How Have Pros Not Bought AMZN and NFLX on Dips?

Recently heard a PM on CNBC say "Yeah, we bought some Amazon back when it was 1400." And my thought was "Really? 1400? How 'bout buying it back when it was 300 five years ago like I did -- when I was 15 years old."

And I'm not saying this makes me a genius. Not at all. Clearly, that PM knows a million times more about investing than I do. But I'm saying it at least made me aware of what was going on around me. Aware that virtually EVERY house on our block had an Amazon package on their front porch almost every day. Aware that, whenever anyone in our family wanted to buy something, we would buy it on Amazon.

Same goes with Netflix. Is there an expression called "Hulu and Relax?" No, it's Netflix and Chill. Because every kid I know has and watches Netflix, and virtually every adult I know also has Netflix.

So virtually everyone I know uses both Amazon Prime and Netflix multiple times per week, and if either of those companies raised their prices 5, 10, even 15 percent, you know what would happen? Everyone I know would STILL subscribe to those services. Hell, I don't even know exactly what I pay for Netflix -- I just keep paying it. And what about you? When Amazon Prime raises its price in a year or two to 130 instead of 120, are you gonna cancel? I don't think you are.

Plus, from a market psychology standpoint, what's happened fairly soon after each of these two companies has experienced a dip these last 5 years? It's shot back up. Why?

Because both Amazon and Netflix (and you can throw in Facebook on this) have 25-40 percent top-line growth, are industry behemoths in rapidly growing industries and have undeniable pricing power. So how have you not bought on a dip over the last 5 years? And I'm not talking betting the mortgage on it, I'm talking putting 2-5 percent of your portfolio in it. What were you afraid of? That you were going to lose 10 percent of your investment? 20 percent? Maybe you would have. And maybe you will. But by not recognizing the potential of fantastically run companies with tremendous business models that the stock market seems to love, you've lost out on a 500 and 600 percent gain, respectively.

Finally, on market valuation, while NFLX'S valuation makes me a little uncomfortable, AMZN trades at 4.5 times sales -- and while that is slightly (40 percent) above market average, since its top line growth is 200-400 percent above the S&P growth average, I'll take that trade-off any day.

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Comments (49)

Jul 23, 2018

Yeah, I figured I might get some monkey shit thrown my way... and I mean no offense to anyone, but I honestly feel it's an investing misstep to not put a little money into companies whose products/services permeate our society when (1) their stocks have taken a hit, (2) valuations are not outrageous and (3) the companies still exhibit strong top-line growth and (4) history has shown that investors pile back into these stocks shortly after they've taken a hit.

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Jul 19, 2018

Are you fucking autistic?

Jul 23, 2018

Why do you ask that? Why do you think my opinion lacks merit?

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Most Helpful
Jul 19, 2018

Your analysis here is a combination of hindsight and not understanding that the things you knew about Amazon and Netflix 5 years ago were already included in the price of the stock, because everyone else knew them too. AMZN and NFLX have been winners because they have exceeded their lofty expectations. This will continue to be true until it isn't.

Good for you that you made some money. But what you've written above is essentially: I bought stock because I know a lot of people who like their products. You were lucky, not good.

Jul 23, 2018

I'm not claiming that I'm better, or as good, as any other investor. And like every investor, I've made plenty of losing investments. But when assessing a company for investment, don't you look at things like growth, valuation, market share and market sentiment?

And while past performance does not guarantee future results, if you look at the above four metrics, it seems unwise to not invest in something that has worked in the past. And all I'm saying is, with respect to these FAANG companies, this is what has worked: companies that are market leaders, with huge market shares, who still churn out 20%+ growth have -- in the recent past -- almost always bounced back from these temporary dips. So if nothing in this equation has changed, then why not follow what has been the winning path and make an investment in these top companies that still exhibit robust growth when they're down?

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Jul 23, 2018

It is astounding how every word he wrote in response to you went flying hundreds of miles over your head.

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Jul 23, 2018

Re: lucky - half lucky anyways.

