Beating Amazon at Its Own Game

The 1990s were a period of massive change. At least that’s how I remember it growing up during that period.

I remember the first time my parents came home with a phone in their car. Not an actual mobile phone. One attached and wired in the car itself.

Then they upgraded to “the brick.” You may remember it. The massive, bulky phone that looked like this:

I also remember how things were changing at the family construction business. Up until then, they did everything by hand. Payroll. Submitting bids.

Sure, they had typewriters. But they even had an old check-writing machine that stamped paychecks. Like the one pictured below.

Meanwhile, in school, I learned how to use computers. The old Apple IIe. The best part of course was playing The Oregon Trail, hoping I made it to the end without dying of dysentery.

It was all new. But it became part of everyday life.

Then, something magical happened. A new thing – the internet – burst on the scene.

Sure, getting online was slow and cumbersome. But once you dialed in and made it past all the loud noises, the world opened up in a whole new way.

For me, at least at the time, it was things like playing Doom with my cousin who lived across town.

It was a brand new age. And some budding entrepreneurs made the most of it.

Jeff Bezos saw it right away. He saw the potential in the World Wide Web.

So in 1994, he started Amazon.

At the time, selling products online was a crazy idea. Retailers like Sears still ruled the shopping world.

But the idea was simple. Use the power of this new technology to sell books.

Fast forward to today, and Amazon changed the entire landscape. It’s impossible to have any sort of business – especially retail – without an online presence.

It’s why Amazon is one of the most dominant companies in the world. At a $2.7 trillion market cap, it’s the fifth-largest company in the world, behind NVIDIA, Apple, Alphabet and Microsoft.

And since debuting on the Nasdaq in 1997, shares of Amazon are up an astonishing 332,567%.

That’s the result of finding ways to utilize a new technology. And pushing boundaries year-after-year.

Even as one of the world’s most valuable companies, Amazon isn’t exactly slowing down. It’s not just looking to grow its business. It’s seeking ways to create even more wealth for its shareholders.

In some cases, that means using its vast resources to invest in other companies. Or take stakes in them one way or another. A playbook Amazon founder Jeff Bezos started at Amazon well before he sailed off into retirement.

In the past decade alone, Amazon took stakes in dozens of companies. Some of these investments went bust. Some are paying out handsomely.

While we don’t know the specifics of every investment, we do know about some of them.

The reason is that some of these deals are stakes in public companies.

This year alone, Amazon made at least five key deals with some of its suppliers. That includes companies like Generac, Qualcomm, and 3M.

These stakes add up to billions of dollars in current value.

But it’s not the fact that Amazon is getting a stake in these companies. It’s how Amazon is doing it that matters.

Most investors buy a company’s stock. Then hope it goes higher.

Over time, they hope to create new wealth if that company does well. It’s a centuries-old playbook. One that probably 99% of investors still use today.    

Billionaires like Jeff Bezos don’t invest like most people. It’s not just because of his wealth. Sure, he has access to deals we don’t.

Instead, it’s the way he invests. The types of instruments he uses. Instruments he knows give him leverage to the company he’s investing in.

He’s one of the world’s richest men for a reason.

And it’s the same playbook that he brought to Amazon that it still uses today.

Consider that five years ago, Amazon’s public investment portfolio was worth around $10 billion, according to filings. Today, it’s worth more than 20 times that at about $230 billion.

How did that happen?

It happened in part by using a tool that members of Strategic Trader are all too familiar with: stock warrants.

If you’re still new to warrants, that’s ok. I get a lot of questions about them.

What I can tell you is they’re very easy to understand. And just as Amazon knows, they can help take your portfolio to a whole new level.

They’re similar to having an option on a stock. It gives the investor the right to buy stock directly from the company at a specific price – the strike price – for a specific period.

In most cases, that time window is anywhere from three to five years. Sometimes longer.  

That’s a lot of time. And it can give investors the chance to buy a company’s stock at a significant discount to its market price.

