The following segment is taken from this fund letter.
Amazon is clearly one of the best companies on the planet, and most readers are probably getting more packages from Amazon this year than they did last. from Amazon The cloud computing company, AWS, is a global leader and now generates most of the company’s profits.
But there are a few things about Amazon that concern me. Amazon generated $325 billion in revenue from its online store and third-party seller services last year, but only generated a 2% profit margin in retail. You don’t need to make high margins to be a great business.
Costco (COST) is one of the best companies I’ve ever followed, and it only earns about a 3% margin. But Costco removes the markup so it can offer customers exceptional values. Amazon offers exceptional convenience, but (in my experience) not always exceptional value. Costco also achieves extremely stable and high returns on capital.
Amazon’s returns on capital have fallen significantly recently. The return is doubly concerning because Amazon is incredibly ambitious. Like Meta (FB), it is investing heavily for its future growth, including in its own cargo operation. Owning lots of planes to support a marginally profitable retail business doesn’t sound as promising to me as trying to build the metaverse.
When the stock fell to $2,700 last fall, I thought a lot about whether I wanted to buy more. I don’t like holding 1% positions because they consume research time and don’t add much value to the portfolio when they are doing well. But I wasn’t keen on increasing our weight in Amazon, which trades at around 30x 2024 earnings per share estimate versus 15x for Alphabet (GOOG, GOOGL) and 14x for Meta.
Flash forward to early February and the stock is back at $3,100. I decided to go out. I’m sure Amazon will continue to thrive, but I’m comfortable having less exposure to mega-cap stocks, and especially mega-caps which are quite expensive compared to Alphabet, our largest holding .
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.