Ruane Cunniff Comments on Amazon

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Feb 07, 2017

In the fall, we exited our small position in Walmart and replaced it with a similarly small position in Amazon (NASDAQ:AMZN). The company’s e-commerce operation (Amazon.com) and its cloud computing platform (Amazon Web Services) are two of the most advantaged businesses we’ve analyzed in quite some time. Both are growing fast and have miles of runway ahead of them. And they are run by arguably the most talented, customer-focused and long term-oriented businessman of his generation.

At a consolidated level, Amazon produces very little in the way of reported profits. Amazon Web Services, whose financials are disclosed separately, earns very rich margins, but the larger e-commerce business reports scant earnings. Our research indicates that the company’s e-commerce business has substantial earnings power that is being masked by a variety of ambitious growth investments. The Fund purchased shares at what we believe to be a reasonable multiple of underlying earnings power excluding those investments. Estimating the long-term potential of Amazon’s many investments is an inherently imprecise exercise, which is why the investment thus far has been a small one.

From Ruane Cunniff (Trades, Portfolio)'s Sequoia Fund 4th quarter shareholder letter.