Many people know Michael Barry from his books. big short, Or a movie based on it. Both chronicle the story of a group of investors who bet on the U.S. housing market before the 2008-2009 financial crisis, shorting mortgage-backed securities at a time when everyone thought home prices would rise forever. are doing. Barry continues to make his investments and runs Scion Asset Management.
In the fourth quarter of 2023, Scion Asset Management reported two purchases that may surprise fans of value investing. Amazon (NASDAQ:AMZN) and alphabet (NASDAQ:GOOG). These “Magnificent Seven” growth stocks have typically been shunned by value investors because of their high earnings multiples. But as of the end of 2023, they accounted for 10% of Bally’s stock portfolio.
So why did Burley open positions at Amazon and Alphabet?
Amazon: Finally starting to make a profit
At first glance, Amazon appears to be overvalued. Its price/earnings ratio (PER) 62 is more than twice the average. S&P500 Index (28 at the time of this writing). But looking under the hood, it’s clear that Amazon hasn’t shown its true profit potential in 2023. Over the past year, e-commerce and cloud computing giant Amazon has expanded its operating margins, with profit margins of around 7.5% last year. Two quarters. This is a significant increase from the 2.5% return it recorded in late 2022 and early 2023.
If Amazon had earned a 7.5% annual profit margin on its $575 billion in total revenue, it would have generated $43 billion in profit in 2023. That would give the company a P/E ratio of $1.9 trillion against its current market capitalization. But even this doesn’t tell the whole story. Amazon’s profit margins should continue to rise in 2024 for multiple reasons. First, Amazon Web Services (AWS), the highly profitable cloud computing sector, continues to shine. Second, strong growth is driven by high-margin e-commerce services such as third-party sales management and advertising. For reference, ad revenue increased 26% year over year last quarter.
If Amazon’s profit margin reaches 10% in 2024 and sales increase by 10% to $630 billion, it will generate $63 billion in profit this year. That would give it a P/E ratio of 30x, which is about the average for the S&P 500. Burley probably expects earnings fluctuations to occur as well, which may explain why he buys shares in Scion Asset Management’s portfolio.
Alphabet: From AI Loser to AI Winner
Another of Mr. Barry’s Magnificent Seven bets, Alphabet, while not expensive to look at, faced some major negative press throughout 2023. At the beginning of 2023, the tech giant was trading at a P/E ratio below 15x, likely due to investor concerns. In the AI field, it is losing competition from startups such as OpenAI. The stock currently trades at 27x, slightly below the S&P 500 average, even though the stock is up 77% since the beginning of the year.
Mr. Barry and other investors likely expect Alphabet to maintain a commanding share of the search market and profit from its digital advertising business. Google Search’s market share has remained surprisingly stable despite all these new AI competitors, at over 90% according to the latest estimates. His Google search revenue for the fourth quarter of 2023 was up 12.7% year over year to his $48 billion.
Alphabet also has promising businesses in YouTube and Google Cloud. YouTube is a dominant player in video streaming around the world, generating $9.2 billion in advertising revenue in the last quarter and reaching 100 million premium members. Google Cloud’s quarterly revenue is about the same, with revenue up 25% year-over-year.
If Alphabet maintains its No. 1 spot in Google search and continues to grow YouTube and Google Cloud, the stock will do well over the long term.
Learn from the investing greats, but don’t copy them
Examining the portfolio holdings of famous investors can provide some insight. But no one should blindly buy every company in Barry’s portfolio.
First, we outsiders have no way of knowing what Mr. Barry’s actual claims are regarding these two stocks. His reasons for owning the stock may be different than yours, which could make him uncomfortable if the stock price starts to fall. Second, retail investors only learn about hedge fund activities through 13-F filings with the Securities and Exchange Commission. These filings are due one and a half months after the end of the quarter in question, and the latest filings describe the portfolio’s status as of the end of 2023. So it’s unclear whether Mr. Varley bought or sold Amazon or Amazon. Alphabet stock in 2024, or whether you have exposure to it now. This information lag makes it a risky idea to try to copy the moves of famous investors.
Learn from the investing greats, but don’t copy them. It’s better to build your portfolio with stocks you believe in rather than stocks others believe in.
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John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool’s board of directors. Alphabet executive Suzanne Frye is a member of The Motley Fool’s board of directors. Brett Shaffer He has positions at Alphabet and Amazon. The Motley Fool has positions in and recommends Alphabet and Amazon. The Motley Fool has Disclosure policy.
‘Big Short’ investor Michael Burley holds 10% of his portfolio in 2 ‘Magnificent Seven’ AI stocks Originally published by The Motley Fool
