Compared to 25 years ago, the investing landscape has changed drastically. Thanks to the internet, everyday investors have the ability to look up income statements, company press releases, investor presentations, and Securities and Exchange Commission filings at the click of a button. When coupled with most online brokerages removing commission fees and minimum deposit requirements, this is the freest and fairest the stock market has ever been.
This access to information is especially useful when it comes to Form 13F filings. A 13F allows investors to take an under-the-hood look at what stocks, warrants, exchange-traded funds, and options positions the brightest money managers on Wall Street bought, sold, and held in the most recent quarter. Being able to "follow the money" can clue everyday investors into the stocks and trends piquing the interest of highly successful money managers.
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The one stock billionaire Ken Griffin values above all others
One of the more closely watched 13F filings each quarter comes courtesy of billionaire Ken Griffin of Citadel Advisors. Citadel's assets under management totaled $51 billion in May 2022, making it one of the more influential hedge funds on Wall Street.
Griffin's investment strategy for Citadel Advisors primarily involves hedging thousands of smaller stock positions with various option strategies. But among these multiple thousands of options contracts and smaller share positions is one gigantic holding that stands out as Ken Griffin's undisputed favorite stock to buy: Amazon (AMZN -1.65%).
Based on the executable value of the options contracts Griffin's fund holds, 94 of the top 100 holdings for Citadel were put or call contracts, as of the end of the third quarter. The only non-options contract worth more than $1 billion in market value at the end of the third quarter was Citadel's stake in Amazon. It's worth noting that Griffin's fund purchased nearly 4.48 million shares of Amazon during the third quarter, which helped lift the value of this position above $1 billion by the end of September.
Maybe even more telling is how much this position has grown over the past year. As of the end of the third quarter in 2021, Citadel held only 83,006 shares of Amazon stock. Just 12 months later, it owned 9,258,478 shares. Even though this only represents 0.091% of Amazon's outstanding shares, it's a massive stake for a hedge fund with more than 12,000 open positions, including options.
Why Amazon?
If you're wondering why billionaire Ken Griffin and his investment team have gravitated to Amazon over the past year, it likely boils down to three reasons.
To begin with, Amazon is the undisputed leader in e-commerce. Back in March, market research company eMarketer projected that Amazon's online marketplace would account for 39.5% of U.S. online retail sales in 2022. You could add up the company's next 14 competitors by market share and they would still come up more than 8 percentage points shy of Amazon.
The second reason Griffin and his team have piled into Amazon and made it a billion-dollar position for Citadel is almost certainly the outperformance of its three high-margin operating segments. Though its online marketplace generates most of its revenue, retail sales produce very low margins. The bulk of Amazon's cash flow comes from Amazon Web Services (AWS), advertising services, and subscription services.
For example, even though AWS -- the company's cloud infrastructure service segment -- only accounts for about a sixth of Amazon's net sales, it has consistently produced at least half, if not more, of the operating income. AWS has sustained a constant-currency growth rate of around 30%, and is reaping the rewards of cloud spending growth still being in the early stages.
The third factor likely enticing Griffin to significantly increase his fund's position in Amazon is the company's valuation. During the 2010s, investors willingly paid a median of 30 times operating cash flow to own Amazon stock. But if AWS, advertising services, and subscription services succeed in nearly tripling the company's cash flow by mid-decade, investors buying at today's share price would own Amazon at roughly 8 times Wall Street's forecast cash flow in 2025.
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What could go wrong?
But as we know, all stocks come with some degree of risk, even Amazon. Despite prominent billionaires like Griffin piling in, the stock could find itself under more pressure in 2023.
The biggest perceived challenge looks to be the growing likelihood of a U.S. recession. It's perfectly normal for consumers and businesses to reduce their discretionary spending when the economy weakens. Reduced spending, coupled with historically high inflation pushing up labor expenses, could be an unfavorable combination for Amazon's bottom line.
Another potential concern for Amazon would be the significant market-share gains Microsoft (MSFT -2.45%) has achieved with Azure. Based on the latest estimates from technology market analyst firm Canalys, Azure was responsible for 22% of all cloud-service spending during the third quarter -- 10 percentage points behind AWS.
However, Microsoft's Azure has been growing at a faster pace than AWS in recent quarters. While there's plenty of room for multiple winners in cloud services, Amazon's leading role is no longer guaranteed.
The other consideration is that bear markets usually cause investors to be more mindful of stock valuations. Even though it makes more sense to value Amazon based on its operating cash flow given that the company reinvests most of its cash flow back into the business, shares could be pressured by shrinking profits. After earning a split-adjusted $3.24 per share in 2021, Amazon is now expected to deliver a modest loss of $0.09 a share in 2022.
Yet in spite of these headwinds, Amazon has the look of an incredible investment for those who are patient. Although the next couple of quarters could be bumpy as the U.S. economy looks to regain traction, Ken Griffin's patience should be handsomely rewarded.
