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. trustnet.com trustnet.com “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