Sunday, February 5

Amazon vs Wall St: Having your cook book and eating it

Another earnings dissapointment, this time from 2002's net darling Amazon, and there are claims from investment analysts that the maybe "the internet model e-tailer efficiencies are over".

In an article from The Register "Amazon blames the grinch that stole Christmas":

Bezos again stressed needed to invest for the future, in particularly digital services, adding that "if we were totally optimizing our cost structure for a kind of a steady-state business, you would see a different cost structure."

This prompted a withering piece of sarcasm from one analyst, Safa Rashtchy of Piper Jaffray. who told the WSJ: "It seems like Amazon is a company which will perpetually be in investment mode."®

Why would it not be in investment mode, Amazon is still gaining more customers, expanding geographically, improving technology and CRM and now fighting a growing number late starters who can copy-cat their technology. Is this situation really any different to when Coca-Cola, Levis or Starbucks first got started...? Let's remember Amazon is a company that has sprung up $8.5bn in sales in a few short years.

Here are my thoughts:

1. Amazon is the clear first mover and leader, and it's not making the mistake of getting complacent
2. The internet is only a decade young, there is still plenty of time for Wall St to drain these brands like a cash-cow
3. Efficiencies for e-tailers are finite - internet saves on marketing, crm, billing and stores - not the rest
4. The rest of the books/retail industy is playing catch-up, Amazon will have less "space" to dominate as time goes on
5. Maybe these analysts invested for the short-term, and want to cash-in on Amazon
6. It's too soon to consider this an 'income' stock, Amazon is a growth company - and it grew sales by 23% last year
6. Amazon can only dominate a small part of the longtail, because it can't stock everything. The rest of the tail is the preserve of small specialists i.e. the store in Paris that has 1,000 rare Tin Tin comics
7. The incremental return from further efficiencies/technologies will decline - since Amazon are already well optimised. But a 5% hit on earnings due to investment is more than justified by a 1% improvement in earnings year-on-year thereafter as a result of the investment
8. For all it's ingenuity and innovation, Amazon still has to manage real world costs (distn costs rising due to oil, exchange rate risks..), and the net efficiencies and growth will not always compensate

Everything goes in cycles. Net cycles are a little quicker. It was only five years ago Bezo's and Amazon was derided for its investment strategy, to then receive applause in 2002/2003 for turning a profit. That's not to say their respective stocks aren't overvalued right now but are we really so short sighted to question the business model?

Here's a reminder of the past:

Internet stocks hit 52-week lows on advertising, e-commerce worries


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