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  • Writer's pictureIshfaaq Peerally


Good day for the market with the $SPX500 up by 0.5%. The $DJ30 , however, is not doing that great because of a 5% fall in $BA which is the largest component of the Dow Jones Industrial Average. Our portfolio is doing better than the market especially with $SWKS $AAPL and $JPM all over 1.5% .


Nobody knows when will be the next recession but as intelligent investor, we should ensure that we have the right stocks in out portfolio. This time things will be different since the top companies are from the same sector and are direct competitors to each other. 40% of The Nasdaq 100 index $NSDQ100 is just 5 companies, Apple $AAPL , Microsoft $MSFT , Amazon $AMZN , Google $GOOG and Facebook $FB .

Apple is dependent on iPhones which is 60% of their sales. People will still need smartphones during a recession because it is an extension of the self but upgrading to a premium smartphone, an iPhone, will need to wait. Apple sales will go down if there is a recession. Facebook and Google depends on ads and businesses will be spending less money on ads during a recession. Microsoft has a very diversified business and will be pretty safe during a recession. But the most recession-proof business among the big tech is Amazon. That's because Amazon is a retailer, the second largest retailer in the world after Walmart $WMT . Retailers thrives during recession especially if they are not selling premium goods. In 2008, when the S&P 500 $SPX500 lost 38%, Walmart gained 19% and Dollar Tree $DLTR gained over 60%. Amazon, however, is more than just a retailer.

89% of the revenues of Amazon last year came from retail(including Kindle, Echo, Fire, etc) and 11% came from Amazon Web Services (AWS). But if we look at profit margin, this gives us a different picture. Amazon doesn't have a large profit margin since they are a retailer. In their North American retail business, they had an operating margin of only 5%. Internationally, they lost money(actually Amazon has never been profitable internationally) because of competition such as Alibaba $BABA , $JD.CH , MercadoLibre $MELI , Flipkart (owned by Walmart). The operating margin on AWS is 28%. Most of the profits of Amazon come from AWS.

If we look at retail only, they have been growing in 2002 and 2008-2009 during recession and they will still grow when there is a future recession. But we should look at AWS since this is where they draw most of their profits. This is uncharted territory since cloud computing was not something very common during the last recession. Most of the customers of AWS are businesses and unless they go bankrupt, they will still need to use cloud services even during a recession. If you want a concrete example, let's look at Salesforce $CRM . This is the only company during the last recession deriving most of their revenues from cloud computing and they did well during the last recession. AWS also will not be so affected by a recession.

Amazon is a fast growing business and if there is a recession, growth will be slowed but it won't stop. Amazon will still grow faster than most companies its size. The problem is with the stock which is not recession-proof. When companies start missing earnings and people start selling these shares, passive investors will sell their ETFs and index funds. Vanguard, Blackrock $BLK , Fidelity, State Street $STT will have to sell the underlying assets including Amazon, which has a big portion of its shares outstanding owned by these companies. Algorithmic trading will trigger even more selling. This is what happened last year during the correction, the S&P 500 lost 19% while Amazon lost 35%. You may say that you are buying the business and not the stock but if you look at Microsoft in 2000, the stock crashed and it took 16 years for it to recover although the business was still growing. The same thing can happen to stocks such as Amazon.

It all depends on you, if you want to invest in Amazon for the next 20 years, you can do so but now if you are thinking of the next 5 years, it can be risky since sooner or later, the recession will come.

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