No new long & short trades today so I wanted to write a quick take on one of the more fascinating stories….
I’ve always been interested in Amazon as a customer, an investor and just an overall fan. I’ve never been able for that to translate into buying the stock because it has felt so expensive the past few years. I’m currently listening to the audiobook: Amazon: The Everything Store. It’s truly a fascinating story, a must-read for anyone interested in the company, in Jeff Bezos, etc.
The Standard Way To Look At Amazon
You have this giant company that despite being over 10 years old, has been unable to ever generate meaningful profits, trades at a P/E of over 500 despite seeing solid but not spectacular growth. There is nothing to indicate that Amazon will ever put much of its focus on profits which is a very worrying trend for any shareholder. The next time the market goes into “crash” mode, stocks that seem overvalued will obviously be the ones paying the most and Amazon seems like the perfect candidate.
A Better Way To Look At Amazon?
If 10-15 years ago, someone had envisioned how important ecommerce would become and that it would mean a complete change in how shopping would be done, I think we’d all agree that there would be a HUGE opportunity. The problem of course is that the only way to become a dominant player in this sector would require:
-building a major brand
-building a distribution network that enables it to sell & ship all around the world
-the logistics involved would require warehouses all around the US and the world
-setting up agreements with sellers all around the world in a hyper competitive world
-building customer loyalty to avoid having to fight for those same clients day after day in a world where the next shop is one click away
-being able to become the dominant digital store where customers and businesses would download digital documents, cloud space, etc
All of that is a major challenge. I can’t imagine an existing giant such as Walmart being nimble enough to pull this off. But it would have seemed nearly impossible to imagine a new company being able to pull this off. Why?
-You’d need an extremely long term view
-You’d need to invest tens of billions in infrastructure
-Because of that, you’d likely be earnings no profits for over a decade
-You’d need to rely on your future competitors in order to initially start selling their stuff
Impossible… yet Amazon has pulled it off. Not only is it one of 4 major ecosystem players but it’s by far the best positioned for the continued growth in ecommerce. I can’t think of one single player that can successfully compete with AMZN. Maybe 5-10 years ago EBAY could have made its case but it feels so long ago.
What if at some point, Amazon has built enough of its infrastructure and can finally start slowing down the spending in those areas? What if it starts generating margins that the Walmart (WMT, Costco (COS) and others manage to generate? Yes, it has a lot of shipping costs, but it saves a lot on retail space, employees, etc.
Does this seem that impossible? It wouldn’t happen in the next few years but what if it did happen at some point?
