10-bagger at 10-times the price
I was recently asked about the lofty valuations of technology companies, and if the sector was overvalued because the ratio of stock prices to earnings seems to be high. While I think there are almost certainly a lot of overvalued stocks of technology companies today, blunt valuation tools risk missing truly amazing opportunities to compound for long periods of time.
Around fifteen years ago, Amazon’s share price was around $30 which represented a ratio of 26 times the earnings per share, before interest, tax, depreciation, and amortisation charges. To many this would seem like an astronomical price to pay for the stock of any company and almost certainly guarantees a paltry investment return in future – if it’s even positive at all.
Fast forward to today and Amazon has grown from being an online book seller, to an e-commerce giant, a logistics and fulfilment juggernaut, and a leading cloud computing platform. It also offers music and video streaming among many other services. Amazon’s shares now trade at around $3,000 representing a 100-fold increase. In fact, investors 15 years ago could have bought Amazon shares at 10-times the price they were trading at back then, and still made 10-time their money!
Amazon Share Price: Last 15 Years (Log Scale)
Source: Bloomberg
Good things happen to great businesses, and public equity investors that rely on short-cut valuation measures alone will often miss out on the greatest opportunities of their lifetimes. In the Montaka long portfolio we focus on owning the winners in attractive markets, that will likely grow into new businesses and markets, and deliver outstanding compound returns over time. We’re looking to invest behind the “next” Amazon, and even the existing Amazon, as it continues to expand its advantages and earnings power.
Montaka owns shares in Amazon. This article was prepared 16 October with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Amazon you should seek financial advice.
Christopher is a Portfolio Manager for the Montaka funds and the Montgomery Global funds. He joined MGIM at establishment in 2015.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
