Almost all businesses are trying to grow. If or when these growth prospects darken and revenues start to stagnate, they tend to focus on maximizing current profits and returning cash to shareholders through dividends and / or share buybacks. . This is usually the rational decision when the possibilities of using cash to reinvest in their own businesses are limited.
The ideal corporate culture
When a business reinvests virtually all of its resources, year after year, into growth at the expense of current profits, it’s a whole different ball game. Amazon Founder and CEO Jeff Bezos wrote in his 1997 letter to shareholders: “When we are forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flow, we will take cash flow. “
Being prepared to sacrifice short-term profits to invest in growth was not so common when Amazon entered the scene. As a result, the business has long been misunderstood. One reporter called it “a charity run by parts of the investment community for the benefit of consumers.”
The truth is, Amazon’s willingness to reinvest and try (and possibly fail) in its new ventures is a corporate superpower. And he certainly had his share of failures. The Fire Phone was a high profile flop. He has tried at least twice, without success, to engage in the online travel game. Amazon tried to compete with Blue Nile by selling high-end jewelry many years ago. He even tried to compete with eBay and start a failed online auction business.
But these failures are precious. Being willing to take risks is why Amazon has also been so successful in building new businesses. This failure of online auctions ultimately led to what is now the company’s third-party market, which is responsible for the majority of physical units shipped.
None of Amazon’s successful businesses were perfect from day one. They had to be iterated and optimized to work well. Imagine how much smaller Amazon would be as a business today if it weren’t willing to risk failure. This drive, which sometimes leads to huge success, is a big part of why I will never sell my Amazon shares.
The main activities are still in their infancy
Amazon’s core e-commerce and cloud businesses are dominant, but both are still in their infancy. Think about the staggering size of the global retail market: $ 25 trillion. No company is better positioned to attack this market over time than Amazon, given its willingness to invest where it sees opportunities.
And Amazon’s retail business is no longer exclusively e-commerce. He’s tirelessly experimenting with physical retail concepts, like Amazon Go convenience stores with their futuristic “just walk out” technology. It is now opening Amazon Go grocery stores and Amazon Fresh grocery stores. He also tested several other physical retail concepts such as bookstores, 4-star Amazon stores, and others. So while the share of e-commerce in the global retail market will almost inevitably continue to increase over time, for the benefit of the business, Amazon will also expand into the huge world of physical retail. .
As for Amazon Web Services (AWS), it caters to the $ 3.7 trillion global IT market, according to CEO Andy Jassy. The company has the product, the head start and the culture of innovation to develop new features and new products to respond more and more to this market. For context, AWS just reported nearly $ 11 billion in second-quarter net sales, an annual revenue rate of $ 43 billion. The trail to become this $ 3.7 trillion market is huge, and AWS is in pole position, ahead Microsoft Azure and AlphabetGoogle Cloud Platform.
The unique reason that I will probably never sell my Amazon shares is that it is very difficult for the stock to be noticeably overvalued when the company is relentlessly focused on building these new great companies from scratch. The market will likely never be willing to incorporate these future companies into Amazon’s market assessment, which is perfectly understandable given that many of them don’t even exist yet. But looking back, not putting any value on future companies would have been a huge mistake.
I’m willing to bet that Amazon is successfully creating a lot more of this type of value out of thin air going forward. In 10 years, we could look back nostalgically today, when Amazon was just getting into physical retail and only had a few grocery stores. We can tell our kids that there was a time – before Amazon bought autonomous driving technology company Zoox and invested hundreds of millions of dollars – when its delivery vans weren’t driving themselves. . Likewise, we’ll say that there was a time when Amazon didn’t even use drones to deliver packages. The list goes on.
Investors should think about what the Amazon might look like 10 to 20 years from now before considering selling their stocks.