The largest outsized returns are typically made on qualitative/strategic decisions, not quantitative/tactical; markets lag insightful individuals.

Jul 19, 2018

hindsight is always 20/20, as they say

Jul 23, 2018

I agree. And I'm not saying that this strategy is guaranteed to work; of course it's not, nothing in the market is guaranteed. But as I said above, it's my opinion that the "odds are" that these companies -- after a dip that's not related to long term fundamentals -- will outperform the overall market in the next 9-18 months. Again, no guarantees, but this is what has transpired over the last 5-10 years, so why not take 2 percent of your portfolio and see if this pattern persists?

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Jul 19, 2018

you also need to realize that when Amazon was at $500, most people were screaming about how overvalued the stock was. It seems like a much more obvious investment when the stock is at $1700

Jul 23, 2018

Absolutely. But revenues and earnings are higher now than they were when the stock was 500, so it's not as if the stock is now "3.5 times more expensive," just because the price is 3.5 times higher. And again, I'm not saying there's no risk to buying on the dip.. It's just my contention that these companies are such powerful commercial and social forces that -- when you see a sudden 10-15 percent dip -- you should seriously consider an investment.

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Jul 19, 2018

Ah yes, this novice OP doesn't know what "multiple contraction" is.

Jul 23, 2018

I've certainly heard of multiple contraction and I'm not saying that it's not possible... but you could have said that about these two stocks 1 year ago, 2 years ago... 5 years ago... and then you missed out on 500 percent gains. And why is there an assumption that multiple contraction is suddenly going to happen now? It certainly could. But 5 years ago, Amazon probably didn't have ANY profits... and I'll guess that its P/S wasn't as low as it is now... Of course these stocks "could" start to trend lower... hell, NFLX is down now for a few days after its earnings, and if it disappoints next quarter? My guess is it will take a huge hit. But I'm gonna trust the company that's grown and executed phenomenally over the last 10 years that has no signs of materially slowing down.

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Jul 23, 2018

The funny thing is in all your jibber jabber you never once mentioned the primary cause of amazon going up. Their cloud strategy worked.

How's you oil stocks from 2007? Countrywide finanica/Bear Stearns. Finance eating the world. Maybe some gold stocks from 2010 because it's obvious qe will destroy the dollar.

There's a reason ptj called this game 3 dimensional chess or something like that.

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Jul 19, 2018

Smart money = hedge funds and institutional investors who 1) do this stuff 24/7, 2) have access to management (who can't explicitly tell them insider info... but the hedge funds try to learn how to read inflection, things left unsaid, etc.), 3) pay to get on calls with other industry leaders via expert networks, and 4) conduct their own primary due diligence

With liquid/well-traded assets like these, every time you make vague bets like this you are claiming that you are smarter than the smart money. What's your edge vs. incredibly smart hedge funds and asset managers?

Jul 23, 2018

I don't have an edge. I'm not smarter than those other guys. But these other guys aren't infallible. They're not geniuses. Look at Bill Ackman. While the S&P was up 34 percent from 2015-2017, Ackman lost his clients 38 percent. That's crazy. You paid that guy 2 or 3 percent a year to perform 72 percent WORSE than if you invested in an index fund. And that wasn't over a 6-12 month period. It was for 3 years.

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Funniest
Jul 19, 2018

True but he's still a billionaire and you're mistaking WSO for Wallstreetbets.

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Jul 23, 2018

Ha. You're right about that.

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Jul 19, 2018

Personally wouldn't touch Netflix with a ten foot pole.

Jul 23, 2018

I'm leery of it, as well; it's P/E is above 80, and P/S is 12.

But Netflix has notoriously disappointed on its Q2 earnings, and then rebounded thereafter... so I'm banking that history will repeat itself. And while subscriber growth may slow, I just don't see any serious competitors on the near-term horizon, and think it has a very "sticky service, in that relatively few current customers seem to cancel.

Jul 19, 2018

I do not have anything to comment or add here. But out of curiosity what is a general ballpark # does the retail investor, such as yourself, trade when you "buy the dip"?

Jul 23, 2018

Again, I'm just an amateur, so please don't take my advice as anything close gospel. I just know that, for myself, when a high-quality company is down 10 percent, I start getting interested, and if it's down 15-to-20 percent, I get very tempted. Especially if this loss occurs in one day -- because to me, that strikes me as a very emotional (over)reaction to something that might not warrant such a reaction.

Plus, in my opinion, it's very human to be tempted to buy something you've wanted to buy when it's "on sale." And that's how I view it when these great companies take a big hit -- if I've been wanting to own them, but I think they're currently too expensive, if I see that one is suddenly "on sale" and marked down by 15 percent, I have a hard time resisting. Especially if I think that the stock's hit is based on something that will have only a short-term impact on the company, and that the adverse event has not changed the company's core story/fundamentals.

For instance, with the Netflix hit a few days ago, if it was based on fears of the new Disney streaming channel that's launching in a year or two, I might take pause and think, "Is this going to impact Netflix's long term business model?" But what happened to Netflix a few days ago? They missed their subscriber numbers, which seems to happen to them every second quarter... so I'm thinking that's a short-term problem that will be fixed by the next quarter or two... so I've decided that the potential reward is worth the risk.

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Jul 23, 2018

Quality company doesn't mean anything if you don't do something on valuation.

Cisco intel MSFT dominated the work. And you still lost 75% in those names if you bought in 2000.o

I'm not going to say tech is too expensive right now . It looks in the realm of reason ability to me. But buying dips like that can lose you a fortune.

Biggest risks to tech companies now isn't valuation but regulatory/anti trust.

Array
Jul 19, 2018

Bro put your dick away

Dayman?

Jul 23, 2018

Aw, come on, man... I'm just expressing my opinion. Just a friendly little debate.

Jul 19, 2018

hahah im just fuckin with u bud dont worry. so i had an experience with amazon when i was a sophomore in college. It was the first time i tried to research and value a company, saw a ton of potential for growth, and pitched it to our investment club that was like "no way". i liked them so much that i bought 6 shares with a lot of money i had saved up. they still were like no, but i got the last laugh when i exited for around 3x what i paid hahah dumb

Dayman?

Jul 23, 2018

That's what I'm talking about! You trusted your gut, did a little research and -- boom -- you were freakin' right. You can have all those fancy pros tell you why you shouldn't buy a great company, but if you've got a hunch, then figure out if MAYBE it makes sense from a valuation standpoint... then go ahead and take your 2-5 percent swing.

Jul 19, 2018

One thing I believe to this day, is that management and leadership is an underestimated factor in deciding on an investment or forecasting performance. As someone who basically did the models on amzn for practice, my decision to buy was driven by largely qualitative factors that game me a ton of confidence. While i know this sometimes backfires hard (ex theranos), it worked for me

Dayman?

Jul 23, 2018

Yes -- Bezos is relentless in his pursuit to be the best in every area he enters. It's truly amazing how intent he is on innovating and making the customer experience as good as it possibly can be. He'never seems content and complacent, and he's constantly striving for "more" and "better"... seems like a good move on your part to focus on this.

Jul 19, 2018

He is truly a fantastic leader and has done so much in so little time. I really got a new appreciation for focusing on qualitative aspects of a company/investment by listening to podcasts about how VC funds look at making investments in biotechs and other similarly risky entities. When they are given an opportunity where numbers cannot tell the whole story, factors such as management team really move to the forefront, and there is a lot of consistency behind good leadership and successful exits for the investors.

Dayman?

Jul 23, 2018

Hmm, interesting. You have a favorite one of those VC podcasts?

Jul 19, 2018

A Healthy Dose -- It's run by Steve Kraus, a Venture Partner at Bessemer and Trevor Price, who runs Oxeon Partners. Guy are fun to listen to and have great guests. It'll really get you interested in the healthcare space.

Dayman?

