Interactive Investor

Terry Smith buys Amazon for Fundsmith Equity

Earlier this year, Smith told interactive investor it was ‘probably not’ too late to buy the tech giant.

2nd November 2021 09:16

Kyle Caldwell from interactive investor

Earlier this year, Smith told interactive investor it was ‘probably not’ too late to buy the tech giant.

Terry Smith has snapped up shares in tech giant Amazon (NASDAQ:AMZN) for the first time for Fundsmith Equity.

Smith bought a position in the company last month, but did not offer any commentary regarding the rationale behind the purchase. It has not entered the top 10 holdings.

In October, Smith also sold InterContinental Hotels Group (LSE:IHG) and began buying another new position for the fund, which was not disclosed.

In an interview with interactive investor earlier this year, we asked Smith whether it was too late to buy the big three technology giants – Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOGL) – given that the trio had never been held in Fundsmith Equity, which launched on 1 November 2010.  

Smith told interactive investor it was “probably not” too late to invest. He said: “We are, as a team, people who continually re-examine these things. We don’t think, ‘I’m never going to own Amazon’ or something, and then just forget about it, we regularly sort of blow the dust off metaphorically from the online file and have a look at it. And we’ve done that in the past with companies and changed our mind, and we might change our mind again, on all or any of those, or they might change.

Regarding Amazon, Smith spoke positively about one side of its business: Amazon Web Services, the cloud computing division. However, he was critical of its retail arm’s profit margins, pointing out that they are low at around 2%.

He said if Amazon was to split into two he would be interested, but appeared lukewarm on the prospect of owning the tech giant in its current form.

“It’s clearly not making adequate margins or returns on (its) retail business,” Smith said.

“The two businesses have got no synergy whatsoever in reality...if they were to break the two out, I might really be interested in one of the two, but I’m quite worried about it as it stands, the structure, in terms of where we will end up with a business with a massive cross-subsidy across those two.

In addition to InterContinental Hotels Group, in 2021 Smith has sold three other long-term holdings: software provider Sage (LSE:SGE), testing services firm Intertek (LSE:ITRK), and syringe-maker Becton, Dickinson and Co (NYSE:BDX).

While Smith has been building a position in Amazon, Scottish Mortgage (LSE:SMT), a long-term backer, has been reducing its exposure. Last year, the UK’s largest investment trust noted that Amazon’s $1.5 trillion (£1.1 trillion) market cap (at the time – it is now $1.7 trillion) makes the path to large future returns more challenging.

In its recent third-quarter results to 30 September 2021, Amazon delivered both disappointing sales and outlook guidance as consumers returned to physical stores and rising freight and labour costs began to bite. Third-quarter revenue growth of 15% contrasted with the 37% achieved in the heavily pandemic-driven corresponding period in 2020. Profit fell year over year and both sales and earnings per share missed analyst forecasts. 

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