Hayden Capital, an investment management firm, published its first quarter 2021 investor letter – a copy of which can be downloaded here. A return of+1.2% was recorded by the fund, below the S&P 500 Index that delivered a +6.2% return and the MSCI World Index that was up by +4.9% for the same period. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.
Hayden Capital, in its Q1 2021 investor letter, mentioned Amazon.com, Inc. (NASDAQ: AMZN), and shared their insights on the company. Amazon.com, Inc. is a Seattle, Washington-based e-commerce company that currently has a $1.6 trillion market capitalization. Since the beginning of the year, AMZN delivered a -1.12% return, while its 12-month gains are up by 28.92%. As of May 18, 2021, the stock closed at $3,232.28 per share.
Here is what Hayden Capital has to say about Amazon.com, Inc. in its Q1 2021 investor letter:
“Amazon (AMZN): We sold our last remaining stake in Amazon this quarter. Amazon was our longest-running investment holding, after having originally purchasing it at the inception of Hayden in 2014, at a price of ~$317.
I gave some details of how Amazon has progressed over these past 6.5 years in last year’s Q2 2020 letter, which partners can find here (LINK). The company has executed amazingly well over this tenure, with revenues up ~3.3x and since our initial purchase, and reported operating income up ~30x over that period.
Generally, I believe there are three reasons to sell an investment: 1) we recognize our initial thesis is wrong (sell out as quick as possible), 2) we have a significantly higher returning opportunity to redeploy the capital into (sell-down to fund the new investment), or 3) the company is maturing and hitting the top part of it’s S-curve / business lifecycle, so the business has fewer places to reinvest its capital internally. As such, the future returns will likely be lower than the past. This investment thus becomes a “source of capital” in the future, as we fund earlier-stage investment opportunities.
In the case of Amazon, we decided to sell due to the third scenario. I’m sure Amazon will continue to generate value for shareholders and continue to keep pace with the broader technology sector. However, I’m just not confident it’s as attractive an investment as when we first invested.
With ~51% of US households having an Amazon Prime account (and with very low churn), each of these households continuing to increase their annual spend with Amazon, and few / no real competitors in sight, Amazon is a dominant force that will only continue to accrue value as consumers continue to move from offline to online purchases for their everyday needs. Likewise, the “cash-flow machine” of Amazon Web Services is in a similar position of strength, with AWS now having ~32% market share and continuing to grow at +30% y/y. Because of this, I think Amazon is probably one of the safest investments in the technology sector today.
So why did we decide to sell the investment then? Simply put, Amazon is in a much different place than when we initially invested. Back in 2014, investors were starting to question whether Amazon’s promise of future earnings potential would actually come to fruition.
Operating income had declined from ~$1.4BN in 2010, to ~$676M in 2012, to just ~$178M by the end of 2014. Expenses were outpacing revenue growth, and investors were questioning whether Amazon’s expenses were truly “investments” as they claimed, or whether it was a structural necessity of the business and thus would never flow to investor’s bottom line.
The critical question was ‘what portion of expenses are truly growth investments vs. structural expenses, and as a result, will Amazon ever be capable of generating significant profits?’
Our analysis indicated that these expenditures truly were the former, and led to the belief that the business’ structural margins would inevitably increase over time. This was our differentiated insight / investment edge.
Fast-forward to today, and our thesis proved correct with operating margins having increased from ~0.2% to ~6%. However due to this success and proving this facet out to investors, Amazon investors have much higher confidence and a better understanding of the company today. I’m not sure we have the same level of differentiated insights, as we did back then.
In addition, I believe the departure of Jeff Bezos and his long-time lieutenants signal a regime change. Perhaps it’s now “Day 1.5” instead of the Day 1 mentality that made Amazon so successful (LINK)… The departures within the past couple years include:
• Jeff Bezos – Founder, CEO, Visionary. Started Amazon in 1994.
• Jeff Blackburn – Joined Amazon in 1998. Oversaw Amazon Marketplace, Advertising,
Amazon Studios, Prime Video, Prime Music, M&A.
• Jeff Wilke – Joined Amazon in 1999. Oversaw Amazon Consumer (ecommerce)
• Steve Kessel – Joined Amazon in 1999. Oversaw Physical Stores, Kindle, and Whole
Blackburn, Wilke, and Kessel have each arguably created hundreds of billions of shareholder value. On top of this, Bezos is the visionary and culture-setter behind Amazon. When he and his long-time lieutenants take their hands off the wheel, it is probably time for us to as well.
We sold our remaining shares at an average price of ~$3,240. Based on our initial investment, we made a ~10x return in a little over six years, for a ~45% IRR7. We reinvested the proceeds into our existing portfolio, taking advantage of the prices offered by this latest market draw-down.”
Our calculations show that Amazon.com, Inc. (NASDAQ: AMZN) tops our list of the 30 Most Popular Stocks Among Hedge Funds. As of the end of the fourth quarter of 2020, Amazon.com, Inc. was in 273 hedge fund portfolios, compared to 245 funds in the third quarter. AMZN delivered a -3.10% return in the past 3 months.
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Disclosure: None. This article is originally published at Insider Monkey.