PPFAS Mutual Fund has bought shares of Amazon.com Inc., whose value has dropped 7% in the last three months. The fund house’s chief investment officer Rajeev Thakkar says the investment by Parag Parikh Long Term Equity Fund has been done after watching Amazon closely for about a decade. At around 0.5% of the fund’s Rs 1,500-crore AUM, the Amazon position will not immediately matter much, but it is interesting to see an Indian fund take a direct position in this e-commerce giant led by Jeff Bezos. Let us find out why PPFAS bought the stock. Read on.
Isn’t Amazon expensive?
The first question about an Amazon.com investment is about valuation. To be precise, expensive valuation. The stock on a price to earnings basis trades at almost 78x. It ended 2018 with a mammoth revenue of $232.9 billion but net profit is only $10.7 billion or less than 5%. So, why did PPFAS buy such a stock that looks very expensive in terms P/E valuations? Thakkar agrees that if one uses a typical metric of Price / Earnings Ratio, the stock looks very, very expensive. “We have been railing against expensive consumption-related stocks in India for more than two years now. Amazon may seem to fall in the same category. The answer is that P/E ratio is not very helpful if the reported earnings are not “correct” for some reason,” argues Thakkar, who strongly believes in value investing.
He goes on to add that the reported earnings of Amazon.com may be “correct” from the accounting perspective and indeed may have been audited by the best of the auditors. However they should be representative of true economic earnings, and also sustainable. If the earnings are overstated or depressed due to certain factors, they give a misleading P/E ratio. In the case of Amazon, PPFAS MF feels the P/E ratio is not truly representative.
Thakkar argues that mature categories (like say physical books or ebooks on Kindle) are hugely profitable while other categories lose money. Mature markets (say the USA) make money while newer markets (say India) lose money. PPFAS appears to think that the true value of the cloud business of Amazon.com is not getting reflected adequately in the current numbers. While the cloud business brings a huge chunk of profits and is growing fast, it gets clubbed with the retailing business when you look at the net profit numbers.
Also, PPFAS believes un-monetized/partly monetised levers in advertising, media, and subscription, third-party sales and logistics are also things the P/E ratio does not seem to be capturing.
In January 2019, PPFAS MF bought Rs 7 crore worth of Amazon.com Inc. at a price of $1,466 / share. The stock trades at $1,587.70 at present (February 8, 2019 close).
“Familiarity with the company has been there for about two decades while we have been watching it closely for about a decade. Our YouTube presentations on this company go back about four years. We have been systematically underestimating the levers that have been pointed out above. In the latter part of 2018, our understanding of the cloud business was much better than it was earlier and that is what tipped the scales. While plugging in numbers in a spreadsheet and even back of the envelope calculations justify purchasing Amazon, the Benjamin Graham readings have been an impediment in building a larger position,” Thakkar said.
PPFAS MF wants to approach Amazon.com stock investment in a simple way. “…we will either keep buying on each substantial fall in the share price or we will wait to have the reported numbers crystallise our thinking more and more to add to the position. Again if we find our assumptions not validated by the company performance and if we think there is a mistake, we would not hesitate to sell,” Thakkar assures.
Indian funds with Amazon edge
PPFAS’ fund is not the only Indian fund with exposure to Amazon. International equity funds like ICICI Prudential US Bluechip Equity Fund (Amazon: 4.3% of fund assets), and Motilal Oswal NASDAQ 100 Exchange Traded Fund (Amazon: 9.8% of fund assets) are among funds with money invested in Amazon.com shares.
Amazon.com’s expensive valuation is no stranger to Indian investors. In fact, Indian investors pushed India-listed Avenue Supermarts Ltd. stock to stratospheric levels, and the valuation of this owner of DMart (a chain of hypermarkets) has reached record highs. Avenue Supermarts trades at over 100 times P/E. It reported less than Rs 850 crore profit on the back of Rs 16,500 crore annual revenue.