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Did Amazon Get Lost In The Jungle?

31 October 2016

From Seeking Alpha:

I am amused when the headlines read that a company failed to live up to Wall Street’s expectations. It should read “Wall Street completely failed at guess the number again”.

Even Christensen, in his book Innovator’s Dilemma, spoke of forecasters in general. Hint: They never get it right.

If that is not enough credence for you, everyone’s favorite investor (not mine particularly), Warren Buffett, had a decent quote regarding forecasting:

“Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”

Earnings predictions and these short-term ideologies do not tell you anything about what Amazon is doing or not doing correctly. You need to look at company management to get a clearer picture.

What you need to focus on is whether the company structure is set up for a long-term outlook or focused on short-term rewards.

. . . .

If we look at the chairman and CEO positions, Jeff Bezos holds both of them.

Jeffrey P. Bezos, age 52, has been Chairman of the Board since founding the Company in 1994 and Chief Executive Officer since May 1996. Mr. Bezos served as President from founding until June 1999 and again from October 2000 to the present. Mr. Bezos’ individual qualifications and skills as a director include his customer-focused point of view, his willingness to encourage invention, his long-term perspective, and his on-going contributions as founder and CEO.

I have highlighted three important characteristics. These are key in assess the validity of Amazon’s business. The customer focus is the lock-in value of the business model. Most companies are very customer-driven. However, in Christensen’s book, he states that the customer-driven mentality leads companies to just satisfy them, and eventually sees their demise. Thus, encouraging invention is basically acknowledging innovation is needed to survive. This occurs when you pay attention to customers who are dissatisfied.

. . . .

Board Leadership

The Chair of the Board is selected by the Board and currently is the CEO, Jeff Bezos. The Board believes that this leadership structure is appropriate given Mr. Bezos’ role in founding Amazon.com and his significant ownership stake. The Board believes that this leadership structure improves the Board’s ability to focus on key policy and operational issues and helps the Company operate in the long-term interests of shareholders.

This type of duality can be considered a resource. According to the resource-based view, a key characteristic of a valuable resource is inimitably. Bezos represents that because there is no way any firm trying to compete in the same space as Amazon can create a Jeff Bezos clone.

. . . .

Compensation Philosophy

Compensation Philosophy. As stated in the Company’s 1997 letter to shareholders, we believe that a fundamental measure of our success will be the shareholder value we create over the long term.

Another characteristic is the historical dependence created by Bezos. This is an intangible resource that defines what the company is about. The extract below goes into detail further about what Amazon represents.

our compensation program reinforces and reflects our core values, including customer obsession, innovation, bias for action, acting like owners and thinking long term, a high hiring bar, and frugality.

These four traits are consistently echoed in almost every interview or report that I have seen concerning the company. Amazon is lucky in the sense that it does not have to reinvent itself and lose its identity. In essence, what values made the company successful in the first place. If you really start to pay attention to the bits that I have been showing you, Amazon is focusing on what researchers have found to be the key ingredients to sustaining competitive advantage: giving customers a value proposition and continually capturing it, constantly innovating to keep and attract new market segments, a management team not afraid to take risks, and only spending when required.

we do not provide cash or equity incentives tied to performance criteria, which could cause employees to focus solely on short-term returns at the expense of long-term growth and innovation.

Interestingly, there are no required peer benchmarks to base compensation.

. . . .

Stock-Based Compensation

Because our compensation program is designed to reward long-term performance and operate over a period of years, named executive officers may not necessarily receive stock-based awards every year. Due to Mr. Bezos’ substantial stock ownership, he believes he is appropriately incentivized and his interests are appropriately aligned with shareholders’ interests. Mr. Bezos has never received any stock-based compensation from Amazon.com.

. . . .

This paragraph is critical. Most companies have incentives and annual performance awards to reward a CEO based on annual performance. It is extremely rare for a CEO to come out and state in writing that he/she is appropriately incentivized. This is the exception to the norm.

Link to the rest at Seeking Alpha

PG says these characteristics definitely do not describe the large international media conglomerates that own all the large traditional publishers.

If you want to worry about Amazon, worry about what happens to the company after Bezos dies or withdraws from active management. See (a) Sam Walton and Walmart, (b) Steve Jobs and Apple and (c) Bill Gates and Microsoft for possible outcomes.

Amazon

38 Comments to “Did Amazon Get Lost In The Jungle?”

  1. Yep, PG. I worry about Jeff’s dying or being otherwise unable to lead the company. Maybe we should send him some vitamins, or something.

