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What does the recent Amazon and Alphabet data show?

31 October 2019

Amazon and Alphabet have been long-term holdings in the portfolios of J. Stern & Co. Chief investment officer Christopher Rossbach looks at their latest reported figures and what this suggests for the groups going forward.

Third quarter 2019 provided further proof of the strength of Amazon’s business. Amazon had a record Prime Day. It also delivered very good growth within its retail business. Low E-commerce penetration rates provide a long sustainable growth trajectory in its core e-commerce business and Amazon is moving deeper into additional retail markets like consumables, apparel and homewares. In addition Amazon continues to push retail innovations like the Amazon Go store and the Whole Foods acquisition.

The launch of one-day shipping across the Prime membership required significant investment that diluted Amazon’s margins this quarter. However, we think that this investment will strengthen Amazon’s competitive advantage because other competitors will be unable to match this service. This is how Amazon and Jeff Bezos work: The investment may have a short term negative impact but it is the right long term decision to make.

Amazon is strongly positioned for the long term with unassailable competitive positions in its existing large and growing markets. Jeff Bezos’ bold moves into new trillion-dollar markets such as healthcare and grocery can replicate the success that it has had in cloud computing and advertising and become big businesses over time.

Amazon’s willingness to invest into new projects, for example the recently announced acquisition of Health Navigator, which will become part of the company’s Amazon Care group, shows no sign of slowing.

Amazon has great prospects for growth and value creation and any short-term weakness is a timely buying opportunity for long-term investors.

With the upcoming holiday season, we expect to see more shoppers use Amazon as the default starting point for their purchases and to sign up to Prime membership.

Amazon’s AWS business also continued to grow healthily at 35%, growing strongly despite its already large base and at good operating margins. We believe that the opportunity for cloud computing remains significant as businesses take advantage of the benefits of cloud computing and Amazon penetrates deeper into enterprise.

Alphabet

Alphabet reported strong revenue growth of 22% on a constant currency basis. It also had robust operating margins accompanying this growth.

Its core Google business shows that the online advertising industry is still growing quickly. Both mobile search and YouTube continue to grow strongly. Alphabet has been able to introduce significant innovations across its multiple properties and formats. For example, advertising on its Maps properties is focusing more on local advertising, increasing volumes and improving differentiation. We believe that Alphabet’s core advertising business has many years of growth ahead.

Like with Amazon, we believe it is important that Alphabet continues to invest into future value creation.

Alphabet is also building technology for the future as it invests significantly into Artificial Intelligence and machine Learning. Alphabet is already demonstrating the success of these investments in its advertising business. It is also continuing to invest into multi-billion industries, including cloud computing and health, as well as new markets like video game streaming and self-driving cars.

Alphabet is committed to returning some of the sizeable cash on the balance sheet to shareholders through its share buyback plan. At some point in the future Alphabet will have to reconsider its capital allocation and start paying dividends.

Today, however, the company has many growth opportunities that can provide significant upside to the current share price. Alphabet’s outlook remains strong.

Alphabet shares trade at an attractive valuation and represent a compelling opportunity for long-term shareholders

 

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