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Amazon Says Long Term And Means It

17 December 2011

From the New York Times:

In 1997, the year Amazon.com went public, its chief executive, Jeff Bezos, issued a manifesto: “It’s all about the long term,” he said. He warned shareholders “we may make decisions and weigh tradeoffs differently than some companies” and urged them to make sure that a long-term approach “is consistent with your investment policy.” Amazon’s management and employees “are working to build something important, something that matters to our customers, something that we can tell our grandchildren about,” he added.

But shareholders seem never to have gotten the message. In October, when Amazon reported strong third-quarter revenue growth and earnings that were pretty much what the company had predicted, but indicated it would be spending more to support continued growth, investors hammered its stock. Amazon shares dropped nearly $30, or 13 percent, to $198 a share in just one day, Oct. 25. This week they were trading even lower, at $181.

Over the years, Amazon shares have been periodically buffeted by short-term results that seem to have disappointed investors. “The stock has been bumpy,” a Morgan Stanley analyst, Scott Devitt, told me this week. “Investor trust seems to go in cycles.”

. . . .

Amazon, in particular, has been true to its word to manage for the long term. It remains one of the world’s leading growth companies and its stock has soared 12,200 percent since its public offering. In late October it reported quarterly revenue growth of 44 percent to almost $11 billion, which came on the heels of 80 percent growth a year ago. “We’re seeing the best growth which we’ve seen since 2000, meaning in 2010 and so far over the past 12 months ending September,” the chief financial officer, Thomas Szkutak, told investors in October. But operating earnings fell sharply to $79 million. While that was in line with most estimates, Amazon offered a forecast for the fourth quarter in which it said it might lose as much as $200 million or earn as much as $250 million, and even the high end would represent a 47 percent drop.

The reason Amazon is earning so little while selling so much is that it is spending so much on long-term growth. It’s opening 17 new fulfillment centers — airport hangar-size storage and shipping facilities — this year and aggressively cutting prices. Its profit margin for the quarter was just 2.4 percent, and it said it might be zero for the fourth quarter. (By comparison, Wal-Mart’s margins are 6 percent on revenue of $440 billion.)

. . . .

Amazon has done little to dampen speculation that it is selling its revamped Kindle e-reader devices and its recently introduced Fire tablet at a loss. Amazon simply doesn’t think like most other companies. When “we think about the economics of the Kindle business, we think about the totality,” Mr. Szkutak said. “We think of the lifetime value of those devices. So we’re not just thinking about the economics of the device and the accessories. We’re thinking about the content.” In other words, profits will come down the road when Kindle users buy content through Amazon.

“If everything you do needs to work on a three-year time horizon, then you’re competing against a lot of people,” Mr. Bezos told reporter Steve Levy last month in an interview in Wired. “But if you’re willing to invest on a seven-year time horizon, you’re now competing against a fraction of those people, because very few companies are willing to do that. Just by lengthening the time horizon, you can engage in endeavors that you could never otherwise pursue. At Amazon we like things to work in five to seven years. We’re willing to plant seeds, let them grow—and we’re very stubborn.”

. . . .

For Amazon, long-term growth confers two major benefits: the kind of economies of scale enjoyed by Wal-Mart and eliminating or weakening competitors. The book retailer Borders has been forced out of business and a rival, Barnes & Noble, is struggling. Best Buy, the electronics retailer, reported this week that earnings plunged 29 percent, despite higher revenue and a surge of Black Friday sales, because the chain had to cut prices and offer free shipping to compete with Amazon. Amazon inflamed many competitors this holiday season by offering extra discounts to shoppers who took mobile devices into stores and then used them to compare prices and order from Amazon.

The revamped Kindle line and especially the new Fire tablet illustrate Amazon’s long-term strategy. “Amazon has much greater ambitions than near-term profits or margins,” Ken Sena, an Evercore analyst, said.

. . . .

The Fire “isn’t meant to be another iPad,” Mr. Devitt noted. “It’s a device to sell Amazon content. All indications are it’s a success. It’s the most gifted item on Amazon. It’s too soon to tell, but it seems more promising than it’s getting credit for.” This week Amazon said it had sold more than a million Kindles a week for the last three weeks.

Link to the rest at the New York Times

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7 Comments to “Amazon Says Long Term And Means It”

  1. I have to say that Amazon’s approach sounds much more sensible to me than the one where companies (I’ve worked for a few) make decisions that will cost them money in the long term because they make a can short term profit (that helps get them their bonus.)

    Now, I don’t know whether Amazon do performance reviews based on immediate results for their staff but, if they have the wisdom to take a broader view there as well then they’d be high on my list of companies I’d approve of.

    That article makes me want to run out and buy shares in Amazon!

  2. Obviously, that should read “can make a short term profit” – that’s what happens when I try to type, eat my lunch and watch a small child – all at the same time.

  3. Amazon looks like a champ when I compare their thinking to the companies that aim only for good numbers in a given quarter, even if it means outsourcing, laying off workers, or even reducing their selection of products. What are the investors actually investing in — a company that just wants their money at the expense of its employees, product quality, and product line?

    • I’ve worked for companies where, if they had to choose between spending £50k on something that would last for three years (that they’d then have to replace at the same or greater cost to the company) or £70k for something that would last for ten, they’d go for the £50k option because in three years time it will either be someone else’s problem or, if they’re still in post, they’ll have objectives that only apply to that year so any non-cost effective decisions from previous years don’t matter.

      They’d actually be rewarded for making the decision that was worst for the company in the longer term – and this is common practice in business these days. No wonder we’ve got a global downturn!

  4. A little over ten years ago, I had to do some temporary full time work at the day job, and I fully invested my Roth IRA. (Something which I have not been able to afford since.) I bought Apple stock every time Wall St would say “AHHHH, Apple’s going out of business!” And then I took profits every time Apple reached a new high. When Apple’s price stopped plummeting every six months or so, I started buying Amazon on the dips.

    These stocks just keep growing on me. I sell off a bit now and then to diversify, and though I have a nicely balanced portfolio, it’s not as big as it would have been if I’d just kept with Apple and Amazon. They continue to out perform everything else. (Except maybe Chipotle — I guess people love eating them organic burritos while reading their Kindle books on an iPhone….)

    Going after those long term companies has meant that I have a healthy and stable IRA that didn’t lose much in any of the recent crashes.

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