What’s Amazon Worth?

Here’s a fun thought experiment:  how much would you have been willing to pay for a share of Apple stock 10 years ago, in January 2007?  They’d released the iPod five years before, and the stock had tripled in the last two years, trading (split adjusted) at $11.  With so much growth in the last two years, is it worth investing?

Well – if you wanted to maintain 20% annual returns over the next decade, you’d be willing to pay up to $19/share.  At $11, it was a huge bargain.  Even if it didn’t feel that way two years later, when the stock was trading for just $12.88.

I think the decision to invest (or not) in a stock that has just produced incredible returns is one of the most difficult choices.

In 2007, comparatively, Amazon was a steal.  For the same 20% return, you’d be willing to pay $136/share, while the stock was selling for only $37/share.  Amazon was the better investment, and has consistently performed better as an investment than Apple–even though Apple has the most successful single product ever, in the iPhone.

Here’s the thing:  Amazon stock is currently (as of January 2017) on an incredible growth run.  It’s produced amazing returns and seems to be growing faster than the market: 47% gain vs. 24% for the SP500 this year.

The question is whether or not Amazon the business is performing even better.  They’ve continued their growth in ecommerce, added an incredible ubiquotous business in AWS, and they’re positioned themselves to be the operating system of the smarthome with their development of Alexa.  They’ve grown revenue at 20% annually for over a decade.

Tough to tell what the future will hold.

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Remember the Ups and Downs: AAPL

About 15 months ago, I made a large investment in Apple. The original investment was at an average entry price of about $101.74.  14 months later, that position is worth $139.74/share, and is 2.65% larger, due to the dividends paid along the way. These two data points put the return at 41%, versus 24.6% for the SP500 over the same period.

$140 is actually the 1-year target price I thought was reasonable for the company when I bought the position, so I’m happy with the returns.

A few great lessons from this investment for me.

-First, the emotions are such a big part of investing.  This position was hugely overweight in my portfolio, and I was very sure of it–but it was still difficult.  And, as you can see, for most of the year, this looked like a silly investment.

applespy

-Second, this was not my best investment of the year.  That distinction goes to Amazon, which seemed much more of a sure thing, and which I just bought because of a momentary price dip.

aaplspyamzn

-Third, I think the relative timelines of these investments are fascinating.  The Apple investment felt like it took a long time to realize returns–but the reality is that I have capital in my portfolio that has been lagging the market substantially, for much longer, that I ignore.  I’ll write about those pruning decisions in the weeks to come.  But -short insight is this:  one year is plenty of time for an investment to show strong returns.  If it doesn’t short returns after a year or two, and you wouldn’t buy it again (i.e. the thesis you had originally is still intact and more compelling than ever), its probably time to move on.

-Lastly, even in this world of high frequency traders, snap decisions, and instant market updates…  there is time.  Apple’s market cap is $700B+.  It takes time for that money to move.  If you’re an individual investor, you have time to make relevant market decisions–which I take as an encouragement.

 

 

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2016 Year in Review

As we finish up 2016, I wanted to take a minute to review my investments.

Equity Gain SPGain Annualized vs. SP
AAPL 16.95% 18.05% 1.49%
DIS 14.29% 5.19% 20.77%
UL -12.27% 5.19% -36.58%
AMZN 37.90% 19.19% 19.57%
SPY 20.54% 20.67% 1.72%

So, a few lessons from the year.

First, interesting to reflect on the fact that there were only a few investments this year.  Not too many opportunities–so its important to keep a steady effort, applied over a long time period, to succeed.  Investing is a long game.

Second, I’m continually amazed by the importance of dividends.  They’re tougher to quantify because of the timing, but dividend reinvestment makes a huge difference to returns.

Third, I’m humbled by the myopia of the quarterly earnings call.  When I invested in Disney, they’d just underperformed earnings and the stock dipped in price as a result.  But just a few weeks later, two films–Moana and Rogue One–both of which took years to make, and both of which were huge successes, hit theaters.  The same is true with Amazon.  The quarterly earnings simply do not reflect the long term trajectory of the company.  Believe the trend, not the noise.

 

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Thesis: GM

I recently purchased GM on December 29th, 2016, at a price of $35.25 per share.

A few reasons for the purchase.

First, from a customer perspective, I think GM is doing things right.  My extended family (my wife and I, my parents, and my wife’s parents) have considered or bought cars 4 times in the last three years.  Three of the four have been Subarus…    but the fourth is Chevy Volt, and it’s fantastic.  It performs well, looks great, is very reliable.  And it’s the Chevy, not  the Forester, that has people leaving notes on the hood that say “Don’t you love your Volt?!  Me Too!”

I’ve written before about how important the customer perspective is, and in this case, I think it holds true.

Second, I think GM is investing in the right areas.  The three major trends disrupting the auto industry simultaneously are electric vehicles, autonomous driving, and ride sharing.  GM’s Volt and Bolt have Tesla-challenging specs at competitive price points.  They’ve made note in the press of autonomous research and data collection in San Francisco and Scottsdale.  And GM made a $500M investment in Lyft and has started to build a “personal mobility brand” in Maven.  In short–I think they’ve made wise decisions about trends changing their industry.

Finally, when I read through their last earnings call, I was impressed by the CEO’s thinking about the future–both in terms of the changes in the market, and in their supply chain strategy and relevant timelines for making those investments pay off.

 

 

 

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Effort does not guarantee Returns

Great article today in the WSJ on Steve Edmundson, who manages the Nevada Public Employees Retirement System’s $35B worth of investments.

How does he spend his time?  What does he do during the day?

Not much, apparently.  In fact, almost nothing.  A great reminder that returns flow from insight, not time or effort.

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Investment Thesis: Disney

I recently purchased Disney on August 2, 2016, at entry price of $94.81.

Not too many people are saying you should buy DIS these days.  There are a lot of trends that seem to be threatening the business:  the rise of cord cutting, the unbundling of sports and cable channels, the increasing customization and personalization of content.

And, from a trend perspective, things are looking rough.  The stock is down 9% for the year and is the worst performing stock in the SP500 during that time.

dis_year

Not a good year for Disney’s stock.

But – if we look at a longer time period, things look a little more positive.

dis_5ysp

But, over the past 5 years, Disney has performed really well against the SP500.

Here’s the thing: Disney has been one of the top performers within the Fortune 500 for total return to shareholders over the past 5 years.  It’s possible that their business environment has changed enough to make them lose their competitive advantage…   but I think that’s unlikely.

My thesis is this:

  • The channel disruption within media and entertainment is a big deal.  Whoever owns the distribution can control access to customers on some level.  But Disney’s competitive advantage was never about controlling the channel.  Their advantage has always been about monetizing content across an array of experiences better than anyone–and they are still doing it well.
  • Unbundling of sports broadcasting can certainly cause problems for ESPN, one of Disney’s biggest revenue sources.  But sports are not going away:  if anything, they’re increasing in popularity and value, the current football season ratings slump aside.
  • Content is increasingly personalized, which means there’s more value in the tail of the content.  But that doesn’t mean that mass market movies and experiences will disappear: it means that only the leaders will win.
  • Finally, the rest of Disney’s income sources are doing well.  Their park in China is exceeding expectations, and their box office offerings are strong.

And, big picture, media and entertainment are a growing part of all our lives. I think Disney will thrive over the next five years, and the current price makes it a good investment.

Stay tuned to see!

 

 

 

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Bet on Growth

I enjoyed this column recently from Tim Calkins, professor of marketing at the Kellogg School of Management.

Professor Calkins contrasts the portfolio strategy of two iconic companies: P&G and Unilever.  In particular, he focuses on the strategies the two companies are pursuing with regards to the smaller brands in their portfolio.

P&G is looking to trim their portfolio. They’re focusing resources on their largest, most successful brands, and divesting or cutting support from smaller ones. Unilever, in contrast, has been on an acquisition tear, buying smaller brands with strong growth potential.

While both strategies can be right because of the company’s different positions, I agree with Professor Calkin’s conclusion:  Given the choice, I would bet on growth.

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