The best part about them, though, is that they allow you to control a fair amount of stock for far less than buying the stock outright. Think pennies on the dollar.

That’s why Amazon loves them so much. Amazon gets a share of the underlying company’s upside.

Since last month, Amazon made three major deals using warrants.

First it made a deal with Qualcomm (QCOM) for equipment it needs for data centers. The deal is worth up to $60 billion for Qualcomm. In exchange, Amazon got 25 million warrants to buy Qualcomm shares at $161.26 between now and September 2036. That’s 10 years!

Days later, it made a deal with backup generator powerhouse Generac (GNRC). Amazon agreed to a supply agreement with Generac for large backup generators for its data centers.

The value to Generac is initial orders worth about $2.4 billion. In return, Amazon got 1.7 million warrants at an exercise price of $200.93 per share. They expire in 2033.

Finally, last week Amazon made a deal with materials giant 3M (MMM) for optical equipment for its data centers. The $6 billion deal came with 3.1 million warrants at an exercise price of $164.89 per share. The warrants expire in seven years.

All of those warrants have value to Amazon. And they could be far more valuable years from now.

That’s what Amazon is after: a massive increase in the value of its investments.

This isn’t the first time either. In fact, Amazon made billions of dollars on these types of deals in the past.

For example, Plug Power.

Plug Power made fuel-cell systems for the forklifts Amazon uses in its warehouses. Back in 2017, Amazon signed a supply deal with Plug Power worth up to $600 million.

In exchange, Amazon got 55.3 million warrants with a $1.19 strike price. That was about $66 million in stock value at the time.

Within a few years, shares of Plug Power took off. At one point, shares traded as high as $73.

That put the value of the warrants at about $4 billion.

Now, we don’t know exactly how much Amazon made from the deal. But based on company filings, we can estimate it was more than $1 billion. Or more than 15 times the initial value.  

And that’s not the only case.

Amazon did similar deals with companies like Atlas Air, SpartanNash and Air Transport Services Group.

In every case, Amazon didn’t ask for stock. It got warrants.

Do this over and over again and you can start to see how Amazon is playing for keeps.

While Amazon gets sweetheart deals by using its position with its suppliers, I believe our strategy is even better than Amazon’s. Especially since we can buy and sell warrants on the open market. Amazon can’t since their warrants are private.

Instead of using warrants to buy stock at a discount, we’re trading warrants to profit off of the rise in that stock’s price.

That’s because warrants give us leverage to the underlying stock. If a stock doubles, the return on its warrants could be triple or more.

For instance, in January 2021, I recommended warrants of Target Hospitality (TH). Target is a little-known provider of services to the oil-and-gas industry. And to the government. It provides things like temporary housing and services at oil fields and for Customs and Border Protection.

At the time of our recommendation, the stock was trading for $3.62 per share. The warrants were trading for just 31 cents.

By the time we exited the position in January 2023, the stock traded for $17.88 per share, or a 394% return. That’s outstanding by any measure in 19 months.

But the warrants did better…much better. When I recommended our readers sell the warrants, they traded for $7.05. That’s an astounding 2,174%, or a 22x return. That’s more than five times better than the return of the stock.

We did something similar with warrants of BigBear.ai, closing out for a 942% return 24 months later. That was about three times better than the stock’s 290% gain over the same period.

And earlier this year, we gained 300% on warrants of offshore drilling company Valaris in a matter of weeks. All while the stock gained just 56%.

That’s true leverage.

Amazon knows it. That's why it keeps asking for warrants instead of stock, deal after deal. Plug Power. Qualcomm. Generac. 3M.

The difference is, Amazon has to negotiate for its warrants behind closed doors. We don't. We can buy them on the open market, any day the market is open.

Same tool. Same leverage. No billion-dollar supply contract required.

The world's richest investors don't settle for buying stock and hoping. They find leverage.

Now you can too.

Regards,

Editor, Strategic Trader