Amazon.com, Inc. (NASDAQ:AMZN) is a massive business that is a becoming a massive challenge for retailers day by day. Well, if you don’t know that Amazon poses a big threat to retailers, you might be from another planet. Launched as an online bookstore in 1994 by Jeff Bezos, Amazon has become an e-commerce behemoth with a market cap of more than $527 billion. In this piece, we will take a look at some interesting comments about Amazon made by two hedge funds – Horizon Kinetics and Wedgewood Partners – in their Q3 investor letters. First, let’s take a look at what Horizon Kinetics said about Amazon.
Amazon is the fourth most valuable public company in the world, the largest internet firm by revenue in the world, and the eighth largest employer in the United States, according to a report from CNBC. Amazon is one of the most popular stocks among hedge funds tracked by Insider Monkey. There were 132 funds in our database with bullish positions in the tech giant.
Amazon is a Disruptive Force: Horizon Kinetics
Horizon Kinetics, in its Q3 investor letter, said that Amazon is clearly a disruptive force. According to the fund, Amazon.com, Inc. (NASDAQ:AMZN) has destroyed the profitability of entire industry sectors and will continue to do so. The online retailing giant wiped out all the bookstore chains but opened a half-dozen physical bookstores of its own in New York and other cities in 2017.
[Amazon] is destroying profit margins in the retailing industry, and by extension is threatening the real estate that houses those retailers, and by further extension the profitability of the REITs that own the real estate. And by acquiring Whole Foods, Amazon is threatening the grocery store chains.
Meanwhile, Horizon Kinetics believes the next big thing in the technology industry would be cryptocurrency and blockchain technology. The fund discussed both technologies in details in its Q3 letter (you can download a copy here).
Now, look at what Wedgewood Partners’ views on Amazon.
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Our Companies Have Insulated Themselves from Amazon Threat: Wedgewood
Talking about its bullish position in Tractor Supply, Wedgewood Partners said in its Q3 investor letter that it notices “the cries of Amazon, Amazon, Amazon!” every time when an unseasonable weather cause weakness in retail.
Amazon’s retail business has been wildly successful in building revenues (if not profits or returns on capital) over the past 20 years, and this has led them to a low-single-digit share of U.S. retail.
However, the U.S. retail market is a monstrous and growing, multi-trillion-dollar opportunity, which leaves trillions of dollars of the addressable market for everyone who is not Amazon.
It seems that nearly every quarter, a new headline makes its way to the forefront, declaring that brick and mortar retailing is dead – or at least on its death bed. The ongoing evolution and disruption of the retail market resulting from increased e-commerce assumes the impact is far-reaching, affecting all physical retailers. Here at Wedgewood, we perform our due diligence to determine the accuracy of these threats. Over time, we have studied the threat of e-commerce (Amazon in particular) quite thoroughly. What we find, and what our analysis leading up to our initial purchases indicated, is that our companies have differentiated models and/or operate in niche segments, allowing them to grow despite these threats. We wrote at length last quarter about the Amazon threat and clarified why we believe our retail holdings have insulated themselves from this threat. We invite you to return to that letter for a refresher whenever dour headlines raise concerns about this topic.
So, Wedgewood Partners’ thesis suggests that retailers could protect from the Amazon threat by focusing on differentiated business models and niche segments. That said, I strongly believe that retailers can do perform well despite an intensifying competition if they adopt a brick-and-motor model and focus on niche segments. What do you think?
