Jeff Bezos as the world’s richest man, rising Amazon shares and the Amazon P/E ratio have a common denominator - investors’ belief in the leader.
Shares of Amazon have soared to new heights and so has the net worth of the world’s richest man, rock star CEO and Amazon founder Jeff Bezos. Data from Bloomberg’s ‘Billionaires Index’ shows Bezos is $87 billion richer this year.
(Source: Bloomberg Billionaires Index)
The cult leader
Jeff Bezos is a great example of investing in vision and leadership. Tesla's Elon Musk is another great modern day example and Apple's Steve Jobs is the classic. These leaders had world-changing ideas (for example e-commerce) and executed on them.
As of August 28, 2020 Amazon is trading on a P/E ratio of 130, which is very high but low by historical standards for Amazon because this year earnings have been rising alongside price. Still, investors are paying up for expected future growth in Amazon despite its already colossal size, in large part because they believe Bezos can make it happen.
Chart
Amazon stock price, Earnings per share and P/E ratio
(Source: Macrotrends.net)
CEOs going all in
Chief executives with a big vision and the ability to carry it off is the first part of the equation into how money is being put to work by investors. The second part is the CEOs ‘putting their money where their mouth is’. Almost all of Bezos’ net worth is in Amazon (though he did make a timely cash out just before markets crashed in March!)
Investors reward the shares of companies where top managers have invested heavily into the business. Note that a CEO investing into the company is different to a CEO who was given stock options as part of their compensation package. This differentiation makes sense because it means the CEOs interests are more aligned with the shareholders- the CEO will make and lose wealth alongside other shareholders as the share price moves.
The Risks
Investing in a visionary founder is a high risk: high reward strategy that doesn’t always work out. The classic failed example is Enron CEO Robert Herring but modern examples include Uber founder and now ex-CEO Travis Kalanick. The pattern tends to be that company valuations explode since these huge personalities divert attention from problems that are eventually found out and the valuations fall back. Time will tell if the same happens to Amazon or Tesla.
How to play it
Investing with Jeff Bezos has been a very profitable endeavour and might well continue to be. To find the next Bezos will be both much harder to do and likely more profitable. Two places we look are insider transactions and new IPOs.
Two useful sources are:
1) Finviz.com insider deals
https://finviz.com/insidertrading.ashx
2) MarketWatch.com IPO calendar
https://www.marketwatch.com/tools/ipo-calendar
