Baillie Gifford (Trades, Portfolio) is a UK-based investment fund that recently reported over $95 billion worth of 13F holdings as of the end of the fourth quarter of 2022.
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
The firm primarily invests into growth stocks with a focus on the technology sector. For example, the company was an early-stage investor in Tesla (TSLA) and benefited from the stock's huge bull run during 2020, which enabled it to beat the market
In this article, we'll dive into one of Baillie Gifford (Trades, Portfolio)'s fourth-quarter buys, Amazon.com Inc. (AMZN, Financial), which I believe has been unfairly butchered in the market selloff; let's dive in.
About Amazon
Amazon is the leader in the U.S. e-commerce industry with close to 60% of all U.S. online retail sales happening through its website, according to Statista. The business operates with a “scale economics shared” philosophy, in which it passes on its large-scale cost savings back to customers through a combination of benefits. Amazon’s Prime membership grants access to even more benefits for approximately $14.99 per month. Prime customers get access to free shipping, Prime video and a range of benefits that wouldn’t be cost-effective for most other companies.
Guru investors
Baillie Gifford (Trades, Portfolio) increased its stake in Amazon by 0.61% in the fourth quarter, during which shares traded at an average price of $98 apiece, which is close to where the stock trades at the time of writing. The firm owned over 37.8 million shares of Amazon as of the quarter's end, giving it a weight of 3.31% in the equity portfolio.
Other guru investors buying the stock in the fourth quarter included Jeremy Grantham (Trades, Portfolio), Seth Klarman (Trades, Portfolio), Al Gore (Trades, Portfolio) and Jim Simons' (Trades, Portfolio) Renaissance Technologies.
Financial recap
Despite Amazon’s strong market position, the company had a rough 2022 with its share price plummeting by over 48% to a low of $84 per share by January 2023, which was the same share price as back in 2018.
Amazon's most recent financial report was for the fourth quarter of 2022. The company generated revenue of $149 billion for the quarter, which surpassed analyst forecasts by $3.43 billion and represented growth of 8.59% year over year. This growth was slower than past growth rates of over 43% in 2020 and 27% in 2021.
The lackluster fourth quarter top line result was driven by an 8% decline in international revenue, mainly due to a huge $5 billion headwind related to foreign exchange rate fluctuations. This dynamic has been common across companies with international revenue streams and was driven by the strong U.S. dollar relative to most other currencies. A positive is the currency markets tend to be cyclical by nature and the U.S. dollar has already corrected down by 10% versus the Euro since September 2022. Therefore I don’t believe this issue will impact Amazon in the long term.
Even as e-commerce struggles, the company still has a strong growth engine that continues to roar, and its name is Amazon Web Services (AWS), which is the largest cloud infrastructure provider in the U.S. For those unfamiliar with the cloud, to simplify matters, you can think of it as a remote data center with offers “computing as a service." Businesses can get many benefits from moving to the cloud from on-site data centers, which include increased flexibility of operations, reliability and even cost savings, as businesses only need to pay for the compute or storage they actually use.
According to Statista, the cloud industry is forecast to grow at a solid 13.81% compounded annual growth rate and reach a value of over $881 billion by 2027. With this high growth backdrop, AWS reported solid revenue of $21.4 billion in the fourth quarter, up a rapid 20% year over year.
Profitability challenges
Amazon’s overall business is still facing a number of profitability challenges. Its operating income was $2.7 billion in the fourth quarter, which was down 21% year over year. This was mainly driven by higher fulfillment and logistics costs, which wasn’t helped by the inflationary environment. A positive is Amazon has begun to execute a strict cost-cutting plan which included a lay-off of ~18,000 employees and the shutting down of certain fulfillment centers. The layoff number may look large, but given Amazon employees over 1.5 million people and effectively overhired in 2020, I think it’s not as bad as it looks.
Given Amazon employes such as vast number of people and its warehouses have a significantly higher rate of injuries as compared to other warehouses, it is not a surprise the company has been at the forefront of controversy. According to Washington state data, Amazon warehouse workers are twice as likely to be injured on the job and four times as likely to develop musculoskeletal injuries compared to all other non-Amazon warehouse workers. The poor safety conditions are a result of the company trying to cut costs in light of its difficulting turning a profit in the low-margin e-commerce business.
I believe Amazon’s new CEO must be careful to not “rock the boat” too much with employees in order to maintain company morale. Having previously done contract work for Amazon, I know the company’s culture loves “numbers” to back up proposals. Jassy didn’t provide data to back up his decisions regarding making work-from-home employees come back to the office, for example, which many employees believe goes against the culture.
Moving into medical
On Feb. 23, 2023, Amazon announced it has closed the $3.9 billion acquisition of One Medical, a virtual health care provider which enables users to video chat with doctors, request prescriptions online and much more.
The U.S. health care industry was valued at ~$15.7 billion in 2023, according to Statista. It is also poised for distruption due to health care being unaffordable for many people.
Virtual health care providers such as One Medical could offer a cost-effective alternative to in-person care for many people. The service costs just $12 per month or $144 for the year (with the 28% discount promotion running), which is much cheaper than traditional services (though of course, this comes at a drastic reduction in quality of care, and there are still many health issues people would need to see a doctor in person for).
Amazon CEO Andy Jassy commented, “If you fast forward 10 years from now, people are not going to believe how primary care was administered." For decades, you have “called your doctor, made an appointment three or four weeks out, drove 15-20 minutes to the doctor, parked your car, signed in and waited several minutes in reception.” After which, the doctor usually sees us for “10-15 minutes” and we then have to drive another “20 minutes to the pharmacy” to pick up a prescription.
I believe Amazon’s CEO has a good point in that for many common and easy-to-diagnose ailments, this process seems very expensive, time-consuming and wasteful. Thus this could offer huge potential for Amazon to continue to grow in this market.
Valuation
Amazon trades at a price-sales ratio of 1.9, which is over 48% cheaper than its five-year average.
The GF Value chart indicates a fair value of $198.96 per share, making the stock look undervalued at the time of writing. The chart does indicate a possible “value trap,” which could have been driven by the decline in profitability, but I believe this is only a short term issue.
Final thoughts
I believe Amazon is a fantastic company, and it is still the dominant market leader in U.S. e-commerce and cloud. The company is facing a series of headwinds and challenges. However, I believe these are mostly short term issues and the company’s stock price looks to be undervalued.