  2. He’s only 52. Hopefully we don’t have to worry about that for several decades.

  3. Once again the whine is: We don’t understand what he’s up to — but we know we aren’t going to like it!

  4. Earnings predictions and these short-term ideologies do not tell you anything about what Amazon is doing or not doing correctly.

    Agree. They are a guide for short term traders looking to scalp the earnings announcement. These guys provide the liquidity, and are geared to sell as soon as they know they were wrong. They come back in after the dip.

    They are looking at 760 as a support point. If that holds, they will buy again.

  5. To quote investment book author Larry Swedroe, “Financial prognosticators exist to make astrologers look good.”

    • Maybe the title should read:

      “Did Amazon Again Get Wall Street Lost In The Jungle?”

      (And you forgot weathermen! 😉 )

  6. I am amused when the headlines read that a company failed to live up to Wall Street’s expectations. It should read “Wall Street completely failed at guess the number again”.
    When I read a couple of articles about Amazon flaming out, I felt pretty much the same- that it was Wall Street who was on the wrong side. After all, I’m pretty sure one of their divisions’ sales was double last years. And yet, all the sky is falling nonsense.

    They hate Steve Bezos as much as they hated Bernie Sanders! LOL

  7. Actually, it seems that Microsoft is finally turning into a decent company. It took an additional management change After Bill Gates left before they started playing nice with others.

    • I’m going to guess that you were trying to be funny or you use something other than microsoft considering their current operating system and what they’re doing with it. Luckily for me, I avoided the forced ‘upgrade’ to 10 and it’s new ‘features’.

      ‘A decent company’ would not be using their customers as beta testers (as in updates that randomly break stuff and you can’t disable those updates.) Then there’s the ‘phone the mothership’ bit that they claim is to help them ‘improve’ things that you can’t disable.

      I’ve heard some people say 10 makes vista and windows ME look good.

      • Billions of people around the world are benefiting from MicroSoft products. I suspect this blog and many of its contributors are among them.

        • Billions of people around the world are hornswoggled into thinking they benefit from Microsoft products, because those products are bundled with their computers by the manufacturers and they have never been meaningfully exposed to any of the superior alternatives.

          Needless to say, there is no such thing as a ‘MicroSoft’ product. I suppose since the company with the capital S does not exist, at least its products do no harm.

          • Billions of people around the world are hornswoggled into thinking they benefit from Microsoft

            Individual consumers determine if they benefit. They apply their own tastes and preferences. We can observe MS has the largest installed base, and we can observe the users’ evaluation that they benefit.

            Activists try to speak for them, but the consumers continue to buy MS products.

            There is a simple test we can all safely take at home. Look down at the computer you are using. Do you benefit from it and the software that runs it? If not, why are you using it?

            • “There is a simple test we can all safely take at home. Look down at the computer you are using. Do you benefit from it and the software that runs it? If not, why are you using it?”

              Because at the time it was a cheap enough machine that did what I needed/wanted it to do. (windows 7 in this case, though XP or even windows 2000 would have been fine if I could have gotten it with either of them installed.)

              If DAZ had any options other than apple or ms, I would be switching, until then I had to disable updates to keep microsoft from downgrading my windows 7 with their 10.

              When we can’t get what we want we go with the closest we can get for what we can afford. YMMV of course.

            • Activists try to speak for them, but the consumers continue to buy MS products.

              I do not know any consumers who voluntarily buy Windows. It comes installed on the computers they buy, because Microsoft has a long-standing anticompetitive policy of refusing OEM pricing to any manufacturer that does not install Windows as the default operating system on its products.

              The number of people I know who have spent money to install Windows on their machines, or to upgrade to a new version on the same machine, can be conveniently counted on the fingers of one ear.

              There is a simple test we can all safely take at home. Look down at the computer you are using. Do you benefit from it and the software that runs it? If not, why are you using it?

              First of all, the computer I am using is a Mac. I have introduced various people to that platform over the years (and a few to Linux), and they were uniformly surprised and pleased at how much less trouble the computer was, how much less it got in their way, and how much more they could actually get done with it.

              Secondly, the only Microsoft product I use is the Mac version of the Office suite. I use that chiefly because my ebook retailers want .doc files, a proprietary Microsoft format that other software handles imperfectly; and partly because Abyss & Apex, the webzine where I serve as Editor-at-Large, often receives submissions of .docx files, another proprietary Microsoft format that other software does not handle at all.

