Amazon shares - risk to reward ratio?

Steve182

About 2 years ago I bought Amazon shares which have since doubled in value so I'm very happy with them. That's certainly not true of my FTSE100 shares.

As I see it, Amazon has good chance of doubling every 5 years (at least for the next decade hopefully, until it's just too big to grow rapidly), so in 10 years my Amazon shares could be quadruple current value. Of course should we see something resembling the financial crisis or .com collapse as happened a decade or two ago, my current shares could easily be halved.

So in that timescale I'm looking at a possible +300% upside VS a -50% downside.

-50% would not be the end of the world as that's what I paid for them originally. If quizzed on the chances of either scenario happening  I would say that quadrupling in value is definitely more likely than halving in the 10 year timescale. I could cope with 50% loss if I had to but it would not please me.

Just to reiterate, this is not my only investment. I'm not looking for financial advice, I know this investment is not diversified. Is anyone else in a similar position or mindset to me and wishes to share their thoughts?

itwasntme001

I own some too (about 20 shares) and have seen them triple in value.  No plans to sell them just yet.  They still have a lot of growth potential and I am still quite young (30s) so am happy to ride out the voltility that is bound to occur from time ot time.  I have a feeling they will double at least from here but from then on I am not so sure.  I do own PCT, SMT, fundsmith and some other tech names so my portfolio is certainly biased towards growth style but I look at it in term of the compounding of earnings at high rates over time which should hopefully make me wealthy eventually...

george4064

@Steve182 are your Amazon shares held within a globally diversified portfolio? Because if not, you are really excluding yourself from exposure to many other companies that may well perform better than Amazon over the long-term. So why restrict yourself to one company?

John464

They are priced at over 100 times earnings so I can't see what restricts the downside to 50%

dunstonh

This is really starting to feel like Deja Vu. Those around 20 years ago will also probably recognise a similar pattern.

Prism

John464 said:

They are priced at over 100 times earnings so I can't see what restricts the downside to 50%

I have no idea what Amazon are really worth but the standard historical P/E valuation is pretty much irrelevant when trying to work it out. I'll leave it to Fund Managers to try and work out how much money Amazon will be making in 10 years time.

MaxiRobriguez

High P/E's aren't necessarily a problem as it suggests future growth. Owners simply need to decide whether they agree with the consensus as to whether to continue holding or not.

Personally, I doubt that Amazon (and various other tech companies) can post another five years worth of growth like the one we've seen. These are companies which have proliferated every day life and dominate their markets already, and have already started moving to and are big players in other markets as well. P/E's of 100 from this point are frankly getting close to suggesting they will end up owning the entire planets revenue streams.

Not to say growth won't happen from here. Share prices aren't based on fundamentals in the short term, and with interest rates low and people still having spare cash, then there's currently no reason why the favoured tech investment won't suddenly stop now. But I would think *at some point* if there is continued gains then at some point there's going to be losses, as the very aggressive growth expectations aren't met. 

Steve182

george4064 said:

@Steve182 are your Amazon shares held within a globally diversified portfolio? Because if not, you are really excluding yourself from exposure to many other companies that may well perform better than Amazon over the long-term. So why restrict yourself to one company?

Amzn is my largest individual holding by some margin, but I also own the following -

Alibaba
Alphabet
BATS
Burford Capital
Cara Therapeutics
DGOC
DS Smith
Fundsmith
Imperial Brands
JD.com
Lindsell Train IT
Lindsell Train global equity
Microsoft
MJ Gleeson
Northern VCT
Persimmon
RDSB
SMT
Smithson IT
Sylvania Platinum
Tencent Holdings
Universal Display

Steve182

John464 said:

They are priced at over 100 times earnings so I can't see what restricts the downside to 50%

You're right of course, downside is actually restricted to 100%
I should have said I consider the "likely" downside to be a maximum of 50%. Conversely there is no limit to the upside, but I consider the "likely" upside to be a maximum of 300%. This based on CAGR of 15% for 10 years.    

Thrugelmir

Steve182 said:

As I see it, Amazon has good chance of doubling every 5 years (at least for the next decade hopefully, until it's just too big to grow rapidly), so in 10 years my Amazon shares could be quadruple current value.

The share price will increase to whatever investors are willing to pay for them.  That's very different to how profitable Amazon can become in the future as a business. On a head to head comparison as a retailer Walmart is more profitable currently. 

dunstonh

Just to explain my dejavu comment as someone messaged me...
20 years ago, tech stocks boomed way above the average PE Ratio and saw a boom similar to the current one.       
Then what happened is the media stoked it saying how good the returns are.   There was a famous Daily Mail article that encouraged pensioners to reduce their fixed interest securities (corp bonds, gilts etc) and go into tech funds.  That was at 90% of the peak point.
So you saw people who would not normally invest in such a high risk nature start to put the bulk or even all of their money in that area.   
Suddenly, people who did not know much about investments were telling others to invest in tech funds as they couldn't lose money and tech was the way.
Then the tech stocks dropped up to 90% of their values and took 18 years to recover after spending nearly a decade stagnating.

History does not always repeat itself but, generally, when you see people who are not experienced or knowledgeable investors piling their money into high risk areas that they know little about because of past performance then it is often an indication of an out-of-control boom.