In Corporate America and the Gig Economy (Part 1, Part 2 and Part 3) I outlined at a very high level the Good, the Bad, and the Ugly of Corporate America and how that is and will impact the Gig Economy. I used the following categories to do discuss these corporate elements: The Entrepreneur Spirit, Infinite Growth = Infinite Profits, Job Creation, The Cold Sweeping Hand, Infinite Profits > Life, and The Race to the Bottom. Amazon, Whole Foods and the Gig Economy (Part 1 and Part 2) covered The Entrepreneur Spirit. Part 3 will delve into Jeff Bezos’ unique approach to Infinite Profits = Infinite Growth and the reason why that unique unending approach continues unabated.
Amazon: From Book Seller to The Everything Store (Part 3)
Infinite Growth did not always equal Infinite Profits
True to being a scalable endeavor, Jeff wanted Amazon to be more than just retail, he also wanted it to be an online community which led to allowing users to add their own book reviews for everyone to view which is a mainstay to this day albeit the constant barrage of fakes ones, yet if you take the time to discern you can manage your way around it which I do all the time. He got affiliates into his game early on starting in 1996 with the Associates Program. The Initial Public Offering (IPO) occurred on May 15, 1997 as AMZN “targeted at $18, but by the end of the day, public demand had pushed the share price to more than $24 per share.” (Techwalla) In that same year they added movies and music. The following year began their international quest with sites in the UK and Germany. The year after, 1999, they “opened four order fulfillment centers in Fernley, Nevada; Coffeyville, Kansas; and Campbellsville and Lexington, Kentucky to handle the large mass of orders” which was followed by Jeff being features in Time Magazine as “Person of the Year in 1999, calling him “king of cybercommerce.” (Techwalla) He also expanded his product line to now include Consumer Electronics, Toys & Games, Home Improvement, Software, Video Games, and Gift Ideas Stores. The turn of the century continued his “relentless” expansion along with the now famous logo of the curve “smiling” arrow from A to Z. Starting out with one category of books, they eventually expanded to 17 main categories and 143 sub-categories. (Techie Sense) Check the Amazon Timeline Infographic in the Techie Sense link in the Resources Quoted and Referred section at the end of this post for more details of his year to year growth.
Yet unlike many other successful publicly traded corporations, this infinite growth didn’t translate to infinite profits or even just plain ol’ profits for some time and it was all part of his plan. “Amazon’s initial business plan was unusual; it did not expect to make a profit for four to five years. This “slow” growth caused stockholders to complain that the company was not reaching profitability fast enough to justify their investment or even survive in the long-term. When the dot-com bubble burst at the start of the 21st century and destroyed many e-companies in the process, Amazon survived and grew on past the tech crash to become a huge player in online sales. The company finally turned its first profit in the fourth quarter of 2001: $5 million (i.e., 1¢ per share), on revenues of more than $1 billion. This profit margin, though extremely modest, proved to skeptics that Bezos’ unconventional business model could succeed.” (Amazon.com: Get Big Fast by Robert Spector) “In 1995, when Bezos started to raise money from outsiders…he projected that Amazon would, if things, turned reasonably well, have $74M of sales in 2000 and be modestly profitable. In 2000, Amazon turned in sales of $1.6B and had a loss of $1.4B.” (LinkedIn)
These quotes would make it appear that once Amazon starting turning a profit that it would follow that infinite profit growth model that the majority of publicly traded companies adhere to. To some degree that has happened because as of September 21, 2017 the stock is trading at $964.65 making it a major player yet when reading over the analysis at that time at amigobulls.com one can easily see that this adage of not adhering to that is still in play. Here’s some quotes; “Amazon’s revenue has constantly climbed higher as the company is putting all its efforts to expand its topline. This has led to the creation of massive infrastructure causing Amazon’s assets to increase to over $65 billion. Amazon’s stock analysis highlights the contradiction in the exponential growth of its topline and its non-existent bottom line. After over two decades of operations many investors had started questioning if the zero profit business model of the company will allow it to survive in this heavily contested arena in the future.” (emphasis added) The final sentence clearly indicates that although it’s trading in the upper $900’s it’s “relentless” pursuit of infinite growth remains to be a contradiction to profits and after 20 years of this investors who are used to infinite growth equating to infinite profits continue to question the Bezos Business Profits Model yet it’s not stopping him with the recent acquisition of Whole Foods. He has the vision and has built the company to what it is today and apparently not even investors are going to get in the way of that vision. Under the category of “Should you buy AMZN stock?” is; “Amazon sales grew by 24.8% year on year in 2017 Q2. The company saw a significant growth in revenue with a 5 year CAGR of 22.5%. The operating cash flow looks good at 19.4 times the net income.” This is contrasted with “Should you sell AMZN?”; “Amazon had a poor average operating margin of 2.3% over the last 4 quarters. Amazon’s Net margins were poor at 1.3% in the last twelve months. Trading at a PE ratio of 244.8, AMZN stock is overvalued in comparison to industry average multiple of 17.5. AMZN stock is trading at a PS multiple of 3.1, which is a negative when compared to the Internet Commerce industry average multiple of 0.7.”