              • Uh, you do know Microsoft sells a consumer (non-upgrade) version, right?
                Plenty of do-it-yourself system builders (like moi) buy it because they want it. Nobody puts it on the boxes for them.

                https://www.amazon.com/s/ref=sr_1_6_hso_sc_smartcategory_1?rh=n%3A229653%2Ck%3Awindows+10&keywords=windows+10&ie=UTF8&qid=1478059353&sr=8-6-acs

                Windows competes against dozens of free OSes and always has.
                And it still comes out on top. And if Windows is so useless, why did McNeally spend so much money and political capitol on WABI and why do the LINUX aficionados spend so much time on/in WINE? Nobody forces any of them to use it.

                There must be some value in it for them…

                • Linux people spend time on WINE chiefly because nobody writes games for Linux.

                  Windows comes out on top because of network effect, not because it’s a good OS.

              • The number of people I know who have spent money to install Windows on their machines, or to upgrade to a new version on the same machine, can be conveniently counted on the fingers of one ear.

                Of course. They don’t have to do that kind of installation to reap the benefits.

                Secondly, the only Microsoft product I use is the Mac version of the Office suite. I use that chiefly because my ebook retailers want .doc files,

                Great. Sounds like a benefit from using a MS product.

                • Of course. They don’t have to do that kind of installation to reap the benefits.

                  Check some of the other posts to see the ‘benefits’ people are expecting from having to upgrade to Windows 10.

                  Great. Sounds like a benefit from using a MS product.

                  No. I am forced to use the MS product whether I want to or not, because the people I do business with refuse to allow me any other option. That’s not a benefit from Microsoft, that is an imposition by the others.

                • If party-2 demands party-1 use a given tool to do business, and party-1 wants that business, then party-1 benefits from using the given tool.

                  If party-1 did not benefit from use of the tool, he wouldn’t use it.

                  One does not have to like a tool to benefit from the tool.

                • Sometimes I am forced to wonder if you aren’t a tool, or you just play the part of one on TPV. 😉

  8. We should remember that these forecasts aren’t solely a creation of Wall Street analysts. Companies routinely issue “Guidance” that projects future performance. That becomes a big part of Wall Street’s expectations.

    • And what ‘official’ piece of this ‘guidance’ did Amazon issue that wall street used in their WAG? (Wild A$$ed Guess(es) )

  9. And what ‘official’ piece of this ‘guidance’ did Amazon issue that wall street used in their WAG?

    I don’t know. I didn’t pay attention to it. And it’s not a WAG if it is a partial function of the company’s own guidance.

    But companies do this every quarter. They don’t have to do it, but they find it in their interests.

    For example, on October 20, Microsoft’s earnings press release for the quarter ended Sep16 said, “Microsoft will provide forward-looking guidance in connection with this quarterly earnings announcement on its earnings conference call and webcast.”

    They have a conference call with analysts, and answer questions.

    • So ‘you’ are basing a WAG of something you think Amazon did to confuse wall street on something you heard microsoft did?

      Fascinating …

      Though “Microsoft will provide forward-looking guidance in connection with this quarterly earnings announcement on its earnings conference call and webcast.” isn’t them claiming a certain level of profits … (and somehow I don’t think Jeff told wall street what Amazon profits would be either.)

      • So ‘you’ are basing a WAG of something you think Amazon did to confuse wall street on something you heard microsoft did?

        1. The Microsoft reference is an example of the general practice of guidance.

        2. I know of no reason to think Amazon acted to confuse anyone.

        3. Profits are a function of many factors. When companies comment on those factors in their guidance, that guidance is then used in the development of earnings expectations.

        4. This is normal stuff. Happens everyday in large companies.

        • And Amazon has been known for rolling their money back into the company, too bad wall street forgot that minor bit in their guess-ta-ment.

          • Amazon has done that, and will probably continue. Why presume Wall Street forgot that?

            • Hmmm, because wall street guessed wrong on the Amazon numbers? 😉

              • When earning forecasts are wrong there are lots of reasons they can be wrong. Of those many reasons, there is no basis for presuming the forecaster forgot about Amazon’s ongoing financial support for new and developing business ventures.

                If they had forgotten about that, did they remember it in past quarters when they had accurate estimates? Do they forget one quarter, then remember in the next? Have they ignored it for the past 80 quarters?

                The reasons for performance are the kind of thing they go into in the earnings guidance calls. Interesting stuff.

    • Yeah, I’m agreeing with Allen here. Give us a link where Amazon gave guidance for the quarter, and show the correlation between that and analysts’ forecasts – or else withdraw your claim.

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