Jul 23, 2018

Cool, I'm gonna check it out, thanks!

Jul 19, 2018

I simply don't think the quality of their product competes with HBO, Showtime, etc. Again, personal opinion. I haven't looked at technicals.

Jul 19, 2018

I get tempted to buy into really simplistic ideas like "buy the dip" too but have you ever ran a backtest to see how these do? The value of technical trading is literally 0 nowadays. Buy the dip would be a reverse momentum strategy, which have literally 0 value if I remember correctly. The markets generally self correct. If every time the market dipped was an overreaction, eventually it wouldn't dip as much.

Obviously some more complex trends get missed but IIRC there's no value in technicals anymore (unless you are Renaissance).

Jul 23, 2018

Whoa, dude, that's way beyond my pay grade... definitely haven't back-tested, but I'm not talking buying the market on a dip -- just certain stocks. And these stocks I'm talking about have clearly outperformed the overall market the last 5 years, so I'm not talking about "normal" market activity; whether it's right or not, investors have treated these companies differently than the general market over the last 5-10 years.

Jul 19, 2018

Sounds good. It's not that hard to backtest super simple strategies in excel - I'll leave it as an exercise to the reader

Jul 23, 2018

Cool. I'm actually just accelerating my Excel training, so I will definitely check out how to do this. Extremely valuable to have this kind of info./evidence to back up my decisions, thanks.

Jul 23, 2018

kudos to you for putting your thoughts out there as a college kid. I've been dead wrong on amazon (here's the proof) and netflix (because I believe in traditional valuation and free cash flow generation). the only advice have is constantly question your thesis, ask yourself where you could be wrong. read well thought out analysis that is counter to your thesis, and see how strong the argument is.

I'd also recommend you reading aswath damodaran

amzn - http://aswathdamodaran.blogspot.com/2018/04/amazon...
nflx - http://aswathdamodaran.blogspot.com/2018/04/netfli...

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Jul 23, 2018

Yep, awesome, I'll check those out. And I know my analysis is incredibly simplistic compared to what the pros do, but the pros aren't always right and I just find it interesting that many miss these high-profile opportunities. Of course, AMZN and NFLX could have topped out as I type, and both could be on their way to a 50 percent loss. We shall see...

Jul 23, 2018

This thread doesn't make any sense.
You can apply your exact same reasoning to buy now.
People still get things delivered every day, and netflix and chill every other day.
You didn't give a single reason why it was a good buy back then and not now.

Jul 23, 2018

Why a (potential) good buy back then?

(1) At the time (2012-2013), both stocks had suffered significant pullbacks from fairly recent highs (75 drop percent for NFLX; 25 percent drop for AMZN).

(2) Both stocks were still experiencing torrid top-line growth (can't be certain what it was at the time, but if memory serves, it was at least 40-50 percent rev growth for each).

(3) Both had been market darlings, meaning it appeared as if investors "wanted" to own this stock on any good news.

(4) Both were market leaders in rapidly growing industries (streaming; ecommerce).

Jul 23, 2018

I got some grass fed flank steak half off the other day at whole foods on account of dat prime ;)

heister:

Look at all these wannabe richies hating on an expensive salad.

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Jul 23, 2018

Ha. Yeah, you're probably half-kidding (though I actually believe you got a good deal on some steak), but that's what I'm talking about -- Amazon knows how to wrangle in customers and get them to subscribe to Prime -- and Prime members buy 5 times more product than non-Prime members. Bezos & Co. is just a brilliant businessman and -- like someone said above -- investing in Amazon is another way in investing in his tenacity/ambition.

Jul 23, 2018

Because both are overpriced and have accounting fraud, Amazon web services like Phar mor and Netflix capitalized content costs like worldcom capitalized line costs.

Jul 23, 2018

Perhaps... I obviously have no idea. I will say, however, that both stocks' ascents seem to have been attributable to metrics other than profits -- in Amazon's case, revenue; in Netflix's case, subscribers.

Jul 23, 2018
Jul 23, 2018
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