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Perhaps the best advice ever given about investing is to ‘think independently’ (by Warren Buffett’s mentor Benjamin Graham). So simple in theory, yet so difficult in practice.
When it comes to oft-admired US company Amazon, I wonder whether enough people are thinking independently. Like so many successful companies, Amazon has developed a mythology all its own. The consensus view is that Amazon will continue to grow strongly and is well on its way to a market capitalisation of one trillion US dollars.
In the first half of 2017, Amazon gave clues it was about to finally enter Australia. Shareholders in local retailers began panicking. The consensus quickly became that, like a tsunami, Amazon would consume all before it.
Like many doomsday scenarios, this was an overreaction. In our June 2017 special report titled Amazon and the Aussie hit list we said ‘don’t panic’ and ‘it will take time for Amazon to achieve significant Australian sales’.
Last month Amazon launched in Australia. And the pessimistic mood has largely reversed. There seem few real bargains on Amazon’s Australian site and the range is, thus far, underwhelming.
Australian retailers like JB Hi-Fi (ASX: JBH) are, by and large, matching prices and offering fast delivery options (for example, three-hour delivery costs $15). Everyone’s asking: what’s Amazon’s point of difference?
Of course Amazon Australia’s launch was underwhelming – expectations were just too high. But Amazon will keep refining its offer and pricing and will no doubt grow its Australian sales over time. Sales will probably be super-charged by the rollout of Amazon Prime in some areas this year, which offers ‘free’ unlimited deliveries for an annual fee.
The point is that shareholders must continually assess what is ‘baked’ into share prices. There was a fair amount of short-term pessimism in retailer share prices last year based on the Amazon threat.
It’s worth remembering that the consensus – what’s ‘baked in’ – is quite often wrong. And this is where opportunities can present themselves.
So what about Amazon, the US company, itself?
Well, as an Australian company analyst, I haven’t analysed Amazon the US company in any depth. But it feels a lot like the consensus view of Amazon is uncritically positive.
Try to think about how popular stocks might lose their sheen. For Amazon, that could happen in myriad ways.
Perhaps it might fall out with the US administration over the latter’s regulatory threats. It’s no secret that President Donald Trump isn’t a fan of Amazon, recently stating that the company puts retailers out of business. That Amazon chief executive Jeff Bezos owns progressive newspaper The Washington Post is also thought to irritate Trump.
Amazon has faced criticism in other ways too, for everything from the structuring of its tax affairs to its treatment of employees. This hasn’t stopped consumers from spending up big on its site but, as its market power grows, so might calls to rein the company in.
Really, though, potential regulation is less of a threat than maturity or mistakes. With sales up 34% in the third quarter, maturity seems a long way off. But it could happen sooner than you think if consumer preferences change, as they often do in retail.
Perhaps specialist shopping websites will spring up that fragment Amazon’s generalist approach (personally I find the company’s Australian site irritatingly diversified). Or perhaps Amazon will come to be perceived as the Wal-Mart of online shopping – just a little bit downmarket.
Mistakes are the other concern. Amazon is famously not afraid to make them. Yet its takeover of premium supermarket group Whole Foods Market is a risk. Its grocery ambitions might be its undoing.
None of these are predictions. Amazon is an impressive business and, under Jeff Bezos, the company might keep reinventing itself for some time. A one trillion dollar market capitalisation is certainly possible.
But questioning the current consensus view on any company is important. It’s particularly vital for the stocks you own. Ask yourself what might go wrong (or right). Is the current consensus too optimistic or too pessimistic? Ignore the media (and most broking research) – it reflects the consensus rather than questions it.
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