After you receive this alert, we will be selling 25 shares of Alphabet (GOOGL) at roughly $1107.91. In addition, we will be initiating a position in Amazon (AMZN) , buying 35 shares at roughly $1471.61. Following the trades, GOOGL and AMZN will represent 3.78% and 1.76% of the portfolio, respectively.
During our members-only call last Wednesday, we discussed how we are inclined to sell some of our big gain in Alphabet (our sale today will be in an average gain of roughly 97% at the time this was written) to finance an initiation in Amazon. We came to this conclusion after we digested Alphabet's most recent quarter and analyzed how it compared to other big tech company's earnings. During the earnings call, we felt that Alphabet's management team was too nonchalant in their commentary about how rising costs have eaten into the company's bottom line, and we do not stand for this type of complacency when the rest of Alphabet's group smashed expectations. As a result, we are trimming roughly 40% of our position in Alphabet to fund a purchase in Amazon, which is led by CEO Jeff Bezos and a management team that has sought to disrupt and conquer multiple business channels.
Before we provide our thoughts on Amazon, we want members to know that we still believe that Alphabet's management team has the ability to turn its narrative around. However, until we see the team become more committed to beating earnings numbers, or the valuation falls to a point where shares are too cheap to ignore, we will keep our rating as a TWO. Alphabet does have several important earnings levers, such as increased advertising profit if they can improve traffic acquisition costs (TAC), higher Google Cloud revenue growth, and accelerated monetization of Other Bets like Waymo, that it can use to grow earnings above expectations, but we want to see results before we change our opinion.
For Amazon, we are calling this name out of the bullpen. We had previously stayed out of this stock in order to stay disciplined and diversified within FAANG, favoring Facebook (FB) Apple (AAPL) and Alphabet in the process, however, we believe that Amazon's story has gotten so much better in recent months that we had to get it on our sheets. Amazon essentially has three separate business: retail, web services, and an advertising business, that are each growing terrifically well, and we believe that the total potential of the company fully supports, and will increase, the company's valuation.
We will be out with a larger post on Amazon this week as there is just so much that can be discussed, but our bullish thesis on AMZN is mainly predicated on:
- Strength in Retail Sales including both Online and Physical Stores (Whole Foods)
- Amazon offers a wide-range of products at competitive prices that can be conveniently shipped in a short period of time
- The company is the market leader in eCommerce, and we expect Amazon will increase its market share over time
- Improving Margins-Operating Margin in North America was 4.5% in the fourth quarter, the best Q4 result since 2010
- Amazon is looking to make a big impact in the grocery store business thanks to its $13.7 billion acquisition of Whole Foods
- Whole Foods products are sold both in-store and on Amazon's Website
- Whole Foods contributed about $4.5 billion of the company's $60.5 billion fourth quarter result
- Strong Momentum in Amazon Web Services (AWS)
- High margin business with secular growth, and Amazon is the leader in the public cloud with roughly 75% of U.S. market share
- Revenue increased in 2017 to $17.458 billion (up 45% year over year), and growth accelerated in the fourth quarter (+44% yoy excluding F/X) compared to third quarter 2017 (+42% yoy excluding F/X)
- Amazon Web Services is now on a $20+ billion run-rate
- Amazon is expanding its infrastructure and Availability Zones between now and 2019 to better serve its customers
- AWS is dynamic and innovative: Amazon released 497 significant new services and features during the fourth quarter, making the total numbers of launches in 2017 to 1,430
- Growing Advertising/Other business (advertising services and co-branded credit card agreements)
- Revenue is growing at a faster clip (+62% year over year for 2017) compared to both Amazon's Retail and AWS segments, as well as Facebook and Alphabet's advertising business
- Amazon's ad business should continue to thrive in 2018 thanks to increases to Prime subscribers and digital offerings
- Other Notes:
- Subscription Revenue--Includes annual and monthly fees associated with Amazon prime membership, audiobook, e-book, digital video, digital music-2017 revenue grew 49% year over year
- There are more, new paid member joined Amazon Prime in 2017 than any other year
- Artificial Intelligence and the Amazon Alexa
- Alexa Sales have already exceeded management expectations
- CEO Jeff Bezos said on the last earnings call, "We don't see positive surprise of this magnitude very often-expect us to double down."
- Company has made a major push into offering and developing video content
- Amazon Studios has produced award nominated films and series
- Broadcasts of NFL Thursday Night Football on Amazon Prime brought in 18.4 million vies in 11 games
- Amazon owns popular video game streaming site Twitch, which members should be familiar with as a broadcast partner to Activision Blizzard's (ATVI) Overwatch eSports league
We are initiating Amazon with a price target of $1700, which reflects 23.5x 2019 Enterprise Value/EBITDA. Even though the stock is at its all-time highs, we are starting our initiation a little bit bigger than usually as we do not want to see the stock rise before we establish a right-sized position. Plus, we are effectively transferring our funds from our Alphabet sale (with some of our proceeds from our NXP Semiconductor exit to finance this purchase, keeping our FAANG relatively the same.