"We're a company very accustomed to operating at low margins. We grew up that way. We've never had the luxury of high margins, there's no reason to get used to it now." - Jeff Bezos in Wired Magazine
Recently, Wired Magazine interviewed Amazon's (AMZN) Jeff Bezos.
Well worth a read.
Amazon Owns the Internet
The interview reveals a lot about the way Bezos thinks about and approaches business.
It's not at all hard to see why Amazon likely has quite a future with him running the show.
Some excerpts from the interview:
On Inventing and Disrupting
"...one of our greatest cultural strengths is accepting the fact that if you're going to invent, you're going to disrupt."
He later added...
"As a company, we are culturally pioneers, and we like to disrupt even our own business."
On the Two Ways to Build a Successful Business
"One is to work very, very hard to convince customers to pay high margins. The other is to work very, very hard to be able to afford to offer customers low margins. They both work. We're firmly in the second camp."
On Thinking Long-Term
"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. We say we're stubborn on vision and flexible on details."
I've posted on other occasions that I don't care for Amazon's stock. Yet, it's hard to not respect and be impressed with Bezos as a leader. The stock has actually fallen quite a bit (actually more than 25%) from the recent all time highs yet still sell at a very high multiple of current and next year earnings.*
Unfortunately, not only do the shares still seem difficult to value, but they also don't stack up all that well against investment alternatives where the risk-reward, at least for me, is not as difficult to understand.
That's certainly my view but if someone is going to prove that to be wrong, it'll be Jeff Bezos.
Still, even if Amazon's intrinsic value grows spectacularly in the coming decade the risk-adjusted returns will likely be less so due to the high earnings multiple being paid.
It's not that long run returns will necessarily be negative.**
It's that, near the current stock price, investors seem likely to get compensated rather modestly even if Amazon achieves spectacular long-term business results. So what happens to returns if the future ends up being less than spectacular? The ride back to a more normal multiple will hurt.
I'd be somewhat surprised if, in the long run, the company doesn't end up thriving. I won't be surprised if long-term shareholders (i.e. not traders) don't get spectacular market returns.
For me, shares of other good businesses offer a more understandable trade off between potential upside if things go well versus downside if things do not.
The company seems very likely to be an important force for a very long time and, eventually, maybe even make a ton of money.
Too bad the it's not easier to figure out what the shares are likely worth within a narrow enough range.
Check out the full interview.
No position in AMZN
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* The forward 2012 earnings estimates are, somewhat understandably, all over the map. Remarkably, so are the 2011 estimates. That's a bit harder to understand. So there is really no meaningful consensus on what Amazon's earning power really is. Using the average of the 2011 earnings estimates among analysts (certainly, a less than perfect way of looking at it) the price to earnings ratio is ~150x. Using the average of next year's earnings estimates the price to earnings ratio is ~90x. So, using all but the most optimistic view, the share price seems high compared to what Amazon is capable of earning in its current form . Some argue, and it is consistent with what Bezos says above, that Amazon's earning power is held back by the long-term investments the company is making. That may turn out to be true. Yet, as an investor, I'd want to pay a price that provides some protection if that turns out to not be the case.
** Though, near its current price, the risk of negative returns is uncomfortably high if things go a bit less well than expected. Having said that, sustained high return on capital over 2 or 3 decades eventually does make an initially expensive looking investment make sense. In the very long run, results tend to be drawn like a magnet toward the return on capital earned by the business. I don't think I have any capacity to even roughly estimate Amazon's return on capital or its sustainability over such a long time horizon. Others obviously may be able to.
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