Increasingly Confused by Amazon ($AMZN)…the Good, The Bad And The Great

By: ispeculatornew
Date posted: 09.30.2014 (3:00 am) | Write a Comment  (0 Comments)

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$AMZNMany of you know how much I believe in my “web ecosystem theory”. I have started working on a new article about it and the impact that mobile has had on that theory but as you can guess, I’m still a big believer in placing chips on the 5 major ecosystem players ($GOOG, $AAPL, $FB, $MSFT, $AMZN). I have already taken significant longer term stakes in Apple and Facebook which have worked out well so far. I’m certainly not saying that other tech players can’t have success but it’s important to keep in mind that they will need to co-exist with these established players in order to do well. Netflix ($NFLX), Twitter ($TWTR) and TripAdvisor ($TRIP – which I recently bought – are a few of the players which I think will do well despite not “controlling their ecosystem”.

Does Amazon Belong To The Group?

The one player that I often got questions about in this group was Amazon because the nature of their activites (ecommerce) was so different but the 5 names seem to be converging rather quickly and as players like Google move towards ecommerce and shipping while Amazon starts working on mobile devices, advertising services, video websites, gaming platforms, etc, it’s increasingly clear that the collisions between these 5 players are only getting started. One area where Amazon does not fit with them however is in terms of market cap. Just take a look at the biggest US companies (in terms of market cap):

topmktcap

You will see that 3 of the ecosystem plays are among the top 4. Facebook is not that far behind and being the most recently founded company, is well on its way to get there. The missing company? Amazon of course is ranked #26 on that list despite its incredible growth story? Why? It’s a rather simple reason: “Lack of profits”. Today I wanted to take a new look at Amazon after reading two very thought provoking posts written by two of the top guys when it comes to tech in the recent weeks that got me thinking. I highly recommend both:

Losing my Amazon religion @ Stratechery
Why Amazon has no profits (and why it works) @ Benedict-Evans

I won’t go over every statement in those 2 posts but if you are investing or considering trading Amazon, you do need to read both.

The Good

I certainly feel like Benedict-Evans explained it extremely well and perhaps even more clearly is the tweet by legendary VC Marc Andreeson:

Clearly, the reason why Amazon’s net profit has consistently been around $0 is because that is exactly what Jeff Bezos is trying to do.

ycharts_chart (1)

credit: yCharts.com

Spend as much as you can. Why? Because Amazon’s mission requires an incredible amount of resources. What is that “mission”. I’ll agree that it’s not clear and even being the “everything store” seems to under-estimate what Amazon is trying to accomplish. It’s much more than a “store” that can sell you everything.  Jessica Lessin, editor of the Information (a paid but incredibly valuable website) has the best vision that I’ve heard of what Amazon is trying to do: “Amazon-as-city“. Amazon wants to sell more than physical and digital goods and is increasingly moving towards services. The good news is that it’s working as it continues to gain market share and eliminate competition:

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1Amazon has also been able to make incredible progress when it comes to building these incredible warehouses. This post from Re/code gives a few maps that give you some idea of the progress that’s been made.  Clearly, no other company comes close to what Amazon has been able to build. Even companies such as Walmart that have a much broader physical presence are nowhere near as organized which is showing up in the numbers (no surprise here).

Amazon is taking over markets one at a time and if books are any indication, Amazon will be able to innovate greatly once it reaches that point. Just think of how it changed the whole ebook market, its print-as-you-go initiative, unlimited Kindle subscriptions, etc.

The Bad

I feel like Ben Thompson expressed it very well (again the link) and there are many products or ideas that Amazon is working on that make me scratch my head. Bezos is incredible and it’s a tough position to doubt Amazon’s success but it’s hard to argue that Amazon is not well positioned to compete with players such as Apple and Google when it comes to smartphones and tablets for example. Rumors that Amazon has only sold 35,000 Fire phones are a good way to think about how far the company has to go if it wants to become relevant. I understand why it would be important to dominate mobile but at what cost? How much are these products costing to develop and is it even clear that Amazon has a shot of catching up?

When Amazon spends a billion dollars to buy video gaming video community Twitch, it’s not clear how this will end up profiting Amazon. Yes, it’s a terrific property that Google was looking to buy and yes Amazon would like to have terrific video content to provide on all of its platforms. But what makes Amazon uniquely qualified to run Twitch? It seems like one more distraction.

I was very critical of eBay trying to launch an advertising network and can probably be almost as critical about Amazon’s idea to do the same. Yes, Amazon seems like its slightly better positioned but the strategy remains a mystery to me. Wouldn’t it make more sense to use that billion dollars to build more warehouses?

The Great

All of that being said, in the end I do think that Amazon remains worth the gamble. More transparency would certainly help because I’d like to make sure that most of what the company is reinvesting is being used for warehouses and other strategic purchases to feel even more at ease. But the fact remains that in its core business, Amazon is dominant, faces little to no competition (I’m not buying efforts like Google Shopping Express or ebay same-day shipping to this day) and as long as that trend continues, I do believe the “make no profits” philosophy makes sense. If this is a whole new industry that is being created and that we are still its infancy, it makes a lot of sense to reinvest as much as it possibly can to built the best infrastructure for this new world.

I have not yet found an entry point to my liking but believe me that I will be buying at some point if we see a setback.

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