Trustnet Magazine Issue 37 February 2018 | Page 16

YOUR PORTFOLIO
/ E-COMMERCE /
FOLLOWING
AMAZON
Anthony Luzio seeks out the most effective way to tap
into the e-commerce boom
W
ITH TRADITIONAL
HIGH STREET
STORES IN LONG-
TERM DECLINE, the
natural place for investors to turn
to is online retail. But just because
e-commerce has dealt a fatal blow
to many of the shops we grew up
with, does this automatically
make it a good investment?
When it comes to internet
shopping, one name stands head
14
and shoulders above all others –
Amazon. And the figures speak
for themselves: for every dollar
spent online in the US last year,
Amazon captured 53 cents. It
accounted for 4 per cent of total
retail sales and is expected to
bring in $200bn in 2018.
As Janus Henderson’s John
Pattullo put it: “We were at an
Amazon Disruption Day run by
Morgan Stanley recently – we
went with trepidation and we
came back pretty scared. Even
the thought that Amazon is
going to move into something
like the pharmaceutical sector
causes that sector to sell off and
companies to start consolidating
on the back of it.”
One number that isn’t so
impressive is the bottom line.
While Amazon has recently begun
to turn a profit, this is mainly
down to Amazon Web Services,
the company’s cloud-computing
unit. It still loses money from its
retail operations and it is this,
combined with a $650bn market
cap and P/E of above 200, that
has led some investors to call it
overvalued.
However Tom Slater of the
Scottish Mortgage Investment
Trust says investors need to look
at the bigger picture and that with
companies such as Amazon, it is
about where they will be in five
years’ time at the very least.
“I think there’s this idea
that Amazon isn’t interested
in making money because it
has persistently low margins,”
he explains. “I see it slightly
differently, which is that it takes
the profits from things that
are working and invests them
extremely aggressively in new
areas. I would be astonished if
its books business, for example,
didn’t have extremely attractive
margins given its global market
share. It’s just that you never see
that, and that’s why looking at
short-term earnings multiples can
be quite dangerous.”
He adds that you do not need to
delve too deeply into the numbers
to see the benefits of this strategy
– Amazon’s revenue growth
hasn’t fallen below 20 per cent in
the past 10 years, and the figure
for 2017 stands at 31 per cent
compared with about 6 per cent
for the wider market.
OPEN SESAME
To consider just how far Amazon
can go, we need to address the
falsehood at the beginning of
this article – that the company
stands head and shoulders above
the competition when it comes
to online retail. The truth is its
scale is dwarfed by its Chinese
counterpart, Alibaba.
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“We were at an Amazon
Disruption Day run by Morgan
Stanley recently – we went with
trepidation and we came back
pretty scared”
“If you go to the biggest day of
Chinese retail, Singles Day, there
are $25bn of sales on Alibaba’s
website,” says Slater. “If you got
e