Many people know Michael Burry from the book The Big Short, or the movie that was based on it. Both chronicled the story of a ragtag group of investors who bet against the U.S. housing market before the 2008-2009 financial crisis, shorting mortgage-backed securities at a time when everyone else thought housing was set to go up forever. Burry is still investing today, and runs Scion Asset Management.
In 2023’s fourth quarter, Scion Asset Management reported two purchases that may surprise his value-investing followers: Amazon (NASDAQ: AMZN) and Alphabet (NASDAQ: GOOG). These “Magnificent Seven” growth stocks have typically been shunned by value investors due to their high earnings multiples. Yet as of the end of 2023, they made up 10% of Burry’s stock portfolio.
So why did Burry open positions in Amazon and Alphabet?
Amazon: Profits are finally arriving
At first glance, Amazon seems overvalued. Its price-to-earnings ratio (P/E) of 62 is more than twice the average of the S&P 500 index (28, as of this writing). However, when you look under the hood, it is clear that Amazon did not show its true profit potential in 2023. Throughout last year, the e-commerce and cloud computing giant expanded its operating margin, leading to approximately 7.5% margins for the last two quarters. That was up significantly from the 2.5% margins it posted in late 2022 and early 2023.
Had Amazon been earning a 7.5% profit margin for the entire year on its total revenue of $575 billion, it would have generated $43 billion in profits in 2023. Against its current market cap of $1.9 trillion, that would have given it a P/E of 44. But even this doesn’t tell the full story. Amazon’s profit margins should continue to move higher in 2024, for multiple reasons. First, its high-margin cloud computing division, Amazon Web Services (AWS), continues to shine. Second, it is seeing strong growth from higher-margin e-commerce services such as third-party selling management and advertising. Advertising revenues, for reference, grew by 26% year over year last quarter.
Story continues
If Amazon’s profit margin…
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