As continuing evidence of this take on profitability, check out this amigobulls.com article titled “Should You Buy Amazon Stock Going Into The Earnings?” published on September 23, 2017 that not only supports the previous information from two days earlier but also briefly discusses that for the first time a partial quarter for Whole Foods will be reported which discusses the initial post acquisition activities positively yet the following section mentions taking a “wait and see” stance avoiding AMZN advising that “investors must wait for the third quarter earnings before buying the stock. Another miss on the bottom line, especially if the EPS numbers fall below zero, could result in a steep correction in Amazon stock.” If you continue to check out the various amigobulls articles you will notice a mixture of reasons for the stock to continue to grow in contrast to will this rally last? What is his rationale for such consistent investor speculations?
This is all because from the very beginning Amazon was all about the Customer Experience first and Profits second as part of his Business Model from which he has never faltered from:
- Referencing the hectic early days when in the first month of business they had sold to all 50 states and 45 countries, “That early stage when we were so unprepared is probably one of the luckiest things that ever happened to us because it formed a culture of customer service in every department of the company. Every single person in the company because we had to work with our hands so close to the customer making sure those orders went out really served us well and that is our goal to be earth’s most customer centric company.” (Amazing Amazon Story)
- “When we were declared amazon.toast we only had 150 employees. Barnes and Noble had 30,000 employees and somebody wrote an article that said Amazon has had a great two year run but now the big boys have shown up and they’re going to steam roll them. We had an All Hands Meeting…I said “Look, you should wake up worried, terrified every morning but don’t be worried about our competitors cuz they’re never gonna send us money anyway. Let’s be worried about our customers and stay heads down focused.” (Thinking for the Long Term)
- “We want to be Earth’s most customer centric company. We want our brand to be this abstract notion of starting with the customer and working backwards…Customer Centric is Listen, Invent, and Personalize…What we want to do is uplift the worldwide standards for customer service and customer centricity.” (Amazing Amazon Story)
- “Our profitability is not our customer’s problem. We don’t take the point of view that we’re going to price products at a particular margin for ourselves. We say we’re going to price products competitively and if that means on that product that we lost money that’s okay because we need to take care of the customer earned trust and we’ll figure out over time and if we can’t ever make money with that product we’ll stop selling it. We’re not going to make customers pay for any of our efficiencies.” (Thinking for the Long Term)
- “The eager beavers would also blanch at the way in which Amazon Prime was born – no forecasts, no projections – just the instinct of a founder knowing that what would be good for the customer would be great for Amazon…Yet…when everything was going wrong, all the news was bleak, and the entire world seemed lined up against Amazon, its founder was always calm and optimistic.” (LinkedIn)
Part 3 will focus on Amazon as a Job Creator, The Cold Sweeping Hand, Infinite Profits > Life, and most importantly its contribution to the Race to the Bottom. Stay tuned…