If only I had a time machine, I’d go back in time to kill Hitler, shake hands with Stanley Kubrick (the greatest filmmaker of all time), and finally arrive in 1997 and buy shares in Amazon. According to The Motley Fool if you had invested $500 at the IPO price, your shares would have been worth over $568,000 in 2019. That number has gone up in the midst of Covid-19.
Kindle that fire…
I was struck this week reading The Economist‘s excellent deep dive into Amazon and its future.
The thesis of the Briefing goes something like this (keep in mind that this blog is free and it’s probably worth what you paid): Covid-19 has fueled a surge in its “crucial role in e-commerce, logistics and cloud computing…”, but it’s running into problems of conflict and bureaucracy as it scales. Right away we’re hit with some incredible statistics:
- “Today roughly $11,000-worth of goods change hands on Amazon’s e-commerce platform every second. The company delivered 3.5bn packages last year, one for every two human beings on Earth.”
I know that my household was responsible for some of those purchases, but the sheer scale is insane. And Wall Street is completely bullish on the company. Since January 2nd, it’s share price has increased 4.35%. Now you only need to pay over $2,800 to pay for the stock (and likely to increase the moment this piece is published). The Economist writes, “Amazon’s market capitalisation doubled to $734bn between 2016 and 2018. Since then it has closed to doubled again. Its shares trade at 118 times earnings, compared with 25-35 times for Apple and Microsoft, the other members of the trillion-dollar-company club.”
I think one of the larger missing points in The Economist’s breakdown was the negative externalities (I expelled some of my thoughts in “Is Delivery Worth The Price?” last year:
Matt Richtel writes in The New York Times that an economy that runs on this “gotta-have-it-now gratification” is a vexing concern for scientists and policy makers. The environmental cost includes a significant amount of cardboard (35.4 million tons of containerboard were made in 2014 and its expected to grow to over 250 million tons by 2025) and emissions from fleets of trucks circulating neighborhoods delivering goods. Ardeshi Faghri, a professor of civil engineering at the University of Delaware says, “Online shopping has not helped the environment. It has made it worse.” These externalities keep adding up.Banana Fire Guy, 2019
The briefing touches a bit on some of the issues (“Mr. Bezos who has added $54bn to his net worth thanks to his company’s buoyant share price while low-paid warehouse workers toil through the pandemic…”), but I do wonder about the competitive edge as Covid-19 is forcing all companies to accelerate their e-commerce plans (likely at the expense of the environment). Ben Thompson of Stratechery has covered more thoroughly than I ever could. One of his insights strikes me:
- What matters now is dominating search.
- The challenge for…everyone else in the retail space is that there is no bigger brand than Amazon itself. According to eMarketer earlier this year, 49% of Internet shoppers start their searches on Amazon, and only 22% on Google; Amazon’s share is far higher for Prime subscribers, which include over half of U.S. households.
Amazon is also in an exceptional (dare we say “Prime”?) position to accelerate its customer growth and earnings. Its flywheel is moving at light speed: More customers, more data, more Prime users (e.g. shows like The Marvelous Mrs. Maisel helps the company sell paper towels), and a growing advertising business (revenues are now $11bn), but where it’s really dominated is in cloud computing.
Amazon Web Services, as NYU Professor Scott Galloway said above, is the golden egg for Amazon. From The Economist, “Its operating income usually adds up to well over half of Amazon’s total –in the most recent quarter it accounted for 77%.” It likely will get spun off into its own separate company (“Letting go of AWS would mark by far the most dramatic reorganisation in Amazon’s unremittingly accretive history. Analysts reckon the unit accounts for a third or more of Amazon’s value. A plausible valuation fo $500bn would see it start out as one of America’s ten most valuable firms.”). The clouds are turning stormy as Alibaba, Google, and Microsoft are swooping in.
You forgot the Sand Mandala…
Sand Mandala is a Tibetan Buddhist tradition involving the building and destruction of (oftentimes) elaborate and beautiful sand art pieces. To me, it focuses on positive energy and the inherent impermanence of everything. The salient point from me about Amazon is that it will fail…eventually. All things do.
Likely it will last a long long time, though, and probably best if you invest in them if you can. I don’t think it’s reached its peak yet, but regulatory and personnel issues will be interesting to see as time goes by. Its competition threats (Shopify especially) are coming for it. “Everything’s Eventual” as Stephen King aptly put.