By Philip van Doorn
Earnings haven’t been the driver for Amazon. Berg said the company has been able to fund the build-out of its distribution network, including warehouses and its very profitable Amazon Web Services, with internally generated cash.
So he expects Amazon to continue to show average annual share-price gains of 20% in coming years if it can continue increasing its revenue by 20% or more.
He pointed to another new business for Amazon: “Only two and a half years ago, Amazon didn’t sell ads on its website.”
Since then, Amazon has allowed vendors to bid to have their products show up higher in search results. “So for very little cost, they turned this algorithm on, and what it did was grow into $10 billion in revenue per year, with a 75% to 80% profit margin,” Berg said.
Going back to his original decision to purchase Amazon for the fund in October 2008, Berg said the company was already well-established. He bought it at about $60 a share and watched it fall to $40 within the first six months. That is an alarming drop.
The stock closed at $3,138 on Jan. 6. — 52 times Berg’s original cost. “Unless I had experienced it, I would not have believed you would make 50 times your money in a really well-known, high-profile, expensive stock in just over a decade,” Berg said.
A list of the largest holdings of the T. Rowe Price Global Growth Fund is below. When asked about which of these names he remains excited about, Berg said the best way to address that question, without giving away active buying or selling decisions, was to summarize how he places technology stocks into four categories:
Berg described these as “not crazy expensive,” but he is concerned about regulatory headwinds. He said he is slightly underweight the benchmark in these companies, but you can see below that Alphabet and Facebook are among the fund’s top holdings.
Alphabet is expected by analysts to increase sales by 10% for all of 2020, compared with sales growth of 18% in 2019. Facebook is expected to show 19% sales growth for 2020, down from 27% in 2019.
Looking ahead, Berg believes “the biggest thing happening in the world right now is the race to AI [artificial intelligence] superiority,” which will be between the U.S. and China.
The government of China has made it clear that this is a priority and that it expects the country’s largest tech players to invest accordingly. For the U.S., the competition will come from Amazon, Alphabet, Facebook and other large players.
As far as a regulatory crackdown within the U.S. goes, Berg believes “you will hear a lot of rhetoric from politicians,” but there will be “not a lot of teeth to the regulation” to avoid hindering the U.S. giants’ efforts to compete with foreign companies.
These include Salesforce.com Inc. /zigman2/quotes/200515854/composite CRM -0.47% , Workday Inc. /zigman2/quotes/201157610/composite WDAY -1.51% , Zoom Video Communications Inc. /zigman2/quotes/211319643/composite ZM -0.73% , Intuit Inc. /zigman2/quotes/203136605/composite INTU -0.42% and ServiceNow Inc. /zigman2/quotes/202729495/composite NOW -0.44% .
“They are big companies growing much faster than other companies. But now they are competing with each other and approaching market limits,” Berg said.
These include companies such as Okta and Datadog, both of which provide cloud-based network services. “These are expensive, but they are growing tremendously. We may be inflating a tech bubble, but we may also be early,” Berg said.
Another next-generation winner he is positive about is Sea Ltd. /zigman2/quotes/202797958/composite SE +0.93% , which he described as ” the e-commerce leader and mobile-gaming leader in Southeast Asia,” outside of China. “Think of everything Amazon does, plus epic games and Tencent /zigman2/quotes/204605823/delayed HK:700 +1.94% in China, and do that in the rest of the vibrant southeast Asian economy,” he said.
These include International Business Machines Corp. /zigman2/quotes/203856914/composite IBM +0.76% , Cisco Systems Inc. /zigman2/quotes/209509471/composite CSCO +2.25% and Intel Corp. /zigman2/quotes/203649727/composite INTC -0.42% . “This isn’t my bucket to play in,” Berg said, “but I play in the first three buckets.”
The T. Rowe Price Global Growth Fund now holds shares of Apple, but Berg explained that he sold the shares when it appeared the company’s “growth profile had slowed,” before starting a new position in the stock more recently.
“What we got wrong” when selling his entire position in Apple five or six years ago, was that he and colleagues didn’t realize the pricing power of new iPhone models, Berg said. “Unlike when flat-screen TV prices went down, for the iPhone prices went up to $1,000,” he said.
So now he is bullish on Apple, but because of the stock’s strength (it rose 81% in 2020) he hasn’t been able to build as large a position as he wanted.
With so much discussion of technology stocks, you may be surprised that a sector where Berg was adding stock during 2020 was financial services. He said many excellent companies that were making the best use of technology to innovate were “thrown out with the bathwater,” leading to excellent opportunities during the March 2020 doldrums. These included Goldman Sachs Group Inc. /zigman2/quotes/209237603/composite GS +1.11% , Morgan Stanley /zigman2/quotes/209104354/composite MS -2.76% , Charles Schwab Corp. /zigman2/quotes/201281754/composite SCHW -1.16% and KKR & Co. /zigman2/quotes/206126495/composite KKR +0.74% .
He said Morgan Stanley had pretty much completed its transformation to being “a big private wealth and asset manager, much more than it is a bank, with a fast, steady earnings stream.” He also said that Goldman has been transforming into “a disruptive fintech with scale, in addition to having a real franchise and brand.”
The T. Rowe Price Global Growth Stock Fund is about 52% invested in U.S. stocks, compared with 56% for the MSCI All Countries World Index.
Here are the top 10 holdings as of Nov. 30: