolution of Amazon and how even index fund investors have a big stake in the Amazon revolution.
In this episode you’ll learn:
- What has been online sales growth compared to overall retail sales.
- What wager are investors making when they buy high growth stocks like Amazon..
- How big of stake do index investor have in Amazon.
- How Amazon retail business is like a slow motion stock exchange.
- How online shopping impacts global warming.
- What are alternatives ways to index to have a lower exposure to Amazon.
Show Notes
U.S. Census Bureau Retail Sales Data
Are Investors Too Optimistic About Amazon? – The Economist
Urban Outfitters CEO Says The Retail Bubble Has Burst – Nick Turner – Bloomberg
The High Speed Trading Behind Your Amazon Purchase – Christopher Mims – Wall Street Journal
Is online shopping better for the environment than going to the store? – Amrita Khalid – The Kernel
Become a Better Investor With Our Investing Checklist
Become a Better Investor With Our Investing Checklist
Master successful investing with our Checklist and get expert weekly insights to help you build your wealth with confidence.
Summary Article
Amazon Impacts Everything
My first purchase on Amazon.com was in 1998. I bought a book for work on asset allocation called Efficient Asset Management by Richard Michaud. It cost $35 plus $3.95 for shipping.
In those days, I bought most of my books at physical bookstores because it was more convenient.
Only when I couldn’t find a book did I consider buying it from Amazon. Of course, in those early years of web browsing most books were discovered at bookstores rather than online.
I placed two orders with Amazon in 1998, one in 1999 and none in the year 2000. I know this because if you go to your Amazon account, you can find everything you have ever purchased on the site.
Third Party Vendors
In 2002, I placed my first non-book order with Amazon. It was the Legend of Zelda: Link To The Past game for Nintendo Gameboy, a gift for my son. It was sold by Toys-R-Us but delivered by Amazon.
Amazon began handling the logistics of selling for third party vendors in 2000. Now Amazon says there are more than 70,000 companies that earn more than $100,000 a year selling through its site.
Amazon Prime
In 2005, Amazon introduced its Prime service in which members get free two-day shipping. I didn’t join Prime until 2006, a year in which I placed 15 orders with Amazon, including for a very heavy and bulky Jiffy clothes steamer—shipped for free.
Kindle
In the fall of 2007, Amazon introduced the Kindle e-book reader. I didn’t hesitate to pre-order it as I would no longer have to wait two days for a physical book, but I could instead have an electronic edition sent to me immediately. I bought 21 digital books that Fall.
In 2009 on Black Friday, I bought my largest, most expensive item to date on Amazon, and I still find it unbelievable it arrived in one piece: a Panasonic 46 inch plasma HD television set. It cost $1,149.85 with free shipping.
Too Much Stuff
Last year (and I am embarrassed to admit this) we placed 110 physical orders on Amazon and 69 digital orders for e-books and a few streaming movies.
I couldn’t believe the number of orders when I saw it.
The total spent was approximately $3,700, although it was more than that as I’m not counting what my kids spent using their own credit cards.
Half of those purchases came out of our household budget and half were business expenses, including $108 for Amazon Web Services where I host audio, pictures and a database for my business websites and mobile apps.
Granted, many of the orders were combined so UPS or FedEx didn’t show up at our doorstep 100 times, but it still seems beyond excessive.
It turns out many of the orders didn’t show up at our house at all. They were gifts sent to others, and there were orders my sons and daughter had delivered to their apartments, including a number of orders for iPhone LCD screens for a part-time business my youngest son was running fixing iPhones. They also ordered college text books, including text book rentals.
Unlike in the early days of the company, most of what we bought from Amazon in 2016 were not books. The sheer variety of goods we bought is illustrative of how far Amazon has shifted its business away from selling books.
For example, we placed an Amazon Pantry order that was a box filled with grocery items like laundry detergent, paper towels, and Old Bay seasoning.
A number of things I tried to buy local but was unsuccessful such as the right-sized furnace filter, specialty dog food and a Weber Grill.
Many of the items were so specialized that it wouldn’t have been worth the effort to drive around to try to find them such as a beard brush, specialty recording equipment, out of print used books, a map of Oaxaca and Korean keyboard stickers.
The Growth In Online Sales
The U.S. Census Bureau estimates U.S. e-commerce sales were $395 billion in 2016, accounting for 8.1% of total U.S. retail sales. U.S. e-commerce sales increased 15.1% in 2016 while overall retail sales increased 2.9%.
Slice Intelligence in analyzing four million online purchases in 2016 estimates 43% of all online retail sales went though Amazon compared to 33% in 2015.
Amazon’s annual sales were $136 billion in 2016 while its net profit was $2.4 billion.
A Very Expensive Stock
Amazon’s stock currently sells for about $850 per share. It is the most expensive stock in the world as measured by price-to-earnings ratio with a P/E of 173 based on 2016 earnings and 113 based on its expected earnings for 2017.
As a comparison, the overall U.S. stock market as measured by the S&P 500 Index has a price-to-earnings ratio of 24.3 based on trailing 12 month earnings compared to its average P/E of 19.5 over the past 50 years.
Despite its high valuation, Amazon’s stock has done very well, appreciating over 170% since 2015.
As of the end of February, Amazon was the fifth most valuable company in the world based on its market capitalization.
Can Amazon Meet Lofty Expectations?
Can Amazon grow fast enough to justify a stock valuation seven times more expensive than the overall U.S. stock market, which is also richly valued?
Morgan Stanley estimates Amazon will grow its revenue by 16% annualized from 2016 to 2025, according to a recent article in the Economist. That same piece pointed out that Credit Suisse calculated only ten firms with annual sales greater than $50 billion that have been able to grow by an average of 15% or more for 10 straight years and none with sales more than $100 billion.
The Economist writes, “If Amazon were to pull it off, it would be the most aggressive expansion of a giant company in the history of modern business.”
An investor who is overweight Amazon stock relative to the overall market is making a very specific wager. They are predicting Amazon’s revenue and earnings growth will exceed the elevated expectations already reflected in the stock that is priced at over 100 times next year’s earnings.
For Amazon to perform better than an investment in an S&P 500 Index fund over the long-term it must exceed the earnings and revenue growth numbers that investors are collectively anticipating.
If Amazon falls short, then many investors will be disappointed and the stock will fall in price.
Everyone Owns Amazon
Given its size, Amazon’s stock performance will have an impact even on investors who only have exposure through index funds.
An investor in a U.S. stock index fund or ETF such as one that tracks the S&P 500 Index has about a 1.7% allocation to Amazon’s stock.
Amazon has gotten so big that it influences both our shopping and our